Build Forward

In normal times, funding from Micro and SME Finance Institutions can help broader segments of the population pull themselves out of poverty and improve the livelihoods of their families. During a pandemic recovery, these institutions play an even more important role by helping communities obtain the resources necessary to rebuild stronger.

As we approach the end of 2021, the outlook for growth in emerging markets is robust due to the resumption of business activity following the end of COVID-19 lockdowns and the release of pent-up demand for credit. Such significant demand for credit also underscores the scale of the unmet need for capital in many of the markets MicroVest finances, a situation that had predated COVID-19 for many years. Overall, the Microfinance and SME Finance Institutions in our portfolio proved resilient, as our portfolio companies reacted quickly to changing local dynamics and found new ways sustain their lending portfolios while serving their communities.

Financial institutions that preserved liquidity and focused on portfolio quality in 2020 also increased lending activities in 2021. Many quickly witnessed a surge in demand as businesses sought funding for new projects and pursued other growth opportunities. Halfway into 2021, despite the world still feeling the effects of the pandemic, the weighted average gross loan portfolio of Responsible Financial Institutions in MicroVest's two flagship funds grew 12%, reaching $519 million.[1]

In 2020, almost all of our portfolio companies implemented mandatory or voluntary portfolio restructuring and moratorium programs to support end borrowers as widespread lockdowns curtailed economic activity. Policymakers in many of the countries where we invest pursued accommodative monetary and fiscal policies, which enabled our portfolio companies to maintain access to capital. As lockdowns eased and portfolio company collections improved, aided in part by the resumption of payments by end borrowers, we have seen a drop in the level of moratorium loans reported by our portfolio companies.

As second waves emerged in different countries with varying magnitudes, many companies enacted swift and efficient response measures, demonstrating their adaptability through an evolving situation. Overall, our philosophy of "growing with what we know" continues to guide our response to COVID-19. We cautiously reduced the number of portfolio companies in our flagship funds by 32% since 2019 to focus on supporting institutions that, throughout COVID-19, have exhibited strong growth and the capacity to continue lending to end borrowers. Despite the reduction in the number of portfolio companies, the number of end borrowers served by our portfolio remains robust at 10.1 million (vs. 10.8 million borrowers served in 2019). The operations of our portfolio companies has also proven efficient, with the portfolio’s operating expense ratio declining from over 10% in 2019 to just over 9% in 2021, as many of our portfolio companies responded to COVID-19 by re-evaluating their cost structures and seeking out new operational efficiencies, such as downsizing offices as more employees worked from home or moving to hybrid work structures. The underwriting process has also undergone transformation as digitalization has enabled our portfolio companies to underwrite more end borrowers at lower marginal costs. While the average loan size across our global microfinance portfolio decreased from $4.2k in 2019 to $1.9k in 2021, average loan sizes across our SME Finance portfolio doubled from $109k in 2019 to $212k in 2021.

We are seeing many SME institutions in our portfolio maturing and moving upmarket to offer larger loan sizes. In other cases, providers of group microfinance loans have expanded to the individual lending market. Meeting the capital needs of larger SMEs has also translated to lending to more male borrowers, as the majority of established small businesses seeking larger loan sizes are male-owned. Nonetheless, we continue to see steady growth in the percentage of female SME borrowers from 28% in 2019 to 32% in 2021.

Even though COVID-19 is not yet in the rearview mirror and public health challenges caused by new waves of COVID19 can emerge, our team is equipped to adapt our own approaches to investment and portfolio management to match the evolving environment.

Our portfolio companies' need for capital ebbs and flows with restrictions, but our portfolio is still expected to grow by 10% on average in the coming year. We consider this demand growth to be stable regardless of new COVID-19 outbreaks, as our investee portfolio companies consistently need funding to meet demand for loans in their communities. Increasing demand for capital among our portfolio in 2021 combined with stable assets across Microfinance Investment Vehicles (MIV) should support continued normalization in 2022.

[1] As of June 30, 2021.

The information contained here has been written for MicroVest Capital Management LLC ("MicroVest") and no representation or warranty, expressed or implied is made by MicroVest as to the accuracy or completeness of the information contained herein. The portfolio company figures presented in this document have been provided by the respective companies to MicroVest and are not independently verified. Specific RFIs are discussed for educational purposes only, do not represent all of the portfolio holdings and it should not be assumed that investments in the RFI identified and discussed were or will be profitable. The RFIs profiled were selected based on their financial inclusion and impact only, with no reference to amount of profits or losses, realized or unrealized. This document is for informational purposes only and is neither an offer to sell nor a solicitation of an offer to purchase an interest in any MicroVest product (the "Funds"), and nothing herein should be construed as such. Any such offer or solicitation will be made only by means of delivery of a definitive private offering memorandum which contains a description of the significant risks involved in such an investment. Prospective investors should request a copy of the relevant Memorandum and review all offering materials carefully prior to making an investment. Any investment in a MicroVest product is speculative, involves a high degree of risk and is illiquid. An investor could lose all, a significant portion or some amount of its investment. You should not construe the contents of the enclosed materials as legal, tax, investment or other advice. To invest with MicroVest, one must be a qualified purchaser and an accredited investor. The investments may be deemed to be highly speculative investments and are not intended as a complete investment program. They are designed only for sophisticated persons who can bear the economic risk of the loss of their entire investment in the Funds and who have a limited need for liquidity in their investment. There can be no assurance that the Funds will achieve their investment objectives.