TIAA-CREF is a national financial services organization with more than USD 398 billion in combined assets under management (9/30/08) and a provider of retirement services in the academic, research, medical and cultural fields. In 2006 the company had formed a new Social and Community Investing Department within its Asset Management area. The Global Microfinance Investment Program is part of TIAA-CREF’s Social and Community Investing Department, which develops new socially oriented products, oversees the screening methodology of social screened funds, formulates policies around key social issues and manages community investment programs. Notable accomplishments for the firm have been the creation of a USD 100 million Global Microfinance Investment Program (GMIP) to invest in selected Microfinance Institutions (MFI’s) worldwide. Concurrently, TIAA-CREF also announced GMIP’s first investment – a USD 43 million private equity stake in ProCredit Holding AG, a microfinance company.
Scott Budde, Managing Director of the Global Social and Community Investment Group (GSCIG), and founder of the Global Microfinance Investment Program (GMIP) at TIAA-CREF
MC: What is the story behind TIAA-CREF with regards to the Global Social and Community Investment Group (GSCIG) and its founding?
Scott Budde: The group was formed back in 2006. TIAA-CREF as a company has a long history in different socially investing strategies and in social screening. It has a long history in governance, engagement and proxy voting going back as early as the 1970s. In fact, it has the largest socially screened fund in the US going back to 1990. It has also has proactive investing programs mostly in domestic real estate as early as the 1980s. There is a long history of involvement in SRI (socially responsible investment) across these strategies. What we are trying to do when we formed this department is to give these strategies a more centralized home with added emphasis, focus and additional resources. This was the result of recognition that these strategies are very important to our clients. We actually did a large survey in 2006 that certainly confirmed that high level of interest. That survey can be viewed on our website.
MC: What was the vision for TIAA-CREF’s development of the Global Microfinance Investment Program (GMIP) in the beginning? How has that vision evolved?
Scott Budde: I was lobbying to form the GMIP once we formed the GSCIG. Within the proactive and community investing world we looked at what we were currently doing in real estate (our internal expertise in real estate going into affordable housing development) and what would be a really good compliment to that. First of all, the real estate program was entirely domestic. We then asked ourselves what activities we could engage in outside of the US that could provide us with broadly competitive returns relative to the risk in non-US assets. I had done some work in microfinance on an advisory committee for the Grameen Foundation. Certainly, I knew it better than anyone in the investment area. The onus was then on me to indicate that microfinance could provide both reasonable returns relative to the risk, as well as providing a positive social and economic development impact in developing countries. Microfinance ended up as a natural extension for us for a variety of reasons.
In terms of how the vision of the GMIP evolved overtime; the main evolution was when we imagined that the program (upon announcing it) would end up with microfinance assets across the risk and return spectrum. We envisioned that we would have investments in everything from highly rated tranches of microfinance debt (from some of the CDOs (Collateralized Debt Obligations) that were out in the marketplace) through private equity, equity funds, or maybe even very early stage venture capital like investments as well. What has happened though is that it has been much harder for us to get involved in microfinance debt.
We have seen a lot more opportunities both from a social, economic development perspective and from an investment perspective in equity. There is certainly an opportunity and need in the market for microfinance institutions willing and able to play in the private equity space. I think that the biggest evolution is that the portfolio has ended up being really much more of a private equity portfolio than it has been a broad portfolio across different microfinance asset classes. That has been a natural evolution. The microfinance portfolio is within a very large fund and is not constrained by the asset allocation of the fund itself.
Also, with regards to the USD 100 million, four-year Global Microfinance Investment Program, we thought it would take four years to extend commitments for this money. In fact, we actually reached the target of USD 100 million about 18 months early. It was a little quicker than we imagined as there were actually more intermediaries and fund sponsors out there that met our criteria for being able to manage the types of assets that we wanted. Hopefully in 2010 we will be able to revisit that target.
MC: You mentioned that you envisioned that the group would have investments in everything from highly rated tranches of microfinance debt (from some of the CDOs that were out in the marketplace) through private equity, equity funds, or maybe even sort of very early stage venture capital like investments as well. Can you elaborate as to why it has been much harder for you to get involved in microfinance debt?
