MicroVest Sees Microfinance Shifting to Small Business
Microfinance—the business of investing in financial institutions that make loans to low-income entrepreneurs in developing countries—is a form of investing for social good that long predates the decade-old impact investing market.
Today, microfinance is a key part of many impact portfolios, representing 9% of assets held by impact investors surveyed by the Global Impact Investing Network, or GIIN.
But for MicroVest, a 15-year veteran fund manager in the sector, the practice of investing in microfinance institutions is shifting from “classic” microfinance—providing loans to individuals selling vegetables at a local market, for example—to investing in small businesses, a sector MicroVest says is often under-served.
“What happens when the woman borrower who started with a $200 loan has built her business and has 10 employees and now needs $5,000 in capital to buy equipment and machinery?” asks Ron Cordes, the former co-founder and executive co-chairman of AssetMark, who has invested in MicroVest through his family foundation since 2007.
“One of the issues with traditional microfinance is the organization she’s borrowed from to that point no longer has capacity to serve her,” Cordes says.
One of MicroVest’s objectives now is to serve this “missing middle,” by investing in low-income financial institutions with the capacity to lend to small businesses, to, in effect, strengthen the hand of these institutions to grow and serve more clients, which in turn helps to strengthen local developing economies.
“Small businesses pay taxes, so you can have schools and roads. They hire people outside of the family unit, they formalize and start to follow regulations, and they can link into the export economy,” says Gil Crawford, CEO, who co-founded the firm in 2003.
For example, the Indian School Finance Co., or ISFC, is a 10-year-old non-banking finance company providing financing to affordable private schools, small institutions that often fill a crucial education gap in India. ISFC helps finance new classrooms, labs, and restroom facilities, and has reached more than three million students, 20% of whom are in rural areas.
Today, 47% of MicroVest’s $381 million in assets are invested in institutions like ISFC, or others that lend to small businesses, while 48% are invested in companies involved in classic microfinance, according to the firm’s annual report.
MicroVest has two private, open-end funds for qualified investors. While the minimum investment is $250,000, individuals can also invest via ImpactAssets donor-advised fund. As a private investing vehicle, MicroVest can’t disclose returns, but the GIIN reports the private debt sector has low but stable returns averaging 2% to 4% annually.
Cordes was drawn to MicroVest as he and his wife, Marty, searched for investments aligned with the mission of their foundation, which was largely focused on supporting women and girls. In 2017, 59% of the borrowers funded by institutions MicroVest supports were women, according to MicroVest’s Social Impact Report 2018.
The Cordes Foundation invested in one of MicroVest’s early funds in 2007, “as much as a learning experience as anything else, to get familiar with the space and understand it.” As an investment manager himself, he appreciated the fact that the managers were “real investors” and found the approach was a “real blending of head and heart.”
Two years later, Cordes, who ended up investing 20% of the foundation’s portfolio in MicroVest and other impact investing vehicles, found these investments performed best through the worst of the financial crisis.
“I joke it was as if the thousands of women that MicroVest loaned to through microfinance institutions around the world just didn’t get the memo that there was a global financial crisis,” Cordes says. “They were going on with their lives, building their business, paying back their loans.”
By 2012, the Cordes Foundation—which today is 100% invested in impact investments—bought an equity stake in MicroVest. The nonprofits CARE and MEDA [Mennonite Economic Development Associates] are also major shareholders.
MicroVest invests in about 40 countries globally, a deliberate strategy to diversify and reduce risk. The firm also focuses on relatively short-term loans so it can quickly adjust its exposure to any one institution, or country, if issues arise, Crawford says.
With much of the impact investing market bar-belled today between large funds, like The Rise Fund, an expected $2 billion financing vehicle managed by TPG, and smaller venture capital funds, microfinance investing and other private debt funds can often fill a gap for investors on the supply side, he says.
Microfinance is “relatively low volatility and it’s liquid—to invest in MicroVest you don’t tie your money up for 10 years, in fact there’s liquidity as quickly as 30 days,” Cordes says. For a lot of wealthy individuals and family offices, it can be “an ideal entry point.”