Insights from the investment team: From crisis management to growth

26/10/2020 Blog, Covid-19

On a recent webinar, Sébastien Juhen, Lead Portfolio Manager for the BlueOrchard Microfinance Fund (BOMF) and Matthew Sparkes, Chief Risk Officer and General Counsel, shared an update on the current situation for microfinance investing in emerging markets. We also had the pleasure to welcome Arun Nayyar, Chief Executive Officer of NeoGrowth, one of the fund’s portfolio companies based in India. Arun presented an overview of NeoGrowth’s activities leveraging the digital ecosystem, the importance of MSMEs to the Indian economy, and the company’s response to the current pandemic.

A look at the markets

Global markets have continued to recover despite the ongoing challenges and uncertainty created by the pandemic.  The recovery is being driven by strong fiscal and monetary stimulus efforts across most developed and emerging markets.  Financial vulnerability remains elevated for weaker countries and is the key focus of our investment and risk management strategies. The vulnerability comes as a consequence of the pandemic to the real economy – it varies greatly across individual markets, depending on governmental ability to provide continued fiscal support. Recent economic news from Asia was upbeat with data showing a recovery was underway. The mood in Latin America was a bit more somber as the number of new COVID-19 cases continued to rise, and legacy economic concerns are exacerbated. There are clearly also positive signs, for example, the credit rating of Ecuador which S&P and Fitch have upgraded to B-, following a successful restructuring of sovereign debt and an agreement with the IMF to provide emergency liquidity.

The BlueOrchard approach

Our investment approach places a strong emphasis on high-quality institutions and those with long term potential for growth aligned with our strategy of maximizing impact. In addition, we have been limiting specific country risks exposure.

The BlueOrchard Microfinance Fund portfolio has shown continued resilience and despite challenges facing many of our partner institutions, has stabilized with no new requests for debt rescheduling received since June 2020.  Performance has increased along with investment level in September.  The fund continues to yield a strong social return, serving more than 1.2 million micro-entrepreneurs, of whom 79% of end clients are female.  The fund has invested in 151 MFIs across 48 countries, with majority stakes in India, Georgia, Ecuador, Mexico and Costa Rica.

With regard to new fund disbursements, we have seen growing demand for lending in certain key markets, and we continue to build a pipeline for the fourth quarter and new year based on the strategy noted above.  Though travel restrictions have placed constraints on our ability to meet personally with investees and conduct in-person diligence, our investment team continues to use all means available including “virtual” diligence and trusted relationships in the regions to source new transactions and track performance of existing investees.

Insights from the field – NeoGrowth

NeoGrowth, one of BlueOrchard Microfinance Fund’s portfolio companies in India, provides loans to underserved and underbanked micro, small, and medium entrepreneurs across the country.

In India, MSMEs employ over 120 million people, and it is a large contributor to the country’s GDP: 25% of service, and 6% of manufacturing sectors. However, despite this significant size, the sector operates in a mostly informal space; less than 10% of the total banking credits in India goes to the MSME sector.

Digital payments are on the rise in India with over five million point of sale terminal installed across the country. This is due to the demonetization of Indian currency back in 2016 that led to a significant increase in digital payments.

NeoGrowth has leveraged this opportunity to serve the MSMEs sector of consumer-facing retail business. Creditworthiness is assessed through records of credit, debit cards payments, and universal payment interfaced – a new payment system recently introduced in India.

NeoGrowth places high importance on financial inclusion and social impact since over 51% of its clients are first-time borrowers and 78% are first-generation entrepreneurs.

Throughout this pandemic, the organization has shown resilience and its investments in payment technology have yielded positive results.  Indeed, we have seen a trend across our portfolio that investees with solid electronic repayment infrastructure are weathering the COVID-19 storm reasonably well.  NeoGrowth has reactivated engagement and repayments with 96% of all customers after the initial lockdown. With many businesses under lockdown, NeoGrowth accommodated rescheduling requests, offered payment moratorium, and focusing on maintaining liquidity. During the early month of the pandemic, the company kept on engaging with its customers through various means of communication, where they focused on understanding and accommodating customer needs. The economic activity since resumed in India and the company has resumed lending focusing on the core clients, risk mitigation and risk management.

Disclaimer:

The information in this document was produced by BlueOrchard Finance Ltd (“BOF”) to the best of its present knowledge and belief. However, all data and financial information provided is on an unaudited and “as is” basis. The opinions expressed in this document are those of BOF and its employees and are subject to change at any time without notice. BOF provides no guarantee with regard to the accuracy and completeness of the content in this document and BOF does not under any circumstance, accept liability for any losses or damages which may arise from making use of, or relying upon any information, content or opinion provided by BOF in this document. This document may contain references or links to other documents and websites and BOF has not reviewed such other documents and websites and is not responsible in any way in relation to the content of such documents and websites.  

The information in this document is the sole property of BOF unless otherwise noted, and may not be reproduced in full or in part without the express prior written consent of BOF.

All investments involve risk. We note specifically that past performance is not an indication of future results. Emerging markets impact investments involve a unique and substantial level of risk that is critical to understand before engaging in any prospective relationship with BOF and its various managed funds. Investments in emerging markets, particularly those involving foreign currencies, may present significant additional risk and in all cases the risks implicated in this disclaimer include the risk of loss of invested capital.

The materials provided in this document are for informational purposes only and nothing in this document can be construed as constituting any offer to purchase any product, or a recommendation/solicitation or other inducement to buy or sell any financial instrument of any kind and shall not under any circumstances be construed as absolving any reader of this document of his/her responsibility for making an independent evaluation of the risks and potential rewards of any financial transaction. We note in particular that none of the investment products referred to in this document constitute securities registered under the Securities Act of 1933 (of the United States of America) and BOF and its managed/advised funds are materially limited in their capacity to sell any financial products of any kind in the United States. No investment product referenced in this document may be publicly offered for sale in the United States and nothing in this document shall be construed under any circumstances as a solicitation of a US Person (as defined in applicable law/regulation) to purchase any BOF investment product.

The information provided in this document is intended for review and receipt only by those persons who are qualified (in accordance with applicable legal/regulatory definitions) in their respective place of residence and/or business to view it, and the information is not intended under any circumstances to be provided to any person who is not legally eligible to receive it. Any recipient of information from this document who wishes to engage with BOF in furtherance of any transaction or any relationship whatsoever must consult his/her own tax, legal and investment professionals to determine whether such relationship and/or transaction is suitable. 

By no means is the information provided in this document aimed at persons who are residents of any country where the product mentioned herein is not registered or approved for sale or marketing or in which dissemination of such information is not permitted.

BOF disclaims all liability for any direct or indirect damages and/or costs that may arise from the use of (whether such use is proper or improper), or access to, this document (or the inability to access this document).

Copyright © 2020, BlueOrchard Finance Ltd. All rights reserved.