Scott Budde: I think the main issue is that it is tough to look at microfinance debt from a traditional debt analysis perspective and come to the conclusion that the debt is delivering reasonably competitive returns. It is in some markets and not in others. This is apart from my own personal opinion about whether those returns are competitive or reasonable. I will take Bangladesh as an example. If you look at debt (from a traditional debt perspective) of a Bangladeshi MFI like Grameen, BRAC (Bangladesh Rural Advancement Committee) or even ASHA, a traditional emerging market debt analyst would say ‘okay, we will start with US Treasuries and add a 1300 basis point country risk premium to that (because it has got to be at least as high as Pakistan, if not higher; Bangladesh does not have much sovereign debt out there) and we would add a borrower premium on top of that.’ Before you know it, you would have BRAC debt priced into the high teens or low twenties. This is obviously a lot more than BRAC pays to borrow money from most of its sources of debt. Apart from whether I think what (BRAC) pays is reasonable or not, the debt world has a way of looking at things. Thus, it’s tough to get microfinance debt to look attractive based on that traditional framework.
MC: When you talk about competitive rates, what level are we talking about?
Scott Budde: Well, I think if you look at a traditional perspective, you would have microfinance debt (a broad global portfolio) probably in the mid to high teen in terms of just the coupon on those loans, notes or however you structure it. But in reality, most microfinance debt funds might have yields in the high single digits. Based on this traditional analysis, they are off by quite a bit. That’s not to say that I think that the returns on microfinance debt are too low. I’ll just say that they appear to be low relative to a traditional analysis. Also, when you get into microfinance debt, you get into all sorts of questions about exotic currency risk. There are only a very few countries where microfinance operates, that you can do any sort of reasonable hedging. So you really get into complicated analytical issues as well. I won’t say that those issues aren’t solvable but they are more easily addressed by other firms than us and there are certainly institutional investors who look at microfinance debt as being an attractive market. Just from our perspective, it was a little bit more difficult to be comfortable.
MC: Please tell me more about the socially screened funds that you manage?
Scott Budde: Unlike the microfinance fund that started in 2006, the socially screened fund goes back to 1990. The largest of those funds is called CREF Social Choice and as of June 30, 2009 is at USD 7.3 billion. That fund is the largest comprehensively screened fund for individual investors in the US. It’s a balance fund of stock and bonds (the stock portion includes both domestic and international stock). The fund has a very long track record and what it has shown is that, in fact, we can get very close to the characteristics of the broad US market with the stocks and bonds that pass the screen. I think it is safely shown that investors aren’t giving up anything by going to a socially screened fund. This is an important conclusion that we highlight. We believe our screening is a comprehensive one. There is also a mutual fund that has a variety of share classes that’s quite a bit smaller in the range of USD 400 million to 500 million that uses a similar approach, but that is entirely an equity fund.
MC: With regards to the Global Microfinance Investment Program, what is your geographic scope in terms of providing additional capital?
Scott Budde: About half of the USD 100 million is committed to ProCredit Holding AG. ProCredit Holding AG is in far eastern Europe: Moldova, Ukraine, Romania, Bulgaria, Kosovo, Serbia; significant exposure in Latin America and four countries in Africa: Sierra Leone, Congo, Ghana and Mozambique. We would have our share of that holding company’s investment in those areas. There is also USD 10 million commitment to Catalyst Microfinance Investors (CMI), a private equity investment fund that focuses on microfinance opportunities in Asia and Africa. What they are mostly doing is financing the growth of AHSA International, basically an ASHA replicator in other parts of the world. So they are taking the expertise and staff of ASHA in Bangladesh. I believe ASHA in Bangladesh is huge; larger that Grameen or BRAC in terms of microfinance in Bangladesh. Furthermore, I believe it is also a much focused, highly efficient, standardized and classic model of microfinance with very small scale lending to very low-income borrowers in very poor countries.
So with regards to the ASHA replication, the main places where ASHA International is working are: West Bengal, India (next to Bangladesh), Pakistan, Cambodia, Philippines, Sri Lanka, and they have a small operation in Afghanistan. They are certainly looking at Indonesia and China but there is nothing on the ground yet.
