56721 BRIEF MIV Performance and Prospects: Highlights from the CGAP 2009 MIV Benchmark Survey CGAP's 2009 Microfinance Investment Vehicles (MIVs) Survey sheds light on the resilience of microfinance investments. MIVs grew by 31 percent in 2008 and posted strong returns on investments in the face of one of the toughest financial crises in decades. However, overall MIV performance may deteriorate in 2009 as the impact of adverse market condi- tions, including increased credit risks, hits. The survey, for the first time, also reveals MIVs' efforts to include environment, social, and governance (ESG) considerations in their invest- ment policies, due diligence, and monitoring. Foreign capital investments in microfinance passed growth of 2007, but it is still impressive in the the US$10 billion mark in December 2008.1 More context of the 20 percent sell off experienced than half of this cross-border investment is managed by emerging markets funds in 2008 (Anderson by MIVs. This new and fast-growing segment of the 2009). Even during the first semester of 2009, emerging market asset class is attracting a broad MIVs continued to grow at an annualized rate of range of socially oriented investors. 16 percent, and asset managers reported very few fund redemptions as a result of the crisis. There are 103 MIVs with an estimated US$6.6 billion2 assets under management. Eighty MIVs The solid growth in MIV assets was supported participated in the third edition of CGAP's annual by a broad range of public and private investors. MIV Survey,3 representing 93 percent of total MIV Retail investors continued to invest in MIVs. For assets. Most of the funds are registered in Europe-- instance, the ResponsAbility Global Microfinance mainly Luxembourg and the Netherlands--because Fund, a retail-oriented fund, grew by 96 percent of favorable tax and regulatory frameworks. North in 2008. Institutional investors, who account for America hosts only 7.6 percent of MIV assets, 42 percent of funding to MIVs, maintained stable and no specialized fund has been registered by a asset allocation to microfinance. Public investors market authority in the United States. increased their microfinance commitments and launched two new funds providing liquidity for Slowdown in Growth, cash-strapped microfinance institutions (MFIs): but Few Redemptions the US$250 million Microfinance Enhancement Facility4 created in February 2009 and the US$100 Among the MIVs surveyed, assets under million Microfinance Growth Fund5 announced by management grew by 31 percent in 2008. This U.S. President Barack Obama at the summit of the is much slower than the exuberant 72 percent Americas in April 2009. 1 Stock of microfinance investments (equity and debt capital) from development finance institutions and private investors. 2 As of December 2007, there were 91 MIVs with estimated US$5.4 billion assets under management. 3 Conducted by Symbiotics, a company based in Switzerland that provides information and asset management services to the microfinance industry. 4 Launched by two large development finance institutions: IFC and KfW. 5 A partnership of the Multilateral Investment Fund at the Inter-American Development Bank, the U.S. Overseas Private Investment Corporation, and the inter-American Investment Corporation. September 2009 2 Figure 1: Number of MIVs Figure 2: Total Assets Growth(1) 120 80% 72% 103 68% 70% 100 92 60% 80 75 80 50% 62 60 40% 58 31% 43 29% (2) 30% 40 36 40 30 25 20% 23 20 10% 0 0% 2000 2002 2004 2006 2008 2006 2007 2008 2009 (1)Total Assets growth rate based on data provided by participating MIVs All MIVs CGAP Survey: Participating MIVs (2)Asset managers forecast for 2009 In total, 11 new funds were created in 2008. concentrated--76 percent of MIV investments are Among the new funds, there is a greater emphasis in Latin America and in Eastern Europe/Central on equity investments, new markets such as Asia. Asia is catching up, with growth of 55 percent agriculture, and new financial services. For in 2008 primarily fuelled by the rapid expansion of example, the LeapFrog Financial Inclusion Fund the Indian microfinance market. focuses on microinsurance. Performance of Fixed-Income Still a Hard Currency, and Equity Investments Fixed-Income Business Steady return for fixed-income (debt) funds. MIVs are a diverse group, comprising structured Registered fixed-income mutual funds are finance