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Challenging Times: Do MIVs Need A New Investment Strategy?May 5, 2010
While growth stalled during 2009 in several microfinance markets, assets of the top ten MIVs grew by 23%. However, returns dropped and MIVs faced challenges, including increased credit risk and concerns about where to place their money.
New commitments from investors fuel MIVs’ growth Top 10 MIVs at the end of 20091
Microfinance remains attractive to investors. Total assets of the top 10 microfinance investment vehicles (MIVs) reached USD3.6 billion at the end of 2009, having grown 31% in 2008 and 23% in 2009. For example, ASN Novib Fund, which includes mostly retail investors, grew by 40% last year. Institutional investors, maintained or even increased their microfinance holdings. For example, the senior tranche of EFSE, which is primarily reserved for private institutional shareholders, as well as its notes, reached EUR 383 million at the end of 2009. Public investors have tried to mitigate the effects of the financial crisis by staying active in MIVs. At the beginning of 2009, IFC and KfW launched the USD 250 million Microfinance Enhancement Facility to help MFIs refinance their debts; USD 87.5 million has been disbursed to date. Eight MIVs were created in 2009, and three new ones have been launched so far in 2010. Lack of investment opportunities raises MIV cash levels In 2009, several high profile microfinance markets faced a severe delinquency crisis, and most regions saw some increase in non-performing loans. Many MFIs are tightening their underwriting policies and slowing down growth. The demand for foreign debt dropped significantly in the second half of 2009. As a result, the top ten MIVs’ investments in MFIs grew at only 12% last year, compared with asset growth of 23%. This led to high cash holdings—for instance, 30% of assets for responsAbility Global Microfinance Fund and Dexia Micro-Credit Fund at the end of 2009. Declining returns for fixed-income MIVs Symbiotics Microfinance Indexes (SMX)
In 2009, the SMX Index2 recorded one of its worst performances since its creation, with yields decreasing to 3.08% in USD and 2.06% in EUR, compared to 5.95% and 5.55% respectively for 2008. This decline can be attributed to three main factors. MIVs had to build significant loan loss provision to cover potential defaults in distressed markets like Nicaragua. Also, currency volatility impacted the funds’ return. Emerging markets’ currencies were more volatile in 2009, increasing the MIVs’ costs of hedging foreign exchange risk. Finally, the high levels of cash holdings are producing close to zero interest. However, even though yields are lower, they provide a risk premium of 196 basis points above the six-month Libor and 62 basis points above the six-month Euribor. There were significant differences in fund performance: and the dispersion of their yearly return doubled in 2009. The way forward: expanding investment frontiers We expect MIVs to grow more slowly in 2010, up to 15% on average, while return for fixed income funds will remain at or below 3%. Asset managers are scaling back their fundraising, focusing instead on new investments and risk management. MIVs may need new investment approaches, such as expanding to new markets (e.g., Africa and Asia), funding in local currency, taking equity positions, or reaching beyond the top tier of MFIs.
Questions or comments about this article can be sent to Jasmina Glisovic-Mezieres, Xavier Reille, or Yannis Berthouzoz.
1Based on total assets, at December 2009 exchange rates. All the leading MIVs are fixed income based in Western Europe (especially in Luxembourg and the Netherlands).
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