Finally, there is the USD 40 million in commitments to the Developing World Markets Microfinance Equity Fund I that has just been launched. We have signed that commitment but not very much of it has yet been deployed. It will, however, be deployed in the next two years or so.
MC: Can you tell me why did you specifically choose Catalyst Microfinance Investors?
Scott Budde: I think it was basically the compelling nature of that model and the fact that we were looking at other models with proven track records in an industry in the form that they were currently in. For example, institutions that have been around for a while as an NGO but later converted into a different charter a year or two ago. ASHA has been around for twenty plus years with a pretty strong track record. I think the ability to use this track record (expertise and huge staff that they could deploy into other countries as consultants, managers or advisors) to expand that model (sort of classic microfinance model into other areas) seems to be compelling.
MC: How did you become an advocate for microfinance investing within the investment management arena?
Scott Budde: I served on the Capital Markets Advisory Committee at the Grameen Foundation. Eventually, I had to leave the committee once we launched an investment program at TIAA-CREF. Also, my academic background has been a Masters of International Affairs and International Economics at Columbia. So I certainly have been exposed to microfinance pretty early on and followed it from afar until my involvement with the Grameen Foundation (which began 4-5 years ago). Prior to this, I have worked as a bank stock analyst in banking and bank consulting, so I had pretty good knowledge of financial services in general. That certainly helps for microfinance. It’s really kind of a confluence of all those things, in addition to the earlier/looking for international exposure to compliment domestic exposure and those types of factors in asset management.
MC: With regards to our discussions regarding the vision for Global Microfinance Investment Program, how do you evaluate and select the most sustainable businesses in which to invest?
Scott Budde: I think we would start by really looking at individual businesses first; by looking for broad areas that we can get involved and then drilling down. I think it’s very important for us that we develop some specialized expertise in different areas. People will send us information on all sorts of different business models and perhaps they are looking for capital, but we try to focus where we have established a program or where we have some expertise and are developing more. We follow that methodology because it enables us to be more effective investors (because we have a better idea of what we are doing). It also enables us to draw other institutional investors into these spaces. That certainly has been true for microfinance.
We don’t evaluate every business. We would evaluate first the creation of a broad investment program in an area and then we would look at investment deals within that. Hopefully, in the creation of these three programs I mentioned (two of which are relatively new and a fourth that we are considering at the moment), we have narrowed the universe to a group of companies or investment opportunities that are inherently/relatively sustainable in their approach.
For example, I know ProCredit Holding AG pretty well. The sustainability of ProCredit has certainly been very positive relative to lot of other global banks. We would certainly look at the broad areas first of whether there are community banks that are offering the underserved area and have sustainable models or are they well run/capitalized, profitable and focused on what they do best. We have spent a lot of time with individual institutions or in the case of microfinance where we have a couple of investments through funds. We have also spent a lot of time with the fund managers to see how they approach the business; looking at Developing World Markets (DWI) and Catalyst Microfinance Investors (CMI) to see how they go out and look for investment opportunities and who they are working with. That is part of the process of picking those firms to manage money for us.
MC: Your group had announced in 2003, a USD 43 million private equity investment in ProCredit Holding. While Citigroup had employed a traditional mechanism of debt to MFIs for feeding directly into microfinance loans, TIAA-CREF set what was precedent at that time by providing broader structural support for microfinance through an equity investment that supports ProCredit’s entire infrastructure. The opportunity seemed logical since the equity had been levered with deposits and debt.
Does your group intended to provide a similar commitments to additional microfinance institutions in the near future. If so, can you provide additional detail?
