SKS Microfinance IPO – Unitus Donors ask uncomfortable questions

High Profile Donors To Unitus Asking Questions About Profits That Could Be

Investors linked to a charity stand to receive millions of dollars when a company they supported in lending to the poor in India goes public next week.

The charity, Unitus, abruptly dismissed most of its staff this month, saying it had accomplished its mission of creating an avenue for private capital to flow into microloans. However, its for-profit arm, Unitus Equity Fund, lives on and stands to receive an estimated return of about $70.4 million on the $6 million in private funds it invested in SKS Microfinance of India over the past few years.

SKS’ initial public offering is a major event in the development of the microloan industry in India. With more than 1,600 offices and 17,000 staff, SKS is the largest Indian microlender and also the first to go public there. Many cite its success in using private capital for small-business loans—typically between $40 and $200—as proof that private investments can help alleviate poverty.

Bill Gates and other big-name philanthropists have funneled money into Unitus, and now there are questions as to where their money went

Indeed, that was one reason that Unitus founders gave for all but shuttering their organization earlier this month. “With $50 billion of microfinance capital available to more than 150 million of the world’s working poor…we feel the time is right for Unitus to seek out other transformative fields of endeavor,” Unitus chairman Joseph Grenny wrote in a July 14 letter to donors.

Unitus called itself a “microfinance accelerator” that used private donations to help build up SKS and other such lenders, while at the same time putting private-investment money to work funding the loans.

But as the SKS IPO nears, the potential return is raising questions about the ethics of combining charity and business—and the extent to which Unitus founders and board members may profit personally from their investments. Citing confidentiality, Unitus never publicly disclosed who the investors were in the Unitus Equity Fund.

Herb Bridge, co-chairman of Ben Bridge Jewelers in Seattle, Washington, said he has given $10,000 to Unitus, and the charity did not tell him it had created an equity fund that was investing in the microlenders that Unitus was assisting. “Whether for good or ill, I feel that lack of representation is the same as misrepresentation,” Bridge said.

The microfinance industry is struggling with the issue of how philanthropists should use donations to help for-profit microlenders. A New York organization focused on financial access for the poor questioned whether a Mexican microlender that went public in 2007 improperly used aid to enrich its investors.

“That dilemma is not only there in SKS and for organizations that Unitus is involved with, it is across our industry,” said Greg Chen, a representative for the Consultive Group to Assist the Poor, which authored a report on Mexican microlender Compartamos Banco. The report determined that Compartamos had not improperly used public aid to enrich investors.

Nobel Prize winner Muhammad Yunus, considered the founder of microfinance, has criticized the SKS IPO. “Microcredit should not be presented as a money-making opportunity. It is an opportunity to make an impact on poor people’s lives. An IPO gives a wrong message,” Yunus was quoted as saying by the Wall Street Journal.

The SKS offering is particularly important because India is the world’s largest microcredit market. If its IPO succeeds, others stand ready to go public.

Prior to and around the time of the investments in SKS, Unitus was raising money from other donors to help with the mission. It found many individuals and institutions willing to support the cause, including the Bill & Melinda Gates Foundation, Boeing Co., Washington State Department of Commerce Director Rogers Weed, and Danny Ainge, general manager of the Boston Celtics basketball team. One of the largest donors, giving a total of $11.7 million, was the Omidyar Network, the charitable foundation of eBay founder Pierre Omidyar. Omidyar also was an investor in Unitus Equity Fund, so it stands to share in the profit.

Matt Bannick, managing director at Omidyar Network, told the Puget Sound Business Journal he wasn’t sure how much his group would receive for the $5 million it invested in UEF.

Bannick also served on the Unitus board for several months, but resigned in May when “it was becoming increasingly apparent to me that management wanted to go in a different strategic direction,” he said. Bannick’s departure preceded the recent resignations of three other Unitus board members, one of whom said she left in protest over the decision to lay off the Unitus staff and reorganize.

UEF already has cashed out part of its holdings. Last July, it sold about $10 million worth of stock to another investor, keeping a minority stake in SKS, according to the SKS prospectus.

Next week it will further reduce its stake by selling about 1 million shares at the IPO. That will leave UEF with about 2.6 million shares in SKS that won’t be part of the public float.

The shares, due to be priced July 28 to 30, are expected to value SKS at just over $1 billion, with the publicly traded shares worth an estimated $275 million.

At that price, about $16.38 a share, Unitus Equity Fund’s 3.69 million shares would be worth about $60.4 million, a significant return on its $6 million investment, made between 2006 and 2008.

How those proceeds will be distributed remains unclear. UEF, which is registered in the Cayman Islands, hasn’t disclosed who all of its shareholders are and how much they have invested. It also is unclear who among Unitus’ founders and board members invested in UEF. The fund invested in SKS through an entity called Mauritius Unitus Corp., registered in the tiny island nation of Mauritius off the coast of Africa.

In response to questions from the Business Journal, Unitus co-founder and chairman Joseph Grenny declined to provide specifics.

“We candidly do not feel this is a productive line of inquiry for Unitus,” a spokesman for the charity wrote in response to an interview request by the Business Journal. The UEF investors are considered “promoters” of SKS stock and are prohibited from making public statements that may affect the stock’s pricing during a “quiet period” around the IPO, according to a Unitus spokesman.

However, in an earlier interview, a Unitus official gave some details about the Unitus Equity Fund investors. The fund raised $23.6 million in 2007 to invest in SKS and other microfinance companies. UEF’s investors fell into four main groups, each contributing about one fourth of the fund total, according to the interview with Christopher Brookfield, who was the fund’s director at the time and a Unitus employee. The interview was published on a blog run by a Unitus board member.

He identified the investors as: “Unitus board members and friends; Omidyar Network; professional investors who are leaders in technology VC (venture capital), private equity, and health care; and a group of socially responsible investors managed by Abacus Wealth Management.”

Brookfield declined to be interviewed for this article.

Regulatory filings indicate some Unitus board members had invested in UEF. Unitus board member and co-founder Michael Murray’s charitable foundation had about $250,000 invested in the fund, according to his foundation’s 2008 tax filing, the latest available.

Former Unitus board member Geoff Woolley, who is helping lead the reorganization of Unitus following its closure this month, is a member of the Unitus Equity Fund investment committee and also sits on the SKS board of directors. Woolley holds 36,000 shares of SKS stock, according to the SKS prospectus.

The nonprofit Unitus charity also appears to be an investor in UEF. Through a subsidiary, it had $142,647 invested in UEF, according to a 2008 tax filing.

The Unitus charity channeled about $6.6 million in donor cash and services to SKS. This support, which is separate from the private investment capital, provided operational funding, technical advice, and other help that Unitus says is now no longer needed.

During the period when those donations were made, SKS grew rapidly. In 2003, when Unitus began providing SKS with assistance, the microlender had about 10,000 borrowers. Today, SKS serves more than 6 million borrowers.