Helping the poor can be rewarding. In fact, it can yield about an 8 percent internal rate of return, according to US private investment firm MicroVest.
Founded in March 2003, MicroVest is the first organisation of its kind in the US, providing debt and equity globally to microfinance institutions (MFIs), or microbanks, which in turn give out small, unsecured loans – usually of between $100 and $3,000 – to poor entrepreneurs in developing countries.
Two private equity pros are now helping to corral funds for capital-starved MFIs around the world. MicroVest's board of directors is chaired by Warburg Pincus managing director W. Bowman Cutter and also includes the New York-based private equity firm's co-president, Joseph Landy.
“MicroVest is an independent, for-profit organisation,” Cutter says. “But it's nothing in dimension compared to private equity. If you're trying to build personal net worth or grow your pension fund, this is not where to invest. MicroVest will get money out of people's and institutions' social investment pockets.”
Cutter adds: “These investments aren't grants. You're investing with the prospect of getting your capital back, plus a return. [MFIs] have the lowest loss rates of any financial institutions in the world. When someone who cannot get money any other way, and who is trying to live on a dollar a day, borrows $150 to buy a used sewing machine for their own business, it transforms their life.”
In January, MicroVest announced the initial close of its debut fund, MicroVest I, on $15 million. The firm hopes to raise between $25 million and $30 million by yearend, and to be fully invested by the end of 2005.
MicroVest is projecting a net yield of 9.53 percent for its fund. Management fees and expenses will total approximately 3.5 percent and the target IRR is between 7 percent and 8 percent. Given the performance of private equity firms over the last several years, it would appear that the world's poorest entrepreneurs can compete rather well against the wealthiest.