MEET THE BOSS: Rick Beckett, CEO of Microfinance Fund Manager Global Partnerships, Which Will Host a Social Investor Forum on June 8, 2010, in Seattle, Washington, USA

MicroCapital: What is your personal motivation for investing in microfinance?

Rick Beckett: I spent the first 20 years of my career in the private sector. My motivation is really rooted in a couple things: one is I want to live in a world where everybody is treated like they matter, and for me that’s a lot about people having the opportunity to earn a living and provide for their families. We don’t live in that kind of a world. I do the work I do at Global Partnerships and Direct Relief and elsewhere because I’m interested in how we can use market solutions to advance the common good. I’m intrigued by the opportunity to change investment markets to incorporate more social motivations. I’m intrigued by the evolution of enterprises and products to incorporate more of the common good, both in terms of global poverty and global health issues as well as environmental issues. So it’s a combination of wanting to see a different world and intrigue in how the market mechanisms are evolving to advance that. So it’s a pretty interesting place to be in right now.

MC: You have said previously that “All microfinance is not created equal.” How you make such distinctions?

RB: If you go back to the roots of microcredit, you had small working capital loans going to people in capital-starved environments to start or grow businesses. What we’re seeing now is that there are other types of microfinance: consumer finance, micro-housing finance, those types of things. They’re all coming into play, so you’re seeing issues of over indebtedness and that really forces us to ask questions like: What is the purpose of the capital? How is it being used? Is it in fact generating positive social good (whatever we mean by that)?

What I believe works is what I think of as well-targeted microcredit, whereby working capital loans are made to people who are not over indebted, ideally combined with some way to save. That doesn’t mean the microfinance institutions (MFIs) themselves have to offer the savings product and be regulated, it just means they need to create an opportunity for the person living in poverty to save. And we think it performs better when you combine it with targeted business education. For example, many of our MFI partners offer some type of business education to help the borrower make the business more successful and expand income generation.

The other thing we’re interested in is how microfinance channels can be leveraged to offer more products and services that make a difference in people’s lives. We see commercial microfinance doing that in certain ways. For example life insurance, which is a highly profitable and low-cost product, we think will get picked up by commercial microfinance. But there are other things which are not profit-maximizing – things like combining preventative health education and health services with a village banking microfinance model. Economic incentives are not in place to have commercial enterprises offer them, but they can be done in fully economically sustainable ways.

We are a believer in and an investor in what we call the social enterprise model of microfinance, which involves profitable and growing MFIs that are mission-driven rather than profit-maximizing. These MFIs are reinvesting their profits to advance their mission, and that’s a different kind of MFI. They manifest this by doing things like creating more affordable access, combining microfinance with education and combining microfinance with health education and health services.

We are also seeing some innovation that we’re interested in around moving from microenterprise to small enterprise capitalization, which is about job creation at the base of the pyramid. But the common element is whether the MFI is maximizing profits to try to deliver high-risk adjusted financial returns to equity investors or whether it intends to be profitable and sustainable and then reinvest the profits for the benefit of people living in poverty in some way: lower prices, better access to education, health, whatever. So that’s how we distinguish the type of microfinance. It’s really a judgment about the economic models and then a look at what they’re doing with their profits programmatically to make a bigger difference in people’s lives.

MC: If you judge an institution by whether its model is mission-driven or profit-maximizing, does that allow you to sidestep the use of metrics to assess whether clients are getting out of poverty over time?

RB: That’s a really good question. There are a variety of important questions about what constitutes “greater” social impact. So there is a longitudinal question of whether the poorest people are being reached with sustained access to microcredit or other things to make progress (whatever we mean by progress). And then there are tools to measure that, such as those designed by Grameen [Foundation] and the US Agency for International Development.

There are other ways to frame the question also. With access to credit and education, do you see measurable increases in the progress of the business and household income? Or is there science behind health interventions that gives you confidence that – if you combine the health intervention with the loan – good health outcomes will likely follow? For example, Pro Mujer in Nicaragua has provided cervical cancer screening to its borrowers and then plugged all of the women who were identified to be “at risk” into the health system. I think it was close to ten percent of roughly nine thousand borrowers that were either at risk or had cervical cancer. And so in that instance what you’re measuring isn’t economic progress, it’s the incidence of a disease diagnosed early and treated and then you’ve got 700 families who didn’t lose a mom. So, anyway all that’s to say that there are a variety of ways to think about impact, and I think it’s worth thinking about it in a variety of dimensions. I’m not a big believer that there will be one universal metric for social impact. I think thoughtful use of a variety of different ways of trying to use our resources to make a bigger difference is both a pragmatic and a useful way to act on it.

MC: Would you please tell us about your due diligence process?

RB: We believe that social enterprises will either be more inclusive or more innovative. So, on inclusion, we’re looking at either: they’re more affordable – you can look at portfolio yield as a metric – or we’re looking for access in less profitable markets, such as rural markets and the low end of the market.

