MEET THE BOSS: Discussions on Successful Due Diligence When Evaluating Microfinance Investment Vehicles’ (MIV’s) Financial Viability: Interview with Christina Leijonhufvud, Managing Director, Social Sector Finance Group (SSF)/Investment Bank (IB) at JP Morgan (Part I of a Three Part Series)

Ms. Leijonhufvud is Managing Director of the Global Social Sector Finance Group at JPMorgan.  The SSF unit leverages JP Morgan’s products and skills to help bring financial services to microfinance and social enterprises around the world.  The scope includes capital markets, structured products and principal investments.  The unit seeks to achieve a double bottom line of social benefit and financial returns.  According to JP Morgan, potential demand for sustainable financial services is immense, at an estimated USD 300 billion. JPMorgan utilizes its global IB platform to raise capital to support poverty alleviation initiatives in developing economies.

Christina has led J.P. Morgan’s Social Sector Finance unit since its inception in late 2007.  A double bottom line initiative that brings financial services and financing to microfinance institutions and other enterprises serving the base of the economic pyramid, Social Sector Finance also focuses on engaging the firm’s employees in these sectors.  Outside J.P. Morgan, Christina serves on the Advisory Board for the Center for Financial Inclusion, has been a consultant to Ashoka-Innovators for the Public in their social financial services venture, and has lectured widely on financial globalization and emerging markets risks.  Christina has held various risk management positions at J.P. Morgan, including as head of Country Risk Management & Advisory, Credit Portfolio Market Risk Management, Emerging Markets Market Risk Management, and Industry Concentrations.  Prior to joining J.P. Morgan in 1996, Christina worked at the World Bank as Country Officer, helping develop reform programs and borrowing strategies for the former Soviet Republics of Central Asia.  In 1991, she served on the Economic Reform Committee for the Government of Kazakhstan.  Ms. Leijonhufvud earned a M.Sc. degree in Economics from the London School of Economics, a M.A. degree in International Affairs from George Washington University, and a B.A. in Sociology from UCLA.

Christina Leijonhufvud, Managing Director of the Social Sector Finance Group (SSFG) at JP Morgan      

MicroCapital: First of all, can you provide us your interpretation of what “socially responsible investment and social investment funds” means in relation to the microfinance sector and regulated banking channels? 

Christina Leijonhufvud: I view microfinance investing as a subset of what we at JP Morgan like to call ‘impact investing’.  You have probably seen the Rockefeller foundation’s initiative on creation of the global impact investing network (GIIN) which Mathew Bishop covered in the Economist last week.  JP Morgan has become a founding sponsor of that initiative, one that we are heavily engaged in.  We define social impact investing as investing for social and/or environmental returns as well as financial returns.  This differs from the classic/traditional concept of SRI (socially responsible investing) in that SRI has largely evolved into a sort of negative screening methodology where you invest in things that you feel do not create ‘social bads’; whereas, ‘social impact investing is something that directly seeks a social good as well as some level of financial return.  I believe that microfinance investing sits firmly in this category of ‘social impact investing’.

MC: Please tell me more about the story behind JP Morgan with regards to the Social Sector Finance Group and the scope of financial services that your group provides, such as capital markets, structured products and principal investments?

Christina Leijonhufvud:  The Social Sector Finance Group was created in late 2007 and it is a unit within the investment bank at JP Morgan.  We are really looking to bring a broad range of investment banking products and services to the field of social investing in microfinance. To be more specific, the group has capital to invest directly.  We are an investor looking at any range of investment opportunities both in microfinance and other kinds of funds and enterprises serving the base of the economic pyramid.  We have also brought some credit capacity to the table. So we have extended credit to select microfinance institutions.  Importantly, we also bring placement services to the sector and have actually worked with one MIV in the last year and helped raise a diversified equity fund for them.  So we helped place their fund with JP Morgan’s institutional clients.  This placement activity is one of the most important early demonstration projects for this group because we have helped bring a number of new institutional accounts (real money accounts, managing pension funds, insurance company assets) to the table to people who were clearly interested in this asset class from a double bottom line perspective.  I’d like to see us do more of that placement activity in the future.

As a group, the social sector finance helped originate a couple of straightforward investment banking advisory opportunity in the microfinance space.  For example, the firm executed an M&A transaction for Opportunity International, helping them sell their stake in Opportunity Montenegro to Erste Bank in Austria.  That was done by our M&A team in London.   Our Latam banking team also advised Banco Caja Social in Colombia on a private equity placement.  We also have been mandated for a potential IPO out of Latin America in the microfinance sector and have had a number of opportunities to bring broader investment banking services to bear in this sector.  I think that is important because it’s not something that would have likely been accomplished without the social sector finance unit’s expertise in this sector because the deal sizes are still very small.  So from a pure economic standpoint, it’s not super attractive to the investment bank just based on size and fee potential.    However, there is growing recognition within our emerging markets banking group that this is a sector that has grown immensely over the last three decades, the potential is immense and many of these institutions are  at the tipping point or transforming into potential mainstream clients of the bank.  This was something that was not previously recognized.