Scott Budde: You are right. Our investment in ProCredit is very different than what some of the big global banks do. There is the funding which is in ProCredit, but all of the company’s subsidiary banks are in countries that have charters that allow them to raise deposits. So ProCredit in terms of liquidity (this has been a big plus over that past year) has local retail funding in all those markets. In terms of future investments, there really are not many opportunities to invest in something that has already reached the scale of ProCredit. I really doubt that we would have any other direct investments in MFIs. I think our future investments will likely be through funds. Probably the most visible ones will be the Developing World Markets Fund. Developing World Markets is actively out their looking at equity investments across the world in microfinance. That is where they would deploy the money. That is also largely a function of scale. We don’t want to own very large percentages (over 5 or 10 percent) of any one institution. Even the largest MFIs after ProCredit Holding; that five or ten percent would simply be too small of a transaction. In addition, direct ownership is very time and resource intensive. Thus, for a large institutional investor, it really makes sense, given that size to work with a fund manager who could deploy smaller amounts. I mean Developing World Markets could make USD 1 million to USD 2 million investments on behalf of all of its investors, rather than have us try to make one USD 500,000 investment. I say USD 500,000 because its way too small for us to consider. It quickly got to a point that (for equity investing) we needed to work through a fund manager. So when MFIs come through me looking for equity investment, I’d say that we made a commitment to Developing World Markets and refer them to DWM. They actually do so thereafter.
MC: I know that it can be very challenging to get private and institutional investors involved in Microfinance. As the global liquidity crisis continues to impact the developing regions/bottom of the pyramid, one can argue that microfinance (as an asset class) may become more crucial in providing access to capital to communities in need. Furthermore, with the reduction of remittances affecting regions like Latin America and the Caribbean, the need for microfinance institutions to draw investments into the industry is critical. Through socially private and institutional investment programs, it may be possible to reach a sufficient scale to ensure liquidity.
Can you give me your perspective as to why it can be challenging to get private and institutional investors involved?
Scott Budde: In my experience, I think the number one issue is that most investors mistakenly believe that social investing is about giving up returns for added social impact. Blue Orchard, Developing World Markets, MicroVest and Accion’s Investment team have been around for a while. There is a great deal of experience out there. Investors don’t understand that they can really get both competitive returns and positive social impact. They mistakenly assume it’s all about giving up returns. So many investors simply approach it with that mindset, which actually turns many of them off. Now that is complicated sometimes by the microfinance industry itself which sometimes believes that this is the structure they should create and offer to investors. So sometimes there is a mixed message that is coming out of the industry and that makes it a little more complicated.
MC: Can you provide your perspective as how to ensure sustainable industry growth by attracting more institutional investors?
Scott Budde: I think the industry would find it easier to attract more money if it clearly made the distinctions between investing for competitive returns and philanthropy. I absolutely believe there is a role for philanthropy, technical assistance and grant funding for certain aspects of microfinance; for certain MFIs that maybe are operating in very difficult assertive areas (with certain populations that just aren’t going to be able to be accessed with the commercial model or to enhance certain commercial models with certain types technical assistance). It becomes very confusing to institutional investors if you try and mix that with a market rate of return like investing.
There are funds out there that will say ‘we can give you a microfinance fund or exposure to microfinance with a low single digit return.’ There are websites out that that will say microfinance lending is really about loaning money at a zero percent interest rate. When an institutional investor sees that, it becomes very confusing to them as to what microfinance is about. I am not saying that there isn’t a role for philanthropy (there in fact is a role), but when it overlaps with the investing world to the point where it becomes very confusing to international investors, it kind of chokes off the spigot of commercial capital and makes it much more difficult for commercial investors to invest. I think the industry would be much better served by clearly delineating investing from philanthropy.
MC: What do you see as the next challenge (if any) for the microfinance industry?
Scott Budde: There are some challenges related to what I have just mentioned. I think probably the next big challenge that’s going to happen in a couple of areas will be around consolidation of the microfinance industry and formation of holding companies. More and more institutions have started to look at a holding company model as having a lot of advantages for really getting microfinance up to scale and accessing the global capital markets. This is because you create large institutions that could then effectively try to borrow or raise large amounts of money with easier access to large institutions. I know that FINCA is an example that is going down that route. I think that other networks have certainly contemplated it. You could talk to Women’s World Banking, Grameen or Accion on the extent to which they are interested in that model or not. There are certainly other institutions that are interested in it. There are a lot of individual MFIs that are looking at regional expansion and creating regional holding companies such as BANEX in Nicaragua.
