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Sequoia Invests $11.5 Million in Microfinance Fund

From Google to Yahoo! and YouTube, Sequoia Capital provided venture capital funding to some of the biggest cutting-edge talent in recent memory.

Now the private equity fund is making a big bet on microlending, with its $11.5 million investment in India's SKS Microfinance.

This is "the first pure for-profit private equity play" ever seen in the microlending world, SKS Microfinance CEO Vikram Akula said in an exclusive interview with CNBC. Sequoia's investment makes SKS the largest for-profit microfinance institution in the world.

An investment from a private equity firm of Sequoia's stature is seen as a sign that microfinance is no longer just a socially-conscious investment option, but a potentially profitable one for investors. Akula estimated that SKS' loans have a return on equity of 23%.

The concept of microfinance -- providing small business loans to poor borrowers who lack credit -- was made famous by Nobel peace prize winner Mohammed Yunus, founder of the not-for-profit Grameen Bank of Bangladesh. While the foundations are similar in concept, SKS' version of microlending provides loans that carry interest rates to its 600,000 members in 7,200 villages in rural India.

"We charge average interest rate of 24%," says Akula, explaining that while this rate is high compared with conventional loan standards, "It is actually the lowest cost financing available to the poor."

"The poor are credit worthy," adds Akula. "What they are looking for is the opportunity to access working capital."

Akula said that Sequoia's investment includes an exit clause; in the next three to five years, SKS will either have an initial public offering or be acquired. Sequoia's investment makes it SKS' lead investor. Other stakeholders including Unitus Equity.

According to the World Bank, foreign private investment has exploded over the past two years to more than $4 billion in 2006. Commercial banks like Deutsche Bank, Citigroup, HSBC and others are entering the market.

The interest of such global players shows that there is "tremendous business potential," according to microcredit specialist Guatam Ivatury of The World Bank.