Purposeful Investing through MSME Finance

Filling funding gaps overlooked by the formal financial system

Micro, small and medium enterprises (MSMEs) are the lifeblood of the global economy, accounting for roughly 90% of businesses and generating more than half of the world's employment.[1] The contribution of formal SMEs in developing markets is even more important, driving nearly 40% of GDP and 70% of new job creation.

Yet, across frontier and emerging markets, more than 130 million MSMEs face onerous constraints in accessing finance, leading to unmet growth potential and unfulfilled aspirations.

In aggregate, the unmet demand for finance among MSMEs in these markets amounts to $4.8 trillion,[2] with women-owned businesses constituting one-third of this total. At MicroVest, we believe that providing MSMEs with access to responsible, productivity-generating financing can have a profound impact on economic growth. As business needs are financed, productivity rises and MSMEs contribute more valuable goods, services, and jobs to the local economy.

Why funding gaps persist for millions of MSMEs

How we are addressing barriers to financing for underserved MSMEs

MicroVest’s private debt vehicles seek to promote financial inclusion for un- and underbanked small businesses and communities in emerging markets by investing in—and catalyzing the availability of credit for—responsible micro and SME financial institutions. Capital provided to these financial institutions is used to extend credit to underserved micro, small, and medium enterprises (MSMEs) that seek funding for productive initiatives such as business expansion or asset acquisition but are unable to access financing from the formal financial system.

MicroVest believes that an investment vehicle dedicated to providing flexible and tailored financing, ranging from three months to three years, can potentially facilitate the growth of these institutions and enable greater outreach to underserved enterprises and communities across emerging markets. These investments address key barriers to financing that continue to persist for millions of underserved MSMEs, often due to information asymmetry and risk perception, underwriting difficulty, high transaction and due diligence costs in emerging markets, a lack of infrastructure in rural areas, and small loan sizes, among others.

MicroVest's approach

MicroVest’s investment approach targets responsible micro and SME financial institutions with commercially sound business models that finance MSMEs typically overlooked by traditional banks. These MSMEs often struggle to secure sufficient debt capital from local markets at affordable rates and thus rely on external lenders like MicroVest to support the institutions that bank them.

MicroVest’s Theory of Change is rooted in the belief that comprehensive, responsible financial services have the potential to empower underserved segments and drive lasting impact. Through the provision of ethical and transparent financial products, underserved households and small businesses can grow and sustain their businesses, thereby generating income, creating employment opportunities, and improving standards of housing, healthcare, and education for themselves and their families. Additionally, these households and small businesses benefit from financial inclusion through their enhanced ability to manage cash flow and household finances, as well as heightened resilience in dealing with emergencies.

Our Financial Contribution

Historically, MicroVest’s contribution has been primarily financial. We typically provide flexible loan structures (e.g., amortizing loans, bullet payment loans, unsecured loans) to its investees that would otherwise be generally unavailable through traditional banks or local financiers due to a variety of structural reasons or perceptions around risk. MicroVest will consider short-term loans and work with an RFI to provide customized, flexible instruments, provided that the institution meets its social impact and credit underwriting criteria.

Depending on the financial institution’s needs, MicroVest also provides local currency debt (approximately 30% of the portfolio), which we then hedge to US dollars. This structure helps these institutions, which typically lack access to hedging instruments, access international capital markets without bearing foreign exchange risk. MicroVest’s investment in a financial institution can also indirectly improve both the availability and cost of capital for end borrowers.

Among the institutions in MicroVest’s portfolio, interest rates for end borrowers represent significant cost savings versus other informal and/or proprietary lenders that might charge exorbitant rates if they are willing to lend at all, which makes capital either unavailable or unaffordable and risks leading to debt traps for borrowers. MicroVest’s due diligence and portfolio monitoring processes support and deepen financial institution partnerships by providing advice on how the institution can implement more sophisticated risk management processes, as well as via its rigorous monitoring requirements. In both cases, these institutions benefit from MicroVest’s global perspective and 20 years of experience evaluating and working with them.

Non-Financial Contribution

Historically, MicroVest has been dedicated to solely providing financial contribution to its portfolio companies. However, we are looking to expand on our additionality to include Technical Assistance to our portfolio companies, with design and implementation support from our partners.

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. This piece 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.