Microfinance men launch fund of funds

Two microfinance veterans are launching one of the first funds of funds to focus on the fast-growing sector.

Jack Lowe and Vincent Oswald, formerly of Blue Orchard, a Geneva-based microfinance investment manager, are launching the vehicle under their new Azure Partners label.

Two small funds of funds, managed by Austria’s Erste Bank and Fondazione Cariplo, a philanthropic Italian foundation, are currently available, but Azure is targeting far larger assets of $500m.

Microfinance, the provision of basic financial services to poor people, has grown into a $40bn market that is expanding at 30-40 per cent a year, said Mr Lowe, chairman of Azure, who argued the concept was attractive for financial, as well as social, reasons.

“‘Microfinance has three distinct advantages for the investor; negative correlation with most other asset classes, extremely low volatility and enormous geographic diversification in emerging markets,” he said. “This combination of factors has provided historic returns of 4-8 per cent for debt funds and 12-18 per cent for private equity funds. The sector has never experienced a negative yearly performance.”

Mr Lowe said that of the 120 funds active in the sector, he and Mr Oswald had co-invested in 70 of them while at Blue Orchard, making them well placed to run a fund of funds.

Up to 65 per cent of assets will be invested in debt funds and 25 per cent in private equity, which targets microfinance institutions, such as specialist banks created by non-governmental organisations. The balance will be in cash. The fund is targeting annual returns of 5-6 per cent, net of fees of 1.2 per cent.

The microfinance sector has been criticised by some for becoming too focused on profit, potentially at the expense of its customers, but Mr Lowe argued that Azure’s initiative would provide social benefits.

“We have been educated that if it’s for profit it’s bad, if it’s not it’s good, but there is no conflict between running this as a business and still having an impact in a social sense. There isn’t enough money coming in from the private sector and public money is drying up.”