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Investing in the World's Poor

Taking Microfinance to the Next Level

By Jennifer L. Schenker

The aim of outfits like BlueOrchard to serve those below the poverty line is both a philanthropic and profitable endeavor.

Thanks in part to the Nobel Peace Prize awarded in 2006 to Mohammad Yunus, the Bangladeshi founder of Grameen Bank, there has been a surge of interest in recent years in microfinance, a tool Yunus helped pioneer. Made especially to poor people in emerging economies, these small business loans, averaging about $345 (€229), play a vital role in lifting millions of people out of poverty.

Yunus was far from the only devotee of microfinance, though. In 2001 a pair of Europeans, Jean-Philippe de Schrevel and Cédric Lombard, discovered they shared a mutual conviction that the best way to cure poverty is through the capital markets. So they began lending money to microfinance institutions through a Geneva vehicle called BlueOrchard. Belgian de Schrevel, a former McKinsey & Co. consultant, got his MBA at Wharton, while Lombard hails from one of the families behind Lombard Odier Darier Hentsch, among Switzerland's oldest private banks. (Lombard is no longer involved with BlueOrchard, but has founded a Geneva company called Symbiotics that provides consulting and services to the microfinance industry.)

Seven years later, BlueOrchard Finance manages a loan portfolio of more than $710 million through different funds launched in partnership with major international banks such as Dexia, Rothschild, BBVA and Morgan Stanley. Along the way it has forged relationships with more than 107 microfinance institutions in 36 countries.

Now, BlueOrchard wants to do for microfinance institutions what local lenders do for loan recipients: help them expand their businesses. It is launching a Luxembourg-based private equity fund it hopes to grow to $100 million by the end of 2008. The fund is aimed at buying into microfinance institutions around the world and helping them launch new services for people without access to banks, including savings accounts, mortgages, and insurance. One advantage of taking equity positions is that BlueOrchard will gain some influence over the strategic direction of its investment targets.

The BlueOrchard Private Equity Fund, which has already raised $35 million from private, institutional, and individual investors, also plans to help microfinance institutions in far-flung corners of the globe expand across borders and become regional players.

Return on Investment

In recent years investors' appetite for microfinance has exploded. A wide variety of players, including hedge funds and venture capitalists, have begun competing to lend money to the institutions that provide such loans. Among them are Omidyar Network, established by Pierre Omidyar, the founder of eBay, and his wife Pamela, as well as Sequoia Capital, the Silicon Valley-based venture firm that backed Google and YouTube.

One reason for the interest in microfinance is that, as it turns out, institutions serving especially poor customers are more profitable than those serving better-off clients, partly because of the high interest paid on microloans and partly because there tend to be fewer defaults.

Altogether there are now an estimated 85 investment vehicles lending money to microfinance institutions, according to the Consultative Group to Assist the Poor, a microfinance industry association housed at the World Bank in Washington. But most are debt vehicles, and if microcredit institutions are taking on debt in foreign currency and lending in local currency they are vulnerable to currency movements. It is only now that equity investments are being added to the mix, a welcome development because there is only so much hard currency microfinance institutions can absorb, says Elizabeth Littlefield, CGAP's chief executive.