Saturday, August 21, 2010

Shorebank's Shadowy PEU

Defunct ShoreBank had a private equity division, ShoreCap International. An overview stated:

ShoreCap International Ltd. is an international private equity company seeking to invest in small business banks and regulated microfinance institutions in countries with developing and transitional economies. Founded in mid-2003 with $28.3 million in capital commitments, ShoreCap’s goal is to support the growth of development finance institutions in Africa, Asia and Eastern Europe. After more than three years of operations, the company has invested / committed nearly $14 million in 11 financial institutions located in Bangladesh, India, Kenya, Cambodia, Armenia, The Gambia, Mongolia, Tajikistan, Uganda, the Philippines, and Afghanistan.
ShoreBank started ShoreCap International during the Bush years. His reign was good to private equity underwriters (PEU's), at least until the very end. However, Shorebank ended up government subsidized, like Bush's TARP.

ShoreCap was created by ShoreBank Corporation, a $1.7 billion asset U.S. community development bank holding company with over 30 years experience in building sustainable development financial institutions. In addition to its own regulated banking operations, ShoreBank has been a leading provider of technical assistance and capacity building services to financial institutions in developing economies around the world. ShoreBank is a $2.5 million investor in ShoreCap and runs the management company which oversees investment activities.
ShoreCap's minimum investment size is $500,000 and the firm has a targeted rate of return of 12-15% per annum. Who knew microfinance spun off those kinds of returns?

ShoreCap's investor list, other than ShoreBank, included:

ABN AMRO Bank, the Asian Development Bank (ADB), BIO, Calvert, CDC Group, the European Investment Bank (EIB), the Evslin Family Foundation, Finnfund, FMO, Ford Foundation, Gatsby Charitable Foundation, the International Finance Corporation (IFC) and the Skoll Foundation.

Interesting, especially given the mix of Wall Street firms and private foundations that banded together to take over ShoreBank's deposits.

ShoreBank promoted ShoreCap International's sister relationship with ShoreCap Exchange.

ShoreCap Exchange is a not-for-profit company which provides technical assistance and knowledge networking services to all ShoreCap Investees. Prior to investment, ShoreCap Exchange conducts an in-depth needs assessment of the institution and prepares a comprehensive technical assistance plan. Working with local management, ShoreCap Exchange then oversees implementation of the plan by offering a choice of TA providers and grant funding to help pay a portion of the cost of the services. In many cases, it will be ShoreBank’s own senior staff that will assist Investees in achieving their expansion and development aspirations.

The nonprofit mobilizes grant funds on behalf of private equity affiliates. ShoreBank senior staff provide skilled management to the table in their private equity role.

How do PEU annual management fees and special dividends play out in microfinance institutions? Their annual report doesn't say. However, it did boast of a 23% rate of return.

Update: ShoreCap International's website remains under revision, however ShoreBank International put out a statement.