Partner spotlight: How MicroVest combines a commercial and social approach to microfinance investing
Earlier this week OPIC announced that it has surpassed $1 billion in financing to support microfinance investing around the world. Here, we look at one of our microfinance partners, Bethesda, Maryland-based MicroVest, which invests in microfinance institutions in over 30 developing countries. Here, MicroVest explains its approach to successful microfinance investing and the ways OPIC has supported it.
MicroVest has an extensive reach across the world. Can you share one personal story of how the investments you’ve made have made a meaningful difference in someone’s life?
When we traveled to Mongolia on a due diligence trip, we visited a former Soviet era teacher who had built a thriving artisanal yurt manufacturing operation that employed more than 20 people and gave her family and her community a sense of larger purpose. The former teacher saw her business as an opportunity to provide work, training and hope for the entire neighborhood. This is the sort of personal story that we hear on every due diligence trip that is proof to us that microfinance has its place in the greater toolbox of development.
Explain the MicroVest approach to microfinance investing and why you believe that there does not have to be a stark separation between doing well and doing good?
Properly underwritten small businesses can see great productivity gains when they can get fair financing. We believe that traditional markets have overlooked the underlying economics of these businesses, and if properly banked, there is hidden value aligned with our values.
At MicroVest we’ve worked to adapt our due diligence process to better underwrite our investments, using a “three “C’s” framework focused on country, character and credit. We look for management teams that share our view that creating profitable multi-generational institutions tend to be good investments. We are able to produce risk-adjusted returns for our investors because of the social impact factors we look for in our extensive due diligence. It’s this focus on achieving a positive social impact that makes our portfolio companies successful in what they do.
When working in unbanked and underserved markets, why is a commercial approach so useful in achieving a positive impact?
The term “no margin, no mission” was coined by Catholic Sister Irene Kraus, who after World War II and with a very humble start ended up successfully growing a major hospital operation. She understood that charitable dollars are finite, and that while they may be needed to kick-start an impactful organization, that they ultimately will not be sufficient to reach the scale needed in the time frame demanded.
The balanced commercial approach is what enables MicroVest to reach more financial institutions and end borrowers. There is a strong need for self-sustaining, scalable endeavors if we ever want to make any real long-term change.
How has OPIC’s support made a difference in your work?
OPIC has a unique ability to scout out and support early commercial ventures that have long-term development potential. And for MicroVest, our partnership with OPIC has had a strong signaling effect to other investors. The presence of a strong and diligent partner like OPIC has added a valuable layer of comfort and validation. Finally, OPIC has been instrumental in allowing MicroVest to scale our funds, especially in the early days. In between individual investors and institutional investors there are few investors that can take the time to do due diligence on transactions as small as $5 million. OPIC has filled this niche for MicroVest and many others.
What steps does MicroVest take to ensure it is following responsible lending practices?
Following responsible lending practices is simply good business. At MicroVest we apply a number of criteria, including a demonstrated commitment to social justice, that help ensure responsible lending practices. We continuously train our staff to effectively screen potential investees, while updating our written policies and procedures. And we encourage responsible lending practices through industry initiatives such as the SMART Campaign.
What does MicroVest expect its focus and direction will be in the coming years with respect to raising capital for and investing in microfinance and related sectors?
We believe that the majority of our investments will remain within the traditional microfinance sector. Having said that, related sectors like education finance, factoring and trade finance are increasingly attractive to us. They help diversify our portfolios and we believe that a wider range of services are beneficial for the broader economic development of a country or society.
Regarding the liabilities side of our business, a focus on raising significant amounts of capital is essential to optimizing our impact. In the last three years we have seen increased interest from institutional investors in impact investing and we understand that to attract institutional investors, MicroVest must have institutional quality investment vehicles. We have been able to grow over the last 13 years into an institutional quality fund manager with OPIC helping bridge the gap.