SNS Asset Management: the growing pains and gains of microfinance

Fund manager raising cash for second microfinance fund as institutional commitments grow and industry debates sharpen.

Last week’s announcement by ABP, the €250bn ($315bn) giant Dutch pension fund for public sector workers, that it had extended its commitment to microfinance investing by an extra €50m, taking it close to the €100m mark, was an indication that institutions now take the strategy seriously. Other major microfinance investors to date include US peer, TIAACREF, the higher education and medical workers fund. Paul Spijkers, ABP’s chief investment officer says microfinance investment has the potential to provide the fund with a combination of strong growth and attractive returns, relatively uncorrelated from equity markets, in high growth economies. However, recent statements by Muhammad Yunus, awarded the Nobel Peace Prize for his work in lending money to poor women in Bangladesh, show a sector ill at ease with its new status as asset class for the world’s investors. Yunus reportedly told reporters at the recent 11th annual Microcredit Summit Campaign conference in Bali that the new language of microfinance such as ‘return on equity’ troubled him: “If you are making profits you are moving into the same mental mind-set as loan sharks,” he said. The sector is questioning whether both profit and non-profit models can co-exist.
Theo Brouwers, director at SNS Asset Management, which in 2007 launched its first microfinance fund and is currently fundraising for a second, believes that despite the reservations, the essential point is to get institutionalcapital into developing countries where there is not enough of it. Brouwers says international investors are increasingly backing microfinance and the sector grew from $4.5bn last year to over $5.5bn this year. He estimates that total borrowing could reach about $250bn.
SNS has its background in the Dutch labour movement. SNS Asset Management, a subsidiary of SNS Reaal, the Dutch bank and insurance group, was founded in 1997 following a merger between SNS Bank and De Hollandse Koopmansbank, which was a manager of union funds and has run SRI money since 1976. The fund manager now runs €19bn in assets, all incorporating a sustainable overlay and also has a separate SRI research department. Brouwers believes that in the highly competitive field of asset management, running speciality funds such as microfinance creates a distinctive brand. SNS’s first microfinance fund, launched at the beginning of 2007, returned a net 6.4% over the year, which he says was one of the best performing funds in its sector. But the goal is not just financially related, he adds: “The other question is how you manage the social return? When you look at microfinance competition in different countries, you can see potential problems.” He alludes to the initial public offering of Mexico’s Banco Compartamos in April 2007, which raised $475m, but outraged campaigners when it was revealed that the bank was charging between 50-

70% interest on its loans. “In Mexico, we looked to invest in smaller microfinance companies to bring in more competition in the right way. A better example for the sector is Bolivia where there are some 400 microfinance companies and the maximum interest rate is capped at 15%,” Brouwers says. He adds that the loan portfolio on SNS’ first microfinance fund has grown on average by more than 80% per annum with excellent profitability, and that as a result more than one million small entrepreneurs and their families have been helped to achieve a higher standard of living.
In practical terms, SNS works closely with US investment manager Developing World Markets (DWM) to select and monitor microfinance institutions (MFIs), which are the project co-ordinators on the ground. Earlier this year, SNS bought a 10% stake in DWM, and the US house will run the second microfinance fund. Brouwers says the second fund is a straight copy of the first with a target of €100m in assets: “We were still getting demands from pension funds after closing the first fund at €160m. We actually had to reject some proposals because the problem we had was whether we could successfully invest the money in 12 months.”
The fund, Brouwers points out, is fiscally transparent for Dutch investors and SNS has not so far sought capital outside of the Netherlands. In a bid to promote microfinance amongst institution al investors, SNS has commissioned a couple of related studies from the University of Groningen. One demonstrated that microfinance could contribute to the diversification of an investment portfolio. Another demonstrated that largermicrofinance projects could have bigger social impacts. Brouwers believes that the findings of the latter predict the next stage of development in the microfinance market: more consolidation. “Microfinance institutions on the ground will merge and commercial banks are looking to take much more of a stake. “ We also believe there could be a shift from group lending to individual lending, because of some of the problems we have seen with over and under financing of individuals within groups where some people carry unequal parts of the burden.”

“When you look at microfinance competition in different countries, you can see potential problems.”

Brouwers says the development of microfinance at SNS has also led it to examine related initiatives across the company, including what he says will be an innovative suite of fund products in the sectors of food, agriculture, land and water themes in Africa, developed specifically to meet the fiduciary needs of pension funds. He says the manager has been working with one of the largest Dutch pension funds on its work in Africa, but declined to name them: “We have found the right projects and size and we are doing the due diligence that is required for these projects. We can get economies across what we do because we are in the microfinance field, which means we are constantly looking at different countries and currencies and at creating partnerships on the ground.”