By Zoran Stanisljevic, based on his interview with Christina Leijonhufvud, Managing Director of the Global Social Sector Finance Group at JP Morgan, published by MicroCapital.org, December 2009, 5 pages, available at https://www.microcapital.org/downloads/whitepapers/Diligence.pdf
As microfinance institutions (MFIs) continue their quest for more accessible and affordable financing, little information is freely available to the public regarding the due diligence required when evaluating microfinance investment vehicles (MIVs). This whitepaper provides a framework for how investors can evaluate MIVs. The author’s interview with Christina Leijonhufvud, Managing Director of the Global Social Sector Finance Group at JP Morgan, resulted in a general framework that investors and MFIs can utilize to better understand one another’s requirements and expectations in order to make informed decisions in meeting both social and financial goals while achieving rational, sustainable industry growth.
The report mentions that the very first and most important screen relates to the individuals behind the MIV. One must begin by examining the ownership structure and the general partners. Examining the operational structure and how much on-site due diligence is performed are also important components when evaluating a MIV. Is the MIV taking an indexed approach to investing, or are they outsourcing much of the due diligence?
Because many fund managers in the microfinance sector have limited track records, rating MIV managers is another important component in the evaluation process. What kinds of work did the fund managers do prior to managing the MIV? Is there private equity or credit expertise on their board or advisory committee?
Understanding the investment policy and process from A to Z is key. One should begin by reviewing copies of the MIV’s very first investment memoranda as well as proposals that go to the investment committee. Does the MIV directly invest in MFIs or does it use a “fund of funds” strategy? Investors should spend time with the committee and understand the types of discussions involved in their investment selections. One should supplement this by traveling with the portfolio manager or investment officer to the MFIs that the MIV invests in.
With regards to risk management, items to consider are credit risk, foreign exchange risk, liquidity risk and country risk. Some questions to ask are: Is the MIV taking a credit or equity position? What are the credit quality and profiles of the MFIs in question? What does the credit evaluation process consist of at the MIV? Does the MIV undertake its own credit analysis, or does it supplement its analysis from a specialized rating agency?
In conclusion, an increased focus on fundamental issues and transparency in microfinance makes the industry more attractive to prospective investors. As more investors enter microfinance, the author believes that MIVs will play a greater role as financial intermediaries, connecting private capital to MFIs. Since microfinance has outgrown donor funding, this private capital becomes critical, allowing for the achievement of both financial and social objectives.
By Zoran Stanisljevic
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