vehicles, private equity funds, holding the largest category of MIVs, with 13 funds companies of microfinance banks, and fixed- representing total assets of US$1.8 billion. income funds. Supervised by market authorities, these MIVs are also the most transparent. MIVs' preferred investments are still fixed-income debt instruments in hard currency, with 76 percent Over the past three years fixed-income funds of total fixed-income investments denominated in have posted net returns between 5.8 percent and Euros or dollars. Such investments may leave MFIs 6.3 percent in U.S. dollar terms (see Figure 3). with large and often unhedged foreign exchange The narrow variation in the rate of return over this currency exposure. period characterized by high market volatility is due in large part to MIVs charging fixed interest Equity investments are growing faster (up by 47 rates, rather than variable rates, on their loans to percent), outstripping fixed-income growth of 32 MFIs.6 It is also due to MIVs' accounting policies; in percent in 2008. Regional distribution is still very the absence of a secondary market for MIV assets, 6 The survey revealed that 90 percent of MIV loans were offered to MFIs at fixed interest rates, with an average rate of 9.3 percent. 3 Figure 3: Performance of Registered Fixed Income Mutual Funds 7% 6.3% 5.8% 5.9% 6% 5.2% 5% 5.3% 4% 3.1% 3% 2% 2.7% 2.3% 2.2% 1% 0% 2006 2007 2008 Total Expense Ratio Annual Return Class USD LIBOR 6 Months most instruments are booked at historical values of 22 microbanks, is the oldest (10 years) and by rather than mark-to-market values. far the largest (about US$1 billion in assets at the end of 2008). The average fund size increased dramatically from US$65.1 million to US$161.2 million over the Holding companies have become more diverse past three years but few economies of scale were over the past three years. Consulting firms achieved. The average total expense ratio declined have set up four holding companies in Europe, marginally from 2.7 percent to 2.2 percent during and MFIs have created three in developing the period. countries. 7 Microfinance networks, such as FINCA, WWB, and Opportunity International, are Increased interest in equity funds. Private equity also creating holding companies to better manage firms and holding companies of microfinance banks their equity investments in affiliated MFIs. are major providers of equity to MFIs. Thirteen private equity funds had combined assets of Growing Focus on US$257 million at the end of 2008. Private equity Environmental and funds are still young (an average of 3.5 years) and Social Priorities there are no reliable return benchmarks yet. For MIVs established before 2005, the average gross Beyond the continuing growth of MIVs during the internal rate of return was 12.5 percent in 2007 and crisis, perhaps the most surprising finding of the 10.5 percent in 2008, but the sample is too small survey was the number of MIVs reporting on ESG to allow for meaningful conclusions. issues, based on the Principles for Responsible Investment developed by a United Nations- Holding companies are growing in number and convened investor group. This was the first time size. Recently, the number of holding companies of ESG indicators were included in CGAP's survey, MFIs, created with the support of public investors, and the results suggest a strong double-bottom- has been growing. These holding companies play a line orientation in many MIVs (see Figure 4). key role by offering equity and technical assistance to create new financial institutions serving the According to the survey, more than 60 percent poor. Procredit, a German-based holding company of participating MIVs report ESG information 7 Catalyst Microfinance Investors created by ASA and BRAC in Bangladesh and Tenger created by XAC in Mongolia. Figure 4: MIV ESG Disclosure The 2009 Story Thus Far September 2009 E - Environment Maintain environmental The performance of MIVs is likely to deteriorate exclusion list during 2009 as the result of changing market All CGAP publications are available on the conditions. MFI credit risk is increasing, with CGAP Web site at Compensate for portfolio-at-risk showing a sharp rise in the www.cgap.org. carbon emission first semester of 2009.8 Demand for capital is dropping across all regions as MFIs are reducing CGAP S - Social Agree to Client 1818 H Street, NW Protection Principles their