MEET THE BOSS: Discussions on Microfinance Investment Vehicles (MIVs): Interview with Gil Crawford, Chief Executive Officer of MicroVest Capital Management

Mr. Crawford is Chief Executive Officer of MicroVest Capital Management, responsible for the development, management and growth of MicroVest, including developing and implementing business development strategies and supervising investment deals. He led the launch of MicroVest I, LP, a commercial private equity vehicle focused on microfinance in North America. He has over 20 years of experience with microfinance institutions (MFIs) and capital markets and has worked in Latin America, Africa and Asia. 

Previously, Mr. Crawford worked for the Latin American Financial Markets Division at the International Finance Corporation (IFC), created and ran Seed Capital Development Fund and was the Assistant Project Director for Africa Venture Capital Project. Mr. Crawford received his bank training at Chase Manhattan Bank in the mid 1980’s after working in Africa for the Red Cross and the US State Department. He graduated from Johns Hopkins University School of Advanced International Studies (SAIS) (US) in 1983 and Bates College (US) in 1980.

MicroCapital: Would you please provide a quick market update with regard to the status of the microfinance industry post-Global Credit Crisis? 

Gil Crawford: I’ve found that in some countries with credit bureaus there has been over-indebtedness. Part of that is a result of the hangover of the enormous amount of consumer finance that is being pushed back into the emerging markets. We have seen a reduction in demand for senior debt but an increase in interest in equity. We are also seeing MFIs restructure their balance sheets.

MC: Please tell me what the vision was when establishing MicroVest and how the vision has evolved since inception.

GC: The vision was very simple. Bowman Cutter, Chairman of CARE USA, realized that while non-profits make effective use of donations, financial intermediation is not part of their core competency. He realized that the MFIs owned by CARE and many others were growing very rapidly, and they would need separate funding, so he worked to set up a separate funding facility outside of CARE. Our common vision was that we wanted to demonstrate to the capital markets that microfinance was an investable asset class. It was not simply a CARE fund–we brought in a couple of other partners. We did have some basic principles including that the initial fund would have to be large enough to be viable, that we would have a pro-business board of directors and that we would have an economist on the investment committee. This was done in essence so that non-profits would not distort the investment process. In addition, we would pay our investment officers a reasonable wage. Lastly, we would have balanced ownership of the management company.

MC: Please tell me more about the funds that you manage.

GC: The first fund is MicroVest I (MV I). It was a demonstration fund that started at USD 15 million and will probably grow to USD 50 million. The fund composition entails 80 percent debt and 20 percent equity investments. It has 100 investors, almost all of whom are social investors including individuals and family foundations. The fund is currently outperforming its projections. Quite frankly, we have been very successful with our equity investments and our exits.

The second facility that we did was not a fund but a mono-buyer collateralized debt obligation (CDO). That is beginning to wind down successfully now. The second fund we did, called MicroVest II (MV II), was around USD 60 million. About 70 percent of it came from institutional equity investors. We also have a number of investors in MV II that were investors from our first fund (MV I). Our anchor investors are the IFC and JP Morgan. JP Morgan is also acting as the placement agent. We have been very pleased with JP Morgan, as they have successfully raised this funding in the midst of the global credit crisis.

MC: Kinnevik (Investment AB Kinnevik) announced that they had committed to investing USD 10 million in MV II in June 2009.  Is MV II a private placement sold to accredited investors?

GC: Yes, MV II is a private placement, which we closed on September 30, 2009. We have started the investment process with about 5 percent of the fund having been invested so far. So we are at the early stage and have three years to make those investments. We will be focusing on the top 120 MFIs and will have a relatively diversified portfolio (i.e. more investments than a typical private equity fund). We do not need to take a board stake.  The stakes will be typically 10-15 percent of an MFI. We think that is very attractive to management.

We have an investment in Tamil Nadu, India and are wrapping up an investment in the Andean region right now. We are also looking at Mexico, Columbia, Brazil, Africa, East and West Africa, the Balkans and other parts of India.

