Achieving impact through frontier investment
Larry Fink’s annual letter to CEOs last year on how companies must have a social purpose helped shift the dial further in the direction of impact investing. Undeniably, this follows a trend that has taken hold in recent years, as investing with a social conscience has gained its own mammoth momentum.
On a wider scale, the need to harness the power of private capital to solve global challenges has been felt around the world and resulted in some fund managers increasingly committing to help scale social impact investment. One company that has been leading the way is MicroVest, a US-based asset management firm dedicated to applying a commercial framework to investing in unbanked and under-served markets.
Founded in 2003, MicroVest aims to demonstrate that investing in an aspiring, and rapidly growing, middle class and its enterprises in a frontier market and focusing on a sustainable investment process that provides private capital to low-income financial institutions could, in turn, deliver good risk-adjusted returns.
‘We are about building financial institutions. It is a commercial approach that offers the most effective, scalable and sustainable solution for generating meaningful financial and social returns to our investors,’ Gil Crawford, CEO at MicroVest, tells IR Magazine.
MicroVest lends only to financial institutions or financial intermediaries. ‘We never make a direct loan to an individual or individual small business, always to a financial intermediary,’ explains Crawford. ‘Our loans tend to be over two to three years, so there is a fairly quick turnover in our portfolio. We have designed investment products that institutional investors, pension funds, insurance companies, family offices, registered investment advisers and endowments can come into.
‘During my most recent trip to London and Zurich, it was clear that European investors understand the importance of financial inclusion.’
With a track record of 15 years, MicroVest has helped bring financial accessibility to the unbanked or under-served regions of the world and held its banner high for promoting a sustainable and inclusive economy. Its assets under management now total $385 mn.
‘There are a lot of good economies in Africa that are not in the emerging markets indexes,’ notes Crawford. ‘By definition, these frontier economies are under-represented. In addition, think how difficult it is to get short-term credit in those countries. We are creating short-term, frontier assets that aren’t accessible to investors anywhere elsewhere.’
MicroVest’s chairman is Bo Cutter, a director of the National Economic Council during the Clinton administration and former chairman of the charity Care USA, as well as a major driver behind the whole operation. He realized that while non-profits make effective use of donations, financial intermediation is not part of their core competence.
‘We wanted to demonstrate to the capital markets that microfinance was an investable asset class,’ says Crawford. ‘We did have some basic principles, including that the initial fund would have to be large enough to attract large institutional ticket sizes, and that we would have a pro-business board of directors and an economist on the investment committee.’
So was his and Cutter’s approach purely business or ideological? ‘It was both,’ admits Crawford. Three non-profits now own 77 percent of the group with the other 23 percent owned by the senior management team.
As CEO, Crawford has the job of balancing the social and business benefits; a clear focus and a measure of diplomacy are much needed. Trained at Chase Manhattan Bank, Crawford learned the three ‘Cs’ of credit – cash flow, collateral and character – which he has changed to country, character and credit.
When looking at a country, Crawford and his colleagues look at four elements: the country’s financial system, the underlying economy, the political situation and the legal environment (involving the rule of law, transparency and the general environment to do business). ‘We have metrics for all those that give us an overall country score,’ says Crawford.
He also has an interesting way to find out what is happening on the ground in a country. ‘I talk to cab drivers and ask them where they are putting their money,’ he says. ‘We interview the clients of the institutions we underwrite, and also ask our local networks for character references of the senior management team before entering any new deal.’
This has obviously had the benefit of putting MicroVest in the driving seat of impact and social investing.