close window
Microfinance is a young industry that hasn’t been wholly successful in getting its message across to larger institutional investors, said Mark Kenderdine-Davies, general counsel and company secretary for the UK government-owned developmental finance institution CDC Group, during a panel discussion on “Investments in Microfinance.”
The afternoon session was part of the Chicago Microfinance Conference at Harper Center on May 6. The panel was moderated by John Heaton, Joseph L. Gidwitz Professor of Finance, and included Fernanda Lima, vice president of Developing World Markets (DWM), and Ron Dadina, managing director and chief credit officer of Minlam Asset Management LLC.
“Microfinance has a story to tell - it has a narrative - but that message is not reaching larger investors investors,” said Kenderdine-Davies, whose CDC Group provides capital to private sector businesses in developing countries.
“In the main, these investors are not attracted microfinance yet,” Kenderdine-Davies said. “Typically you see high net worth individuals, some endowments, and development finance institutions such as CDC and International Finance Corporation [investing]. But over time, as the industry matures, you should see traditional institutional investors entering, at which point the likes of CDC will start exiting, because there’s no point in development finance institutions continuing to invest in industries which are capable of attracting the substantial institutional capital. Our job is done.
Dadina said that the industry is still in its “sunrise phase” with “some bad apples” but there are many more success stories and institutions that are doing a great job.
“For every one bad apple, there are five doing good work,” he said. “There are some countries where there has been a saturation of the market, but there are many more countries where the industry has not yet developed and there is significant potential. It’s just a matter of time that the industry will develop in these countries too.”
According to Dadina, European investors are “ahead of the curve,” in microfinance investing. Many major pension funds in Europe invest in microfinancing, while in the US, only one major pension fund has invested, he said. “US investors, especially institutional investors have not yet taken to investing in microfinance and are behind the curve.”
Dadina said his Minlam Asset Management has both institutional and private investors. “Our private investors are primarily high net worth individuals. Our two anchor investors are the CDC Group and a US university endowment.”
Kenderdine-Davies emphasized you must have “skin in the game” when raising capital to fund microfinance investments.
“What this means is that if I’m going to give you my capital to manage, I want you to have your capital invested alongside my capital, so our interests our aligned,” he said. “This is no different when you’re backing a big private equity firm or a small microfinance firm. You always want to have some of the fund manager’s money alongside your money.
“Now people in the microfinance industry generally don’t have too much spare cash, but that’s not an insurmountable issue,” he added. “We’ve backed microfinance funds where the founders of those funds have put in relatively small amounts of money, but the money’s really meaningful to them - it would hurt them if they lost it. This aligns their interests with ours.”
Kenderdine-Davies said his firm currently invests in funds with underlying microfinance businesses in Madagascar, Liberia, Tanzania, Nigeria, Tajikistan, Pakistan, India, Cambodia, Congo, and elsewhere in Sub-Saharan Africa and South Asia.
Lima, whose firm DWM works in 45 countries, said she sees “a lot of growth and opportunity” in Southeast Asia and Central Asia. “Their microfinancing institutions are less developed than Latin America,” she said. For the firms mostly institutional investors, microfinance has developed into a separate asset class, she said, representing a unique investment strategy to achieve both financial and social returns.
Dadina also anticipates future investment in South Asia and Latin America. “There’s also significant potential in Central Asia, Africa, and Sub-Saharan Africa,” he said.
Kenderdine-Davies said it’s difficult to measure the social and developmental returns of microfinancing. He proposed it as a new field of study. “It’s quite easy to assess financial returns. But assessing developmental and social returns is far more difficult. I suggest to students that they work on new methodologies to assess developmental and social returns in hard, data-based ways. What a great way to start an academic career.”
Tristram Hewitt, a student in the Full-Time MBA Program, said the panel discussion informed him about “the complexities of investing in microfinance, how it’s different from other asset classes, and the balance between the social return versus the financial return.”
—Mary Paleologos