MC: With regards to MV I, many of the Asian and African countries have a lot of donor money, and you had found that you could not get commercial pricing because so much donor money was being pushed in those regions. Do you still find that to be the case now that the global financial crisis has passed?

GC: We don’t think pricing has improved much in Africa. In India, the issue was less government money and more government-mandated priority sector lending. That has been reduced, and we have seen some more opportunities there than in the past.

MC: Have senior debt rates risen considerably during 2009, especially in the first half?

GC: I have been surprised and I think everyone had been surprised that rates have not gone up. I think it’s because many MFIs are not growing their portfolios as quickly, in addition to the government money that I had mentioned earlier.

MC: Since the capital markets/securitization spigot had essentially been shut down during 2009 and possibly will remain closed for a good portion of 2010, are you still looking at structured finance options?

GC: I don’t expect the CDO market to come back for MFIs.

MC: Do you think fund rating in the microfinance sector will prove to be a useful tool for investors coming into the market?

GC: We think that these fund ratings will be very useful. I think that one of the problems that rating agencies will encounter is that the funds will have very distinct investment objectives. It’s very hard to compare a liquid mutual debt fund to a holding company or even a CDO. To begin with, I really think that the rating agencies should start looking at the management companies–their back office, investment strategy, policies and procedures. That will be useful for investors coming into the market. I know that MicroRate has begun doing that, and I was quite impressed at how they are approaching it.

MC: Why do you think that there have only been a few specialized funds (MIVs) that have been registered by a market authority in the United States?

GC: It’s an interesting question. The Europeans were much further along in direct social investing. I also think that the U.S. pension fund laws and the make-up of the pension fund boards are different from the European model. The European pension funds have a little bit more leeway and more of a history of investing in social investments. The Luxembourg mutual fund industry really has funds designed to fit the microfinance asset class much more neatly. I also think that Europeans are much more comfortable trading return for social impact; whereas Americans tend to maximize their returns and then make a donation. If you think about it, many (particularly) northern Europeans do not count on their investments for the core of their retirement–they count on the state. So if you are Dutch, Swedish or German, then you are not looking to your mutual funds to take care of your future. If you are an American, your perspective is relatively different. So I think that a middle-class American saving for retirement has a different perspective than a middle-class northern European whose retirement and healthcare is provided.

MC: Would you please provide greater detail as to what an investor should look out for in terms of risk/reward when examining the operational structures of an MIV?

GC: I think that these fund ratings will be helpful. I also think it would be prudent to look to the boards to determine if their reputation is sound. One of our large investors speaks to many management companies, and they have recognized that there are a lot of funds that have microfinance experience but lack private equity experience and vice versa. I would also be very cautious with people who have just entered the microfinance industry, as very few funds have experience in both microfinance and private equity. At MicroVest the combined experience of our senior management team is on average 15 years. There really are not a lot of funds out there with microfinance experience.

MC: What is your perspective on ensuring sustainable industry growth by attracting more institutional investors to both debt and equity?

GC: I think there are more and more institutional investors who now understand this sector. The thesis that this is a relatively uncorrelated asset is being borne out in many cases. The hardest thing about getting to private investors is getting an introduction; that is a very time consuming process. Also, in a normal period, few institutional investors are interested in anything less than USD 25 million. We felt a small equity fund such as MV II was the right size given the market; however, since many institutional investors don’t want to own more than 25 percent of a private equity fund, it was too small for some institutional investors.

MC: What is your firm’s greatest achievement?

GC: What I strive for us here at MicroVest is to balance our continuing belief in commercial microfinance and the social requirements of this field. I think we are entering a period where it is going to take a lot of focus to make sure we don’t forget that balance.

MC: Can you tell me what you are working on now?

GC: We are working very closely with a partner on a fund for Africa.

By Zoran Stanisljevic

 

 

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