Microvest fights poverty with microfinance

The Gunther Report

Microvest fights poverty with microfinance

Like politics, poverty alleviation makes strange bedfellows. CARE is one of the world’s largest humanitarian organizations, formed in the aftermath of World War II to deliver relief to a battered Europe. (CARE then stood for Cooperative for American Remittances to Europe. Who knew?) Mennonites are a Christian -- but neither Catholic nor Protestant -- faith organization with a strong tradition of pacifism and service. Together, they stand behind a for-profit company called Microvest, whose purpose is to help build capital markets serving the global poor, and whose investors include JPMorgan Chase and Prudential Insurance.

Strange bedfellows, indeed. And that’s no accident, as Gil Crawford, the CEO of MicroVest, told me when we met recently.

Microvest, he told me, reflects a belief that we no longer live in a binary world, one that’s divided between amoral profit-maximizing companies and pure-of-heart nonprofits aimed at doing good.

“Our core premise is that doesn’t work,” Crawford said.

Instead, Microvest raises money from institutional investors, mostly here in the U.S., then makes loans or equity investments in microfinance institutions around the world that lend money to the poor. This activity is designed to generate positive financial returns for everyone along the line -- the U.S. investor, Microvest, the local lender and the ultimate borrower. It’s basically using the power of business to fight poverty.

Some people call this impact investing. In a 2010 report, J.P. Morgan and the Rockefeller Foundation described impact investments as “an emerging asset class” that will create “an investment opportunity of between $400 billion and $1 trillion and profit opportunity of between $183 billion and $667 billion over the next decade in five sectors -- housing, water, health, education, and financial services -- serving global populations earning less than $3,000 annually.” They wrote:

In a world where government resources and charitable donations are insufficient to address the world’s social problems, impact investing offers a new alternative for channeling large-scale private capital for social benefit.

To learn how Microvest puts the principles of impact investing into practice, I sat down with Gil Crawford at the company’s office in Bethesda, Md. Gil worked for the state department and the Red Cross in Guinea and Chad, for the International Finance Corp. and at Chase Manhattan. I also spoke by phone with W. Bowman “Bo” Cutter, the co-founder of Microvest. Cutter, who held senior jobs in the Clinton and Carter administrations, is a former managing director at Warburg Pincus, a senior fellow at the Roosevelt Institute and chair of the board at CARE.

Cutter told me that Microvest got started because CARE had successfully backed microfinance entities around the world, but didn’t want to finance and vet many more local lenders on its own. “These are essentially little banks that do un-collateralized lending,” Cutter said. “CARE’s a big NGO and a good NGO but it doesn’t have an infinite balance sheet.” What’s more, special expertise is required to make sure that the local microfinance institutions are trustworthy and well-managed.

CARE turned to the Mennonite Economic Development Associates (MEDA) as its original partner to form Microvest. MEDA, as it’s known, has been lending money in poor countries since the 1950s when it was formed by a group of US and Canadian Mennonite businessmen who loaned their own money to thousands of Russian Mennonite refugees in Paraguay who wanted to start businesses. The group went on to become a microfinance pioneer, working in Africa and Russia as well as Latin America. “They’ve been doing what we call impact investing quietly for 55 years,” says Crawford, who became Microvest’s first CEO.

    Abstract 3D illustration by mmaxer via Shutterstock.     

Today, Microvest manages about $130 million in assets. ,That’s small beans by US investing standards, but the money goes a long way once it filters down to poor people in the 26 countries where Microvest supports about 80 finance institutions.

Microfinance isn’t a cure-all for poverty, but it can help poor people enter the middle class, Crawford says. That, in turn, can build stable communities.

“Having small business owners in a society is, I believe, absolutely essential for there to be a liberal democracy,” Crawford told me. Small business owners tend to get involved in their communities, and stand up against crime and pollution. “A liberal democracy depends on a a vibrant, educated middle class demanding that they no longer be treated as serfs,” he said.

Microvest typically makes loans of $1 million to $1.5 million to local institutions, some quite small. Vision Banco serves farmers and merchants and makes home loans in a remote area of Paraguay. Arnur Credit has 26 offices and 5,200 clients in rural Kazakhstan. Before making investments, Microvest’s staff checks out each local lender, relying not just on ratings but site visits. “I think we do the best due diligence in the world,” Cutter says.

Interestingly, a nonprofit called the MIX Market analyzes more than 2,000 microfinance institutions; its backers include the Bill and Melinda Gates Foundation, the Susan and Michael Dell Foundation, the Citi Foundation and the Omidyar Network.

Last year, the Cordes Foundation, a nonprofit run by financier Ron Cordes and his wife Mary, took an 18.75% stake in Microvest Holdings, Microvest’s parent company, joining CARE and MEDA as owners. Ron Cordes is a veteran investment pro and co-chairman of Genworth Financial Wealth Management, a $20 billion investment management platform.

How have the investors in Microvest’s funds done? Not badly, it turns out. Microvest’s first fund raised $15 million from limited partners in 2004 and 2005, and the internal rate of return to partners as of December 2011 was 5.7%. The value of remaining assets is expected to add another 1 to 2 percent to that return. “For some investors, it was the best investment in their portfolio,” Crawford says.

At the end of our conversation, I learned that I’ve got money being managed by Microvest through yet another intermediary. Microvest has raised money from the Calvert Foundation, which sells community investment notes to individuals. In my opinion, they're worth a look for investors seeking a small, safe return and the knowledge that their savings are having an impact.