growth and tightening their credit policies. MSN P3-300 In this context, MIV cash positions have reached Washington, DC G - Governance record levels (around 20 percent of total assets 20433 USA Train staff in ESG practices for Luxembourg-based MIVs), lowering total fund Tel: 202-473-9594 returns. MIV hedging costs have also risen because Fax: 202-522-3744 Report ESG information of high currency volatility, putting pressure on to investors funds' profits. Email: cgap@worldbank.org Note: Percentage of CGAP MIV Survey respondents MIVs are responding by slowing down their growth © CGAP, 2009 and tightening their investment monitoring. They are also improving their risk management systems to their investors, and 65 percent have and partnering with public investors to support staff trained in these issues. In addition, 63 distressed MFIs. Though MIVs will likely continue percent of MIVs have also committed to to grow at double-digit rates, we expect returns the Client Protection Principles developed to drop below 3.5 percent in 2009. by CGAP and ACCION's Center for Financial Inclusion. Though a focus on the environment Reference is relatively new for these funds, 12 percent of reporting MIVs have bought offsets for Anderson, Jonathan. 2009. "Chart of the Day: their carbon emissions, while 41 percent have How Much Money Has Left?" Emerging Economic environmental exclusions. Comment, UBS Investment Research, March. 8 Based on information for 50 MFIs monitored by Symbiotics, portfolio-at-risk over 30 days, including refinancing, has increased from 3.8 percent to 6.8 percent as of June 2009. AUTHORS Xavier Reille, Jasmina Glisovic-Mezieres, and Yannis Berthouzoz, with Damian Milverton September 2009 BRIEF Structured Structured Unregistered Finance Finance Registered Fixed-Income Vehicles/ Vehicles/ Fixed-Income Investment Dynamic Asset Static Asset Socially Private Holdings All MIVs Mutual Funds Funds Allocation Allocation Focused Funds Equity Funds of MFIs Group Sample average size GA N GA N GA N GA N GA N GA N GA N (GA) (N) Total Assets 76.4 80* 161.2 11 19.2 5 176.1 6 63.2 8 49.0 20 19.8 13 19.9 6 (million USD) Microfinance Portfolio in 14.3 80 6.2 11 0.02 5 5.9 6 -- 8 4.5 20 12.9 13 14.7 6 Equity (million USD) Microfinance Portfolio in 45.2 80 123.6 11 13.7 5 93.4 6 60.4 8 28.6 20 2.2 13 2.9 6 Debt (million USD) Average Equity Investment Size 3.9 80 2.5 11 0.1 5 2.2 6 -- -- 1.0 20 2.2 13 2.5 6 (million USD) Average Debt Investment Size 1.8 80 2.1 11 0.7 5 3.7 6 4.1 8 0.7 20 0.7 13 1.1 6 (million USD) EUR USD EUR Annual Total 5.8% 10 0.7% 4 3.6% 5 Return USD USD Annex: MIV Benchmarks by Peer Group (2008 Results) 5.9% 5 2.6% 4 Gross IRR 10.5% 2 Total Expense 2.2% 11 3.4% 4 2.3% 5 1.2% 8 4.9% 17 5.8% 13 9.4% 5 Ratio *Out of 80 MIV respondents, only 69 have been classified in a peer group. (See peer group definitions on following page) September 2009 Peer group definitions: · Registered fixed income mutual funds. Mutual funds regulated and supervised by a market All CGAP publications authority. are available on the · Unregistered fixed income investment funds. Private investment companies offering fixed income CGAP Web site at www.cgap.org. products to MFIs. These funds are not supervised by a market authority CGAP · Structured finance vehicles/dynamic asset allocation. These vehicles issue two or three tiers of 1818 H Street, NW liability but only the senior debt is rated. They invest mainly in fixed income in large MFIs. MSN P3-300 Washington, DC · Structured finance vehicles/static asset allocation--CDOs. Generally classified as CDOs, these 20433 USA vehicles also issue two or three tiers of liability but their assets include only a static set of loans to large MFIs (promissory notes). Tel: 202-473-9594 Fax: 202-522-3744 · Socially focused funds provide debt, guarantee, or equity finance to MFIs. They invest in smaller MFIs and in frontier markets. These funds are generally managed by not-for-profit organizations Email: cgap@worldbank.org and cooperatives. © CGAP, 2009 · Private equity funds include venture capital and private equity firms providing equity capital to MFIs. · Holdings of MFIs. These companies provide equity finance and technical assistance to greenfield MFIs. They usually hold a majority stake in their investees. MIV Funding Sources Institutional Investors, Foundations, NGOs and 42% Networks Retail Investors 34% Public Investors 21% MIVs 3%