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Capital market investors interested in microfinance range from high-net-worth individuals to huge financial institutions, said Bridget Burkhardt, senior financial analyst for Shorebank International. “High-net-worth individuals tend to focus heavily on the social return aspect,” Burkhardt said during a panel at the Chicago Microfinance Conference at Gleacher Center on April 18.
“In the middle are development banks and international financial institutions that are looking for a very blended financial return,” she added. “True development agencies put capital into the market to catalyze development output and help get a market started. Different types of investors invest at different stages. In more developed markets, there is a broad range of investors.”
Before the credit crunch in summer 2007, investors had a great appetite for microfinance because the structure allowed them to combine different risks and rewards, said Henry Gonzalez, vice president in Morgan Stanley’s microfinance institutions group. Rated transactions opened the doors for mainstream institutional investors, Gonzalez said.
“Post-summer 2007 and today, it is challenging sometimes to bring in those investors,” he said. “Many of them can only do rated products and some require subordination, which means they cannot take, for example, a non-structured, back-to-back loan on their records. Creativity is at play, where you have to understand an institutional investor’s needs.”
Spreads on microfinance investments are coming down because MFIs are getting very savvy about negotiating and many investors are competing to provide capital, said Mike Gabriel, an associate with the Capital Management and Advisory Center for Grameen Foundation. “It’s becoming more competitive in some of the local markets where MFIs are operating,” Gabriel said. “Achieving profitability is more challenging.”
Nonetheless, the jury is still out on what types of returns private equity funds can offer with microfinance, he said. “Many of those funds haven’t actually closed yet,” Gabriel said. “More and more equity funds are expecting traditional private equity returns upwards of 20 percent. We’re still kind of in the early phase, but that will be interesting.”
Developing World Markets measures and collects data on several social indicators that it provides to its investors, said Simone Balch, who is responsible for financial analysis and identification of investment opportunities, marketing, and investor relations for the firm. Those include numbers of urban and rural clients, types of businesses that clients enter, and average loan size, Balch said.
“There is a lot of intangible social impact that is hard to measure,” she said. “For example, we know that microfinance is helping many women have a voice for the first time in their household and to be the driver of economic improvement at home. That’s very hard to quantify. We know more children are getting food and education. How do you measure that -- bythe number of people who graduate from high school, or make fewer visits to doctors? Or by how much people weigh?”
Conference organizers invited the panelists to explore how microfinance can link those who have large amounts of money with those who need it most, a question raised during a keynote address at last year’s conference, said Olena Verbenko, a PhD student at Harris School of Public Policy and member of the organizing committee for the second year.
“We determined that in the last two years, many of the financial institutions that manage private wealth funds and investment banks that manage their own funds had started to invest in microfinance,” Verbenko said. “This includes insurance companies and wealth management companies. They started many microfinance innovations. We wanted to get people from different organizations, funds, and banks to share their experience, what vehicles they’re using, and why they’re using those vehicles.”
—Phil Rockrohr