MC: There has been concern that investors (who invested private capital in MIVs) may be forced to sell or discontinue investing in healthy assets dues to their portfolios being hit hard by the falling equity markets and investments in structured products that have been written down. This could hamper liquidity of MFIs which may be unable to fund their portfolio growth or even maintain their existing portfolios. While the equity markets have certainly stabilized or at least flattened out somewhat, what is your perspective on the performance of MIVs?
Scott Budde: Given that we are in the large land of private equity space (getting access back to IPO in local or global markets for some of these holding companies) I haven’t really had strong concerns about liquidity and access to it. I think that some of the funds out there could provide liquidity for debt. BlueOrchard is probably the largest and has been growing quite well. MicroVest is still active in providing capital.
I think you are right with regards to the CDO market. The CDO may be an avenue that is not readily open for a while. I may not be the best person to ask this since I am not that familiar with them, but even in that market those structured transactions created publicly rated bonds but were not liquid. These CDOs were basically bought by ‘buy and hold’ investors who wanted exposure to microfinance at different risk levels. They never really traded that much. We never went into the market to buy them, but our understanding was that they were not available to be purchased after the initial sale of the bonds to begin with. You could ask someone like Gil Crawford at MicroVest to provide additional perspective on CDOs. Between the lack of liquidity and all the uncertainty around structured products, in general it’s tough to see that coming back as a source of capital. I basically agree that it could be a tough one in the future.
MC: So then what do you feel may provide an alternative source of capital (not so much Tier 1 capital but rather Tier 2, 3, 4) for smaller MFIs in the next couple of years?
Scott Budde: First, I think the last year has given enormous incentive for any MFI in any country (where they could conceivably go to a model or charter where they can) to gather deposits. I think that BANEX in Nicaragua basically converted to a bank charter and that enabled them to start taking deposits (and probably not a moment too soon). That is an enormously important source of funding, probably by far the largest single thing the industry could do. In countries where MFIs cannot gather deposits, hopefully there is some globalization of the networks, development banks or MFI associations in the country to try and lobby governments and central banks to create a framework to allow for a microfinance charter that can take deposits. That would be a huge plus.
I think another source of funding is going to be consolidation of MFIs and that larger MFIs are at an advantage. I think the large MFIs that can both expand and preserve their mission of giving poor borrowers and customers’ access to financial services are at a significant natural advantage to acquiring and consolidating MFIs in different markets. Think about how many MFIs are in Peru of Tier 1, 2, and 3? There are a lot, perhaps 20, 30 or even 40. So there is certainly some room for a very natural consolidation.
MC: So then what do you think is the answer is to get credit and lending moving again (domestically and internationally)? How can we get lenders to be a little more diligent yet aggressive in terms of availability of credit and lending in your view?
Scott Budde: I think the main answer is for institutions to have a reasonable sustainable business model (which I think is the case for most of the microfinance sector around the world) and to simply continue doing so. Most MFIs have weathered the crisis far better than local or global banks. The other institutions that don’t have very sustainable models have to move very quickly. They would have to think about whether the products or services they are offering are a good deal long term for both their customers and themselves. I know that one of the things that has been a real blessing for microfinance regarding this crisis is the following: when a lot of MFIs have stated their return targets (ROE or ROA), people would come back to them and say that a 16 percent or an 18 percent target ROE is not that impressive compared to the other traditional global banks. Well, they now understand that pushing a financial services firm’s ROE too high has risk that could be unsustainable. Furthermore, institutions that targeted a more balanced/reasonable return targets did fine. I guess that would fall under the ‘silver lining’ category for microfinance; that going forward there would be less pressure to post outsized returns to attract necessary commercial capital.
The main thing for financial services companies is that if have a sustainable model then stick with it. If you don’t, then you better move to one as quickly as you can.
MC: What is the group’s most important achievement to date? What are you currently working on now?
Scott Budde: I think the most important achieve for us was carving out a microfinance space within an investment portfolio and being able to obtain and mobilize that commitment very quickly. We will probably revisit expanding microfinance in 2010 and we are looking at a fourth program that would focus on green building technology, one that we are currently formulating.
By Zoran Stanisljevic
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