Lastly, I’d say that there are a number of other services at JP Morgan that we are providing to the industry.  You may remember the research report that JPM co-authored with CGAP at the beginning of this year entitled “Shedding Light on Microfinance Equity Valuations”.  Our research team, together with CGAP plans to do a new version of that report in the next few months. We have a number of other research ideas that we are looking at and think it will provide an intellectual service to the industry.

On the volunteerism side, we have a very big active employee engagement program that we sponsor called “Bankers without Borders”.  This is Grameen Foundation’s program.  That has been underway now for about six months and has been hugely impactful here internally at JP Morgan.  We have already 200 employees that have filled out applications under the “Bankers without Borders” program and actually some 25 to 30 have been selected and signed onto projects.  That is a great way for a wide range of bankers to be able to do client projects and put their skill sets directly to work in this sector: so everything from FX hedging advice to doing cost-benefit analysis on new technologies on the sector.

What we particularly like about the vision for ‘Bankers without Borders’ is that it is not meant to be confined to the Grameen Foundation network. The plan is to launch this as an industry-wide initiative.  That is a great service that Grameen foundation is bringing to the industry as a whole.

MC: How does the SSF Group (such as its product offerings) differ from its’ competitors?

Christina Leijonhufvud: Our group differs from other groups and competitors in a couple of ways.  First of all, we are not an offshoot of our foundation and we are not an outgrowth of our community development group.  We were really set up as a business unit within the investment bank with the express purpose of investing, raising capital, and bringing a host of other services for double bottom line purpose.  The second element I think is that we have branded ourselves and positioned ourselves to look beyond microfinance as an opportunity.  I think microfinance is certainly one important avenue for investing capital for social good, but it is only one and there are others.  We’d like to help and explore opportunities that go beyond microfinance, bring our own capital and hopefully over time attract and catalyze other investors to the table for other kinds of social enterprise and operations.   Finally, we are not a single product group.  We are not just extending credit and structuring funds.  We feel we’re actually a ‘center of expertise’ bringing a pretty broad array of products and services, including the whole volunteer effort.   The volunteer effort is actually integral to our business and has had a lot of impact as well.

MC: There are about 103 MIVs with an estimated USD 6.6 billion in assets under management.  North America hosts only about 7.6 percent of MIV assets with most of the funds registered in Europe-mainly Luxembourg and the Netherlands (because of favorable tax and regulatory frameworks.) Why do you think that there has not yet been a specialized fund that has been registered by a market authority in the United States?  (I am not including Microplace or Calvert Funds (as a registered broker dealer) in my assessment.)

Christina Leijonhufvud:  I think it’s absolutely true what you’re saying.  I think that the representation of registered funds in the United States is still quite limited.  Although they are a number of players here of note: Microplace being one on the retail side (a full fledged registered broker dealer to bring investments to microfinance), Calvert Funds are another that direct money to microfinance. I think Calvert is on a platform of several hundred registered broker dealers.  So they are a couple of vehicles for retail investors.  But after that, it’s true that it gets to be much smaller.  I have to admit that I am a bit perplexed by it myself but I believe it has to do with the fact that social impact investing is still at a more nascent state in the United States, than it is say in Europe.  Many European countries, obviously the Dutch in particular, have a longer history of encouraging investments into socially impactful enterprises.  As you mentioned, some of these markets, particularly in the Netherlands, have tax benefits that really create an incentive for that kind of investment.  We don’t have anything like that in the United States.

I also think that the United States is still evolving from what is a very   traditional polarization between what is considered charity and what is considered investments.  We do not yet have the infrastructure or the institutions operating in a way that recognizes that there is a middle ground between charity and investing purely to maximize financial returns.  I think our tax laws have helped perpetuate that dichotomy because of the tax exemptions associated with charitable contributions.  The United States is obviously an incredibly generous country from a philanthropic point of view, but I do believe that the seeds are sown for a greater marketplace to develop. Take a look at what Scott Budde is doing at TIAA-CREF and Preston Pinkett at Prudential.  Also, look at the impact investing network that has been launched as an example of the growing marketplace.  I think these announcements, while they may appear to be sort of isolated and fragmented, are reflective of the fact that there really is a growing demand and excitement about investing for social good.

By Zoran Stanisljevic

Stay tuned for parts II and III of our interview (of a three part series) next week…

 

 

 

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