Birth of a new asset class

What ultra-low risk type of asset delivers a cumulative return of investment of 26% over the past three years?

Microfinance has the potential to become a mainstream asset class, much like venture capital 15 years ago, says Alexandre de Lesseps, co-founder of Geneva-based BlueOrchard Finance.

Although the concept of microfinance has been around since Dr. Muhammad Yunus founded Grameen Bank in Bangladesh in 1976 to lend to village women, de Lesseps is taking the concept mainstream. BlueOrchard Finance advises the Dexia BlueOrchard Fund, which is the first private worldwide and fully commercial microfinance investment fund.

De Lesseps stresses that microfinance need not be viewed as a charity. The fund he advises has investors, not donors.

"Microfinance has given investors a new asset class," he says. "Banks and family offices with a surplus of cash can put 1-2% into microfinance, and get as much as Libor plus 6% in return." Venture capital began at the same level, and over time as institutions became more familiar with it, pioneers such as CalPERS placed over 10% of their portfolio into it. De Lesseps believes the same will happen to microfinance.

The BlueOrchard fund has one large Hong Kong investor, which de Lesseps declined to name. He is currently in Asia both to visit the microfinancial institutions (MFIs) in BlueOrchard's portfolio and to drum up interest from investors.

Microfinance has extremely low volatility as non-market traded fixed income, giving it zero correlation to global equity and bond swings. The BlueOrchard Fund pays monthly liquidity, similar to a money market fund. Its RoI since inception in 1998 is 29.9%. And the risk is "ultra-low", de Lesseps says. Of the 116 loan disbursements the fund has made in its five-year history, none have defaulted.

The fund seeks out MFIs in developing countries. These MFIs tend to be professionally run banks, cooperatives or mutual aid societies that use the money to lend on to members in the local community. This money goes to people who otherwise have no access to credit, and the due diligence process of selecting MFIs emphasizes their ability to engender responsibility among recipients.

"There is no collateral," de Lesseps says. "The insurance you have is that you are giving people a first chance, and they do their damnedest to give it back."

The lack of collateral has caused many potential investors in the fund to hesitate, for without charity, the fund is perceived as a charity. He says political risk in various countries included in the fund's portfolio is negligible, and that the efficacy of microfinance far exceeds the wastrel projects of multilateral bureaucracies.

The rise of socially responsible investment in Europe has prompted a lot support from pension funds and other investors. American investors have been bigger givers to charity and wary of microfinance as an investment. But de Lesseps says since 9/11, more Americans see the link between poverty and terrorism, and he is making headway there too. Microfinance not only provides a stable return at low risk, but directly contributes to alleviating poverty and cutting out local loan sharks.

He reckons the MFI market is $3 billion, but the BlueOrchard fund has only $44 million invested in loans to them. About $500 million is currently committed to MFIs worldwide, he adds. At some point de Lesseps would like to develop a bond market for MFIs, but that will take years of work.

The great-great-grandson of the French diplomat Ferdinand de Lesseps, who supervised the construction of the Suez Canal in 1879 and failed to build another in Panama, Alexandre was raised in Khartoum, Sudan, to French and English parents, and has had a number of businesses in France and the United States. "I am an entrepreneur," he says. He has been involved with BlueOrchid for two years as an international fund raiser.

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