MICROCAPITAL STORY: Huge Global Pensions Back Break-Out Private Equity Fund: TIAA-CREF, APG, DWM and SNS REAAL Contribute $82 million to Developing World Markets Microfinance Equity Fund I

Developing World Markets (DWM) has closed its DWM Microfinance Equity Fund I with a commitment of USD 82 million from four large institutional investors. The fund provides equity capital to microfinance institutions (MFIs) around the world. The Fund Manager, DWM Asset Management Limited Liability Company (LLC), now controls a total of USD 200 million in microfinance-related assets: a pool, which it states, is the largest in the world dedicated solely to MFI equity investment. Acting as Advisor to the Fund Manager is major microfinance investor SNS Asset Management. After the closing, Theo Brouwers, Director of SNS Asset Management said, “The success of the fundraising at a time of global economic turmoil demonstrates the confidence of international investors in microfinance as a stable asset class and that institutional investors continue to search for good investment opportunities that contribute to social development.” MicroCapital has previously quoted Theo Brouwers in his argument that despite the controversy over for-profit microfinance, the key to microfinance succeeding in poverty alleviation is to funnel institutional capital to developing countries lacking funds. DWM’s new USD 82 million fund is a step in that direction.

Two anchor investments, each worth USD 40 million, were made by two large pension schemes: Netherlands-based APG (All Pension Group), a European pension asset manager, and New York-based TIAA-CREF (Teachers Insurance and Annuity Association-Cultural Retirement Equities Fund), a US retirement services organization. The remaining USD 2 million was split by an affiliate of each the Fund Manager and the Advisor: Developing World Market SARL, and Dutch financial institution SNS REAAL Invest NV (“SARL” stands for Société Anonyme à Responsabilité Limitée, French for Limited Liability Company; and “NV” stands for Naamloze Vennootschap, Dutch for Public Limited Liability Corporation).

Developing World Markets is an investment bank and asset manager specializing in providing debt, equity investments, and strategic advising to microfinance institutions in the developing world. DWM is divided into three branches: the investment bank DWM Finance LLC; and two fund managers, DWM Asset Management LLC (the Fund Manager of DWM Microfinance Equity Fund I), and DWM Funds SARL (an investor into the fund). As a whole, the DWM Group manages USD 550 million in assets.

DWM has been a key player in the entry of commercial investors into the sector of microfinance. In January 2008, MicroCapital released a Paper Wrap-up on an article published by the DWM in 2007 titled, “The Role of International Capital Markets in Microfinance,” written by DWM partner, Brad Swanson. The paper discusses the importance of commercial capital in fueling growth of the microfinance industry. It states that the estimated demand for microfinance is USD 250 billion, fifteen times the amount of the then current market size USD 17 billion (p.1). At the time of publication, over 75 percent of the USD 17 billion was being met with domestic funding (p.1). However, Mr. Swanson questions the sustainability of this funding, and states that it is unlikely that domestic sources in emerging countries will generate more than a fraction of the estimated USD 200 billion needed to meet the global demand.

The remaining 25 percent of the USD 17 billion in funding, approximately USD 4 billion, was being contributed from international sources (p.2). Non-commercial investors, government agencies and non-profit organizations, supplied 80 percent of the USD 4 billion, with commercial sources accounting for the rest. However, the paper argues that as MFIs’ demand for capital grows exponentially, it is unlikely that non-commercial investors will increase their funding proportionately.

“The only available source of funding for commercial lending of this magnitude (USD 200 billion) is the international capital markets,” states Mr. Swanson. He adds that in 2007, private sector institutional investors, similar to the DWM Microfinance Equity Fund I, were growing their investment portfolios at 233 percent per year, more than twice the growth rate of microfinance investment from non-commercial investors (p.2).

For a more recent article discussing international equity investments into MFIs, please see Part I and Part II of MicroCapital’s two part Paper Wrap-Up on “Shedding Light on Microfinance Equity Valuation – Past and Present,” published by the Consultative Group to Assist the Poor. The paper explains that in 2007 the microfinance sector had an aggregate equity base of roughly USD 5.2 billion (p.5). While returns were solid in 2007 with a median return on equity (ROE) of 14.1 percent and a median portfolio at risk over 30 days of only 1.4 percent, equity investment in the industry remained relatively small compared to the demand. Eighty-five percent of the equity investments were concentrated in the largest 100 MFIs (p.5).

The paper states that one major obstacle to growth of the microfinance industry has been the absence of an organized secondary market. To date, only two MFIs have undergone a pure Initial Public Offering: Compartamos in Mexico, and Equity Bank in Kenya. Thus, the vast majority of equity purchases in MFIs are in the form of private placements by large investment funds. Leading the way were 24 specialized microfinance equity funds that in December 2008 had USD 1.5 billion in total assets (p.3). TIAA-CREF and ABP (owner of APG), the two anchor investors into the new specialized DWM Microfinance Equity Fund I, have been leading the charge (p.3).

All Pension Group (APG), was incorporated in March 2008 as a subsidiary of the USD 330 billion Dutch pension fund (ABP), to manage a pension scheme for 2.7 million Dutch citizens belonging to the Netherland’s government and educational sectors. In December 2008, APG managed approximately USD 175 billion in total assets. Prior to the creation of APG, ABG had made equity allocations of over USD 100 million to the microfinance sector (p.3).

