Heron's Toni Johnson caught up wit Gil Crawford, CEO of MicroVest, a firm that invests in emerging market microfinance institutions.
Toni Johnson: This is Toni Johnson with Heron.org. I'm here today with Gil Crawford, CEO of Microvest, which provides capital and financial services to underbanked markets. How are you today Gil?
Gil Crawford: I'm great Toni and thanks for reaching out to MicroVest with these questions.
Can you provide for our listeners a brief overview of the work of Microvest and its mission to help poor people globally reach the middle class?
Sure, well we’re a for profit asset management company based in the Washington, DC area. We focus on finding financial institutions that have learned how to successfully and profitably bank the bottom quartile of the population. These are people that are starting tiny businesses or maybe growing small businesses so they can be part of the formal economy. We manage about 400 million dollars in several funds, and we were founded in our own three non-profits. Their vision was that these sustainably focused financial institutions, like microfinance banks, are often starved for either long-term common equity, long-term capital or debt funding. Often these banks that have learned how to finance the working poor started out making loans before they started taking deposits. And so we have, since 2003, been focused on doing due diligence on these banks in often difficult countries, countries that many people don’t go on vacation to. But countries that where we find that by looking at why the founders the owners and the management team have chosen to work with this underprivileged population we often find that there are really good returns that can be earned for our investors.
So you’re also working closely on a new fund spearheaded by the Global Alliance for Banking on Values, the fund as I understand it is intended to provide long term capital for investment in the real economy. Can you tell me a little bit about their work, and what’s the real economy and why is it underserved?
GABV went and did some really interesting research supported by the Rockefeller Foundation and what that research showed is that banks that are investing in the real economy, not in financial assets, that are taking deposits from their community, that have really long-term relationships with their customers, good governance, they are much more resilient over business cycles. They tend to outperform these large too big to fail financial institutions and we think that there is real value in those institutions and that the market is just beginning to understand the hidden value in these institutions.
So you work primarily outside the United States but some of these issues you’ve been bringing up also exist here and are tremendous obstacle for poor people in the U.S. What kinds of things should we be doing or looking for?
There are a number of banks that are invested in the real economy in this country, many of them are members of GABV (The Global Alliance for Banking on Values). And I think that what would be interesting for me and I think I need to state that I and Microvest are relatively ignorant of the U.S. market and we spent most of our professional careers in emerging markets. One interesting idea that we have come across recently are some people are looking at disrupting the predatory lending that goes on with payday lending. And I think all of us have seen those in our communities. These are often artisanal payday lenders. There are some people that are doing some very interesting work looking at making that much more systematic but with much greater protection for the borrowers. One thing that struck me was that in the emerging markets many of the predatory lenders are very small local loan sharks, often kind of overweight guys hanging out underneath a shady tree. They know everyone in the community and they’re available to make daily loans against collateral or someone’s name. In this country the predatory lending is much more organized, it’s much more corporate. I’m struck that some of the microfinance institutions have historically been thought of as institutions that put loan sharks out of business, and I don’t know if we can hope to have the same transformative impact say in the states.
You mentioned earlier that you put a lot of stock into thinking about how social and financial performance relate to one another. Do you want to just talk a little more about the importance of coupling the two?
I think, that maybe there are maybe three schools of thought here, one is that impact investments by definition have to be lower returning than a normal investment. And there is a growing body of evidence that that is simply not true. I think there is another school that feels that impact investing should never drive to return a risk-adjusted return, it should be happy with a certain amount of subsidized money that, looking for breakout or scale is either frowned upon or not something that promoters are willing to try. You know we’re very much in the third school where we feel that by using social metrics, in our case really spending a lot of time looking at why our partners have chosen to work in the bottom quartile of the market can result in really remarkable and stable returns for out investors. And in the case of emerging markets, these opportunities are based on solid economics. These micro-entrepreneurs and small business people that we finance, one additional dollar of capital, a loan for example, can have really dramatic impact on the productivity and the profitability of an enterprise and that allows those enterprises to pay the financial intermediary enough money to cover the cost of banking and making lots of small collateralized loans. So, for us one of the lessons is that in balancing the social performance and the finance, there always needs to be underlying economic underpinnings that make business dynamic, profitable and scalable. What excites us at Microvest is looking for those opportunities, are there what Wall Street would call arbitrage opportunities where using a social lens allows us to create an unexpected alpha or superior returns for our investors. And the reason for that, just to summarize all of this is, that without that we’re not going to be able to raise the billions of dollars that are required in these communities.
You’ve been working in the microfinance are for a long time, what are some of the lessons you’ve learned that might be useful for the field going into the space?
Well I think the first is that we look for a balance in the institutions that we work with. We are looking for people that balance the imperative to have a profitable growing business while serving the population that we’re interested in. And we’re looking for partners who understand that if they’re going to bank that segment of the world’s population, 1 billion or 2 billion people, they need to do it in a social way. If they’re focused on being predatory lenders we think it’s very bad for business. We also find that organizations that are embarrassed let’s say about making a profit, they often don’t grow and they often falter and fail. And so we have to weed out potential predatory partners but also partners that really don’t understand how important it is to have a balance institution, to have a balance between social justice and profit objectives. On the other side of the balance sheet, we found that many people in the impact investing space, with good intentions, have created vehicles that are designed to address a specific social problem or dilemma. Unfortunately many of those financial vehicles when they’re structured are so different or their returns are so below market that it’s very hard for institutional investors to allocate resources to it. You know you’ll end up having a very short, polite conversation. They cannot put their stakeholder’s assets at risk and so I think one of the lessons we encourage people to take from the space is to create vehicles that people have seen before, and that are risk adjusted.
Is there anything else you would like to add?
One of the things that our board and our investors got right was balancing the need for us to run a profitable and growing business with the social vision that they had. And at no point have we burdened MicroVest with too many hard to define and measure social matrices. I think one of the things that the entire impact industry is messing with is how to balance those social metrics with the need to be able to scale and offer institutional money risk adjusted returns. And I think in the end where we may come out as an industry is that we’re going to look to the investors to make their own determination about the social impact. Is a given impact asset manager creating the kind of social impact that they want. I have to admit that I am often confused by how we can reach scale through profitability and push so many costs of measuring social impact down to our financial institutions and ultimately to their dollar.
Thank you so much Gil, from Heron.org this is Toni Johnson.
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