Microfinance Investment Vehicles
Introduction to Microfinance Investment Vehicles
Comprehensive List of Microfinance Investment Vehicles
Introduction to Microfinance Investment Vehicles
Microfinance investment vehicles (MIVs) are private entities which act as intermediaries between investors and microfinance institutions. While all MIVs by definition share this basic function, they also differ in many ways. MIVs may be self-managed, managed by an investment management firm, or by trustees. They may receive investments through the issuance of shares, units, bonds, or other financial instruments. Depending on the type of MIV, these investments may then be provided to MFIs as debt, equity, or guarantees. MIVs make use of different currencies as well, since they are located all over the world. While some MIVs are primarily profit-seeking, others additionally combine the objective of social impact. This diversity among MIVs makes it possible for many different types of investors to get involved in the microfinance sector.
Growing Investment Option
Given MFIs’ small size and relative lack of financial sophistication, except for a few local bond issues and four publicly traded MFIs, direct microfinance investments are private transactions. While DFIs, some banks and hedge funds have made direct investments, most investors entrust their funds to MIVs. These have the capacity to conduct the specialized due diligence and monitoring required for sound investing in this niche market, and fund investing confers the added benefit of diversification across many MFIs, countries and currencies.
The unprecedented flow of private sector funds has spawned the creation of more than 100 MIVs, which channel approximately half of all investment from private sources into MFIs. MIVs may offer fixed income, equity or mixed investment options and run the gamut of registered mutual funds, private equity funds, microfinance bank holding companies and structured finance vehicles. In addition, their level of commercialization and corresponding return targets range from development funds that seek capital preservation, to quasi-commercial funds that pursue a blended social/financial objective and are willing to accept below-market financial returns, and to fully commercial funds seeking risk-adjusted returns.
IAMFI estimates that as of April 2009 there are 104 MIVs with a total of $6.1 billion in assets under management. MIV investment has achieved a CAGR of 59% from 2004-2009. According to MicroRate, some of the major factors driving this growth rate include active distribution, financial innovation, and high involvement from development financial institutions (DFIs). According to CGAP, in 2009 75% of MIV deals were in debt, 24% equity, and 1% guarantees.
Challenges
In terms of MIV investment, from the investors’ perspective the industry suffers from a dearth of information, a low level of transparency, a lack of accepted guidelines and standards. This makes it difficult to compare MIVs or undertake projects such as MIV rankings. The absence of other investor services common in more established asset classes such as debt default tracking, objective equity valuations, exit strategies, a secondary market for liquidity, and fund manager rankings also obscure the ability to make informed investment decisions.
In the view of many MFI managers and social investors, commercial funding may cause mission drift. Regulated MFIs’ loan portfolios reflect a higher average loan size, a smaller percentage of women borrowers and a lower ratio of rural to urban clients; this evolution in client profile indicates that given their obligations to lenders and shareholders, commercial MFIs may lose sight of serving the poorest of the poor. Some believe that this decline in social impact is encouraged by MIVs. Their recent rapid growth and the increasing share of commercial funding in their portfolios have raised concerns that financial returns have been pursued at the expense of social impact.
Trends
Despite the recent allocation of MIV investments heavily on the side of debt, with too much capital chasing too few deals, pricing has become unattractive for debt investors seeking market returns. Furthermore, many MFIs have reached leverage limits. Consequently, MIVs have been exploring equity investment opportunities more aggressively. According to the J.P.Morgan – CGAP microfinance equity valuation study published in February 2009, 24 specialized equity funds manage a total of US$1.5 billion. Several MIVs that previously invested exclusively in debt have been allocating a percentage of their portfolios to equity. Blended debt/equity funds have been increasingly prominent as well, generating positive returns in 2008.
Both debt and equity investment have decreased as a consequence of the financial crisis, and MIVs have adjusted their fundraising targets downward. European funds appear to be less impacted than their U.S. counterparts by the market paralysis, possibly due to a stronger social orientation among investors.
However, the outlook for MIV investment is not as negative as might be expected. This is due in part to the surprising stability of microfinance debt performance due to its relatively low default rate. In 2008 the International Association of Microfinance Investors (IAMFI) conducted the first comprehensive analysis of commercial microfinance debt default by MFIs to MIVs. MFI debt is estimated to correspond roughly to a BB to B rating using mainstream rating agency criteria. IAMFI determined the historical microfinance debt default rate to be 2%. Due to fundamental differences between microfinance and commercial approaches to measuring and tracking default rates, direct comparison of the microfinance debt default rate and the mainstream raters’ cumulative default rates is methodologically flawed. However, in an admittedly apples-to-oranges comparison, microfinance’s MFI to MIV 2% debt default rate would correspond roughly to a BBB rating grade. Microfinance debt has behaved as if it were higher rated.
Sector Development
As microfinance investment continues to grow, the role of MIVs will only increase in importance. Given the current challenges and strengths of MIV investment, there are several improvements that should be actively pursued, including full transparency, standardized and consistent definitions and metrics, complete and timely reporting and disclosure, and the development of standardized classification systems that would allow the comparison of MIVs to each other and to other commercial investment choices. IAMFI aims to help investors evaluate risks and opportunities in their investment decisions as a contribution to an industry-wide progression toward commercialization as a means to leverage capital more effectively in the fight against poverty.
To learn more about MIV debt investing read the Key Findings from the IAMFI study Zero Is Not the Number: The Microfinance Debt Default Rate.
To learn more about microfinance investment, visit the Industry Landscape Microfinance Investment page.
To learn more about MFIs, visit the Industry Landscape Microfinance Institutions page.
More information about MIVs is available in the MIVs section of IAMFI’s Current Research page.
More information about IAMFI’s industry building initiatives can be found in the Programs & Services, Collaborators, and IAMFI Events pages.
Comprehensive List of Microfinance Investment Vehicles
The following is a complete list of the microfinance investment vehicles in existence as of July 2009. Each fund name is a hyperlink to a website that provides further information on the fund.
In the interest of representing the limited partner microfinance investor perspective, IAMFI has based this list on the definition of a MIV as a microfinance investment vehicle in which private investors may participate with the full rights of a limited partner. Therefore, facilities, holding companies, and endowments have been excluded.
For more definitions visit IAMFI’s Glossary of Microfinance Terms & Acronyms.
Adam Smith Ventures |
Microfinance Loan Obligations (MFLO) 2: Opportunity Eastern Europe |
SIDI (Solidarité Internationale pour le Développement et l'Investissement) |
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