If it’s an innovation play we’re looking for MFIs that are combining microcredit with education or health or with small enterprise development around job creation or rural economic development where you can measure income expansion. So, depending on which of the theses that a social enterprise MFI fits, we would tailor the metrics that we use on the social side to their business case. So in some cases it will be portfolio yield and borrower growth. In other cases it will be access to education, and in other cases it would be access to proven health interventions. In the small enterprise case it would be around job creation.

On the financial side, we focus entirely on Latin America. We have probably screened between 500 and 600 MFIs to date in that region and have zoned in on probably 50 or 60 that we think have high potential. We have a due diligence process that does both the financial and social sides. We screen first and then we do one- to two-week due diligence visits before we would ever invest. After investment, we’re monitoring monthly and quarterly, both financial and social performance. We have an on-the-ground team headquarters in Managua that leads a lot of that work. So that’s one of the things that distinguishes Global Partnerships: the depth of our field due diligence and then the continuation through the course of investment of monitoring on both the social and financial sides.

MC: Some investors are starting to build up too much liquidity due to factors such as lower demand from MFIs. For example, responsAbility has temporarily halted new investments into its Global Microfinance Fund. Are you experiencing this challenge?

RB: That’s interesting; we haven’t experienced that. Our first fund was small – it was kind of a USD 2 million dollar experiment. And then we did a USD 8.5 million fund, and we just last year did a USD 20 million fund. We’re doing a USD 25 million fund this year. So we basically raised the money and fully invested it in within six months of the second call, and it’s still fully invested, so we haven’t really experienced that. I think one of the challenges for some of the larger commercial funds is when you are looking for maximum risk-adjusted returns and you really only want to work in certain countries. That limits the scope of opportunities. We’re trying to take a long-term view, we’re working across the region, and we’re working with a very specific kind of MFI. Most of the commercial capital flows to large, Tier-1, regulated MFIs. And that’s becoming an increasingly crowded market. When you actually work with social enterprises – medium-sized MFIs and co-ops that tend to be NGOs – that’s a market that attracts less capital. So our investment strategy has positioned us in a different way with the more socially motivated and higher social-impact MFIs, and that tends to be a less crowded market.

MC: How do you see microfinance fitting into impact investing?

RB: That’s a really interesting question. One of the things I’m excited about is I think a growing number of people in institutions want to use their balance sheet – and incidentally they also want to start using their consumption – to drive the common good as they see it. So I think we will see a rapidly growing number of both institutional investors as well as individual investors that are not satisfied with screened, socially responsible investing. They want to see what I describe as socially motivated investing, meaning it proactively is creating good, either proven carbon-footprint-reducing interventions, poverty interventions or whatever it happens to be. I am a believer that we’re moving toward more conscious investors and more conscious consumers.

What’s interesting about microfinance is that it happens to be one of the few global development interventions that cash flows because of the marginal productivity of capital. Between that fact and the fact that people can make a connection to the individual, I think that’s the reason it’s taking off. That being said, I think there are all sorts of interesting opportunities in the global development field, such as the environmental area and small enterprise investing. Not just capitalizing small enterprises but actually doing that in job-intensive and job-creating ways at the base of the pyramid. I think we’re going to see more and more investing in rural enterprises that both work in the value chain and in a variety of other ways: education, improving margins to farmers – those types of things where more of the value of rural work is actually conveyed to the person living in poverty rather than staying with an intermediary co-op or company. It will be an exciting thing to watch, I think over the next ten years, to see the number of ways that socially motivated investing takes hold both environmentally and in the global development field.

MC: On the topic of consumers and investors becoming more aware and more active, please tell us a bit about your Social Investor Forum that’s coming up on June 8.

RB: At Global Partnerships I describe us as equal parts “head” and “heart” or compassion and business acumen. We have an event that we’ve done for years in autumn called The Business of Hope, which really is about having people connect to the heart of our work by hearing a person’s story [directly from one of our investee’s clients].

The Social Investor Forum is really about the business acumen side. This will be more along the lines of an investor strategy meeting and a shareholder’s meeting. It’s the first one we’ve done, and we’re just going to go through how we think about investment strategies, where we see this industry going, how we think about the double bottom line, how we manage risk, how the portfolio shapes up and how it’s performing and why.

Rick Beckett is the president and CEO of Global Partnerships, where he has worked since 2006. Prior to joining Global Partnerships, Rick was managing director of a USD 112 million private equity fund investing in middle-market companies and early-stage ventures. Rick spent 10 years at McKinsey & Company and with his McKinsey partners co-authored the bestselling book, Real Change Leaders: How You Can Create Growth and High Performance at Your Company. He holds a BA with distinction in economics from Stanford University and an MBA as an Arjay Miller Scholar from the Stanford Graduate School of Business. Rick also serves on the board of directors of Direct Relief International.

Founded in 1994, Global Partnerships is a US-based nonprofit that invests capital and management expertise in socially motivated microfinance institutions. Global Partnerships raises capital through a microfinance investment fund strategy. As of March 31, 2010, Global Partnerships had USD 39 million in capital invested in 27 microfinance partner institutions in seven Latin American countries that serve a total of 817,000 borrowers.

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