MicroVest, a for-profit asset management firm owned by three non-profit organizations, treated the challenge as an opportunity to re-engineer its financial offering so it could continue to make debt capital available to microfinance institutions in 66 developing world countries.
Since September 2010, its new fund has raised $74 million and, by MicroVest’s count, has impacted more than 3.5 million people in the developing world who have been served by the banks MicroVest lends to. More than half of the borrowers are women. All told, MicroVest has nearly $300 million under management.
MicroVest’s flexible response shows how financial innovation in Bethesda, Md., can help foster entrepreneurship in the developing world. ”Investing in under-banked markets is the best way to reduce poverty on a global scale,” says Gil Crawford, MicroVest’s CEO and a strong proponent of a commercially-minded approach to social impact.
“The financial organizations we invest in share our belief that this is the best way to promote financial inclusion and empower the productive poor,” Crawford adds.
Investors had been skeptical of MicroVest’s first fund when it was launched in 2003. Microfinance was not yet an established investment category. Some investors were confused by the hybrid debt-equity structure. “Investors want you to fit into one bucket or another,” says David Wedick, MicroVest’s director of strategic operations and business development.
At the time, MicroVest’s chairman, Bowman Cutter, told The Wall Street Journal that raising the MicroVest’s first $15 million, which took three years, was more difficult than the last $15 billion he helped raise for private equity firm Warburg Pincus.
MicroVest’s record helped show that institutions that lend to small- and micro-enterprises can be a solid financial bet. That first fund achieved mid-single digit returns for its investors and gave MicroVest a customer list of credit-worthy financial institutions with an ongoing demand for capital that MicroVest could continue to supply.
Microvest is largely owned by the relief agency CARE, the Mennonite Economic Development Associates (MEDA) and the Cordes Foundation, established by Ron Cordes and his wife, Marty. Other investors include Omidyar Network, Clara Fund, and KL Felicitas Foundation.
“We believe we deliver strong returns in this sector not despite but because of our focus on social impact,” says Cordes, a founder of AssetMark Investment Services. “The financial institutions that deliver the best long-term performance are the ones who are focused on delivering products and services that empower their clients to live better, more productive lives.”
That impact focus drove MicroVest to find a way to attract new kinds of investors. Some institutions and individuals were on board to support microfinance, but needed additional liquidity, the ability to withdraw their money more easily than MicroVest’s traditional fund structure would allow. In MicroVest’s “perpetual life fund” investors need not commit their capital for years at a time; they can pretty much come and go as they please. (MicroVest marks the value of the fund on a monthly basis.) The Calvert Foundation contributed a key slug of the $7 million to launch the perpetual life fund in 2010.
“We and other similar investors are attracted to perpetual life offerings as they provide us with flexibility in the management of our capital – both to make additional investments as capital is available and to take distributions as well,” Cordes says.
Increased liquidity effectively lowers risk and thus boosts MicroVest’s risk-adjusted returns. MicroVest is now expanding beyond its early impact investors who had accepted higher risk as MicroVest built its track record. Crawford is seeking to attract traditional institutional investors and wealth managers focused solely on risk, return and liquidity. Many investors still equate social metrics with charity. Yet more than dozen financial advisory firms have approved MicroVest’s funds on behalf of their clients.
“We have earned our place at the table,” Crawford writes in a report on MicroVest’s plans for the next 10 years. “We are asking impact-agnostic investors to tell us why our funds don’t fit in their current portfolios.”
MicroVest has raised five funds since its launch in 2003 and has grown to nearly $300 million in assets under management. Its first fund, Microvest I, achieved financial returns in the mid-single digits.
Capital from MicroVest’s perpetual life fund has reached more than 3.5 million people, through the financial institutions to which MicroVest lends. Over half of the borrowers are women.
One of a series of impact profiles produced in conjunction with the Case Foundation’s new publication, “A Short Guide to Impact Investing.”