35th Midi de la Microfinance
LMDF was delighted to participate in the 35th Midi de la Microfinance. Hosted by ADA and InFiNe.lu, the event featured an interesting debate between Martin Heimes from ResponsAbility’s and Kaspar Wansleben from LMDF. While the two institutions are on the two ends of the spectrum in terms of size, capital, and human resources, their representatives discussed the similar challenges which they face, as well as the potential they see in the microfinance sphere.
Over the last 10 years, microfinance investments have increased dramatically in terms of assets under management, going from just a few million USD to over 10 billion USD currently. Their increasing ability to focus on both financial and social returns has made them an ever more popular asset class. Yet the managers working in the field are very varied: LMDF and ResponsAbility highlight quite how different fund managers operating in the same field can be.
ResponsAbility has a workforce of 240 employees and works directly with roughly 200 microfinance institutions (MFIs) in a total of 77 countries. It has 1.7 billion USD in microfinance investments. Today 80% of their activities focus on microfinance and around two thirds of these investments are in Tier 1 MFIs, Microfinance Institutions which are larger and more mature.
LMDF, on the other hand, has a staff of just 3 people, and manages 25 million EUR. It currently works directly with 39 MFIs in 20 countries in the developing world. Instead of having an in-house investment team, it works together with ADA, an NGO, which provides investment research. This gives it a very different perspective from many of the larger fund managers who keep their research capabilities in-house. The primary focus of LMDF is on Tier 2 MFIs, MFIs which are smaller and focus on market niches with high growth potential. These institutions may be disregarded by some of the larger microfinance investors due to their lack of performance track record or the instability they faced in their early years. Yet these institutions can present growth opportunities to investors who support these companies during their development.
Whatever the nature of the fund the most recent period has proved challenging for microfinance investors. Volatility in global emerging markets coupled with tumbling oil prices has affected many of the most developed regions for microfinance. Other markets are becoming increasingly sophisticated and local financing is now taking over from international players. In Peru, for instance, many microfinance entities are now able to find financing within the country and no longer have recourse to international players. In this sense, microfinance funds are becoming victims on their own success.
These issues weigh especially heavily on the larger MFIs, the Tier 1 institutions. At a time when the market is growing, competition for good quality Tier 1 investments has resulted in lower yields; meanwhile increased provisioning has been a feature of the year as oil dependent markets struggle. Tier 2 MFIs have fared somewhat better. Although such institutions are exposed to a high degree of company specific risk they have a lower degree of correlation with global microfinance markets. This means that these institutions have been relatively less affected by these challenging times.
The microfinance field has always been innovative. The growth that has been seen over the past decade would certainly not have been possible were it not for the flexible and dynamic nature of the sector. During this challenging time, many fund managers, including ResponsAbility, are looking to niche areas such as agriculture and climate change. Others such as LMDF are looking to work with markets which are at earlier stages of development, enabling them to focus on markets which are less integrated and therefore less impacted by global trends. Opportunities certainly still remain, they may not be as easy to come by as they once were, but this should not present an issue for innovative and flexible fund managers.