The second anchor investor into the DWM Microfinance Equity Fund I, TIAA-CREF, manages a large retirement equity fund for US academic, research, medical and cultural fields. As of December 2008, it had USD 363 billion in combined assets. Its USD 40 million investment into DWM Microfinance Equity Fund I is part of a Global Microfinance Investment Program (GMIP) that TIAA-CREF created in 2006. Through the GMIP, TIAA-CREF committed to purchase USD 100 million of microfinance assets by fall 2010.

GMIP’s first purchase was a USD 43 million stake (a 10 percent share) in ProCredit Holding, a Germany-based parent company of 22 microfinance banks that operate in Africa, Latin America and Eastern Europe. As reported by SocialFunds.com, the purchase was a groundbreaking moment in the microfinance industry. Whereas traditional financial support of MFIs had been in the form of debt provision, TIAA-CREF set precedence by purchasing a private equity stake in an MFI. In 2007, the ProCredit Group had USD 5.3 billion in total assets, a total loan portfolio of USD 3.6 billion, and USD 3.2 billion in accumulated deposits. It had a net profit of USD 56.1 million, and a return on equity (ROE) of 12.64 percent (p.4). For more information on the founding of the GMIP and the ProCredit investment, please refer to this MicroCapital article.

SNS Asset Management NV, the Advisor to the Fund Manager, is a subsidiary of SNS REAAL Invest NV, the fifth largest financial institution in the Netherlands and the fourth investor into the DWM Microfinance Equity Fund I. In December 2008, SNS Asset Management controlled more than USD 28 billion in total assets for institutional investors.

SNS Asset Management has also been extremely active in the creation of a microfinance asset class. It currently owns a 10 percent share in DWM, and manages two MFI Investment Funds. The first, SNS Institutional Microfinance Fund (SIMF I), was established in January 2007 in partnership with DWM. The fund was capped at USD 203.7 million, and had a 6.4 percent return in its first year of operations. For more information on SIMF I, please refer to this MicroCapital Article. Due to the oversubscription of the first fund, a second fund was created in November 2008. SNS Institutional Microfinance Fund II (SIMF II) closed with more than USD 171 million in contributions. DWM Asset Management LLC acts the Fund Manager of SIMF II as well. For more information on the SIMF II, please read this MicroCapital Article. For more information on the organization SNS Asset Management, please refer to the pertaining MicroCapital Who’s Who Article.

CGAP’s paper, “Shedding Light on Microfinance Equity Valuation – Past and Present,” concluded with the prediction that private transactions valuations of MFIs will decrease in 2009. Nonetheless, after TIAA-CREF’s recent USD 40 million investment, Scott Budde, Managing Director at TIAA-CREF, and manager of GMIP stated, “Investments in MFIs remain attractive in this economy, with many institutions still profitable and growing… We believe that these types of double bottom line investment strategies are more important today than ever, given global economic conditions and difficult credit markets.”

By Ryan Hogarth, Research Assistant

Additional Resources:

ABP: Home

All Pension Group (APG): Home

Business Wire: “TIAA-CREF Makes $40 Million Investment in Developing World Markets Microfinance Equity Fund I”

Developing World Markets (DWM): Home

DWM Press Release: “$82 million Closing of the DWM Microfinance Equity Fund I”

DWM Press Release: “€ 117 million ($150 million) Closing of the SNS Institutional Microfinance Fund II Amidst Global Financial Crisis”

Global Pensions: “ABP launches APG”, by Keren Holland

MicroCapital article, September 21, 2006: “TIAA-CREF Creates $100 million Global Microfinance Investment Program. GMIP’s First Investment to be with ProCredit Holding AG”

MicroCapital article, February 16, 2007: “SNS Asset Management launches a micro-credit fund: SNS Institutional Microfinance Fund in Partnership with Developing World Markets and Triple Jump”

MicroCapital article, January 16 2008: “PAPER WRAP-UP: The Role of International Capital Markets in Microfinance, By Brad Swanson”

MicroCapital article, September 8, 2008: “Dutch SNS Asset Management Fundraising for Second SNS Institutional Microfinance Fund to be run by American Developing World Markets (DWM)”

MicroCapital article, September 11, 2008: WHO’S WHO IN MICROFINANCE: SNS Asset Management

MicroCapital article, December 2, 2008: “Second SNS Institutional Microfinance Fund Collects more than $171m Despite Financial Crisis”

MicroCapital article, February 17, 2009: “PAPER WRAP-UP: Shedding Light on Microfinance Equity Valuation – Past and Present, by Nicholas P. O’Donohoe, Frederic Rozeira de Mariz, Elizabeth Littlefield, Xavier Reille, and Christoph Kneiding, Part I of II”

MicroCapital article, February 24, 2009: “PAPER WRAP-UP: Shedding Light on Microfinance Equity Valuation, by Nicholas P. O’Donohoe, Frederic Rozeira de Mariz, Elizabeth Littlefield, Xavier Reille, and Christoph Kneiding, Part II of II”

ProCredit Holding: Annual Report 2007

ProCredit Holding: Home

“Shedding Light on Microfinance Equity Valuation: Past and Present” by Nicholas P. O’Donohoe, Frederic Rozeira de Mariz, Elizabeth Littlefield, Xavier Reille, and Christoph Kneiding, published by CGAP: February 2009

Responsible Investor: “SNS Asset Management: the growing pains and gains of microfinance” by Hugh Wheelan

SNS Asset Management: Home

SNS REAAL: Home

Social Funds: “Microfinance Crosses Continental Divide with $100 Million Commitment from TIAA-CREF”, by Bill Baue

Teachers Insurance and Annuity Association-Cultural Retirement Equities Fund (TIAA-CREF): Home

“The Role of International Capital Markets in Microfinance,” by Brad Swanson, published by DWM: 2007