Let us Share – Banco Compartamos

Banco Compartamos was formed in 1990 as a private organization to aid the poor in rural areas of Chiapas and Oaxaca, Mexico, by providing microloans to the low income population of the region. In 2001, Carlos Danel and Carlos Labarthe, known as “the two Charlies,” took the organization private, and then in 2007 took Compartamos public in an IPO valued at $1.56 billion. Compartamos executives received $150 million of the $450 million in proceeds. Banco Compartamos became one of Mexico’s most successful banks, with an average return on equity of at least 40 percent.

However, after the IPO many criticized that Compartamos no longer benefitted the people but more so worked for its shareholders, a disservice to the world of microfinance. Many in this field saw such a successful and model microfinancing bank completely sell out to the world of big banks. There was also a worry in Compartamos’ social mission being lost.  With the 27.1 price to earnings ratio Compartamos had after the IPO, it was harder to reduce rates if need be in the future, and this indicated high profit expectations which meant tending to the needs of the shareholders was going to be high on the priority list. This new dimension to the company is exactly what made others believe Compartamos had lost their way and was taking the wrong path. This IPO also meant rapid growth in the front office, which meant spending more money to catch up the back office with management info systems, a huge fear in the world of microfinancing.

In weighing their options, the two Charlies considered a private sale of the company, but saw that a private sale had biggest threat to company because it would threaten the current mission and strategy if it were to be under new management. Another option was to continue looking for private investors, which is not only time consuming but demands higher returns and raises less capital than a public offering. Therefore a public offering seemed to be the only viable option under a couple conditions. Some of the conditions ran along the lines of no more than 30% of shares could be sold and no single investor could own more than 10%, to avoid one investor becoming too powerful. With enough leverage, the two Charlies could still run the company their way with their mission.

The IPO proved to be very successful, bringing in $1.56 billion in capital, selling at around $40 per share. Such a figure could have never been raised by non-commercial investors. However, this money had now made an almost impossible goal of 1 million clients, attainable now. A goal that they had set back “in the NGO days,” was a reason they saw themselves still on the right path. The capital now allowed them to expand to more clients and allowed them to offer different products other than their GDI. Among these two were many other opportunities of expansion. The cost of setting up a bank prior to the IPO was around $50,000, to build a new branch now that complied with banking standards cost around $200,000. So even though the new capital allowed expansion, it was almost relatively the same. The two Charlies also mention advice that made them consider what they had done from Luis Velazco saying, “Strategy drives finance and not the other way around.” Velazco’s words resonated in them as they wondered if their method of financing was really a medium to carry out their mission and strategy or not.

As the CEO of Compartamos I would have been against the IPO. I would have been against it because I believe it has distracted the company. It has brought another dimension that needs attention and thus removing administrative attention from their mission and purpose. The company had clearly been successful up until that point, with ridiculous returns on investment; I don’t see how hard it actually would have been to find more investors. The IPO simply juiced up all their operations but when their goal is to reach 1 million clients and the cost of a new branch is amplified four fold then they’re relatively in the same place. In addition to all the regulations, standards, quarterly reports and critizing by the financial world of Wall Street they must deal with now. If anything I believe if the company’s purpose is to provide low income financing, it should do that and grow at its own pace, especially if it has been so successful thus far. If the two Charlies had other ambitions, they should have made a separate company or entity to run alongside their private bank. Running the same programs but for profit and then going public would have been the more rational thing, as long as they kept one of the entities fully dedicated to its purpose of microfinancing.