Microfinance Funds, Investors Experience Uptick
Riva Froymovich, Investment News, March 26, 2007

Foreign-capital investment in microfinance reached an unprecedented cumulative $4 billion last year.

That’s a significant jump from $2.5 billion in 2005 and $1 billion in 2004. Microfinance funds crested at $2 billion last year, growing from $600 million in 2004, said Elizabeth Littlefield, president and chief executive of the Consultative Group to Assist the Poor in Washington.

CGAP is a consortium of 33 private and public development agencies seeking to expand access to financial services for poor people in developing countries.

Ms. Littlefield was speaking at the Microfinance Cracking the Capital Markets II conference in New York, which was sponsored by Credit Suisse Group of Zurich, Switzerland.

In developing countries, microfinance gained prominence in the 1970s as a way to provide small-business loans, mostly to women.The goal was for them to achieve financial independence.

Since then, a reliance on mainstream investment structures such as credit enhancements, mezzanine funds and international collateralized debt obligations has helped to fuel the growth of microfinance, said Ms. Littlefield. The effect has been a significant increase in the number of investors and funds, though the sizes of the latter are mostly modest.

Catching on

By the end of last year, there were 74 microfinance funds in operation — 30 of which were established either in 2005 or 2006. About 82% of them had less than $20 million in assets under management, and the top 10 funds accounted for 65% of total microfinance fund investment, Ms. Littlefield said.

Most notable is Frankfurt, Germany-based ProCredit Holding AG, which has 19 banks operating in Central and Eastern Europe and in developing countries, she added.

But investors are recognizing the potential of these funds to generate profits, speakers at the conference agreed.

For instance, New York-based TIAA-CREF last year launched the $100 million Global Microfinance Investment Program, the largest fund relying on a socially conscious screening process to identify investments. The fund’s goal is competitive returns within an asset class, Scott Budde, managing director and head of social and community investing for TIAA-CREF, said at the conference. The bulk of their investments are in equity funds, he said.

And new types of offerings are evolving. A case in point is The Gray Ghost Fund Inc., the first microfinance fund of funds, which has assets under management of $75 million.

“[There] weren’t many private investors who were going to invest time and effort and take on the challenges of establishing a direct relationship,” said Paul DiLeo, managing partner and chief investment officer at the Atlanta-based firm.

Like the TIAA-CREF fund, Gray Ghost judges returns by their social impact and by their financial prospects. It is invested mostly in Latin America and focuses on equity funds, local country managers and young microfinance institutions that are close to earning a profit or have earned a profit, said Mr. DiLeo.

“We really need to be looking at funds that offer something over 20% [returns],” because investors compare the investment performance to emerging-markets returns, he said.

While there is huge potential in this market, the ability to place large investments is limited, said Jean-Philippe de Schrevel, managing director and founder of Geneva-based Blue Orchard Finance SA. Once retail investors begin to participate, there will be a flood of money flowing into the sector, he said.

“If microfinance is an appealing concept for professional investors, it certainly is an appealing concept for everyone,” Mr. de Schrevel said after his speech. “Think about the masses of capital you could raise. The question is: Where could you put this money to work in the best possible way?”

Expanded pipeline

Accion International of Boston seeks to answer that question and help microfinance institutions grow so that they can handle a larger pipeline of investments, said Maria Otero, president and chief executive. Accion, the host of the conference, provides loans and business training to poor men and women who start their own businesses.

In the meantime, limited capacity has resulted in forfeited opportunities. Mr. de Schrevel said he is about to close a fund because he cannot find places to invest more money.

Other constraints potentially facing investors is transparency, he said. Microfinance funds are not rated, benchmarks for them don’t exist, and they rarely publish reports. Therefore, the cost of research and of entry into microfinance for investors is quite high.

Those barriers are a concern, and they may need to be addressed.

“In the end, do you want to link with capital markets and investors or do you want to work for the poor and not [apply ratings]?” said Mr. de Schrevel.

However, Ms. Littlefield contended that the participation of foreign capital is temporary. “This is not about building an asset class,” but it is about building a line of locally based microfinance institutions throughout the world.