Aegon has completed its first 8 million of a potential 100 million euro investment in microfinance. A third fund has already been earmarked for an investment later this year.
The investment was made in two external funds, responsAbility Microfinanz and Triodos Microfinance.
'Microfinance' is a general term to describe financial services to low-income individuals or to those who do not have access to typical banking services, often in emerging markets. Because of its social benefits, microfinance is considered by many to be an 'impact investment' – an investment that, as well as delivering a financial return, has a positive impact on society.
Aegon began investigating the potential of microfinance in 2014, examining both the financial characteristics – whether these investments could offer a satisfactory level of return on risk – and the social benefits. In 2015 Aegon established a Microfinance Investment Committee to overcome the final obstacles.
Microfinance funds are not rated with agencies such as Moody's and Fitch, and neither are the underlying loans. In order to determine risk, Aegon looked at metrics such as volatility and level of defaults made by microfinance funds to microfinance institutions – banks in emerging markets who in turn provide loans to individual consumers.
The duration of these loans was also a key consideration. "The Solvency II regulations that apply to insurance companies' investments and that we need to adhere to stipulate that the longer the duration of the investment, the more capital we need to hold," explains Harald Walkate, Global Head of Responsible Investment at Aegon Asset Management. "So while in our line of business we normally invest long term, for microfinance we actually want a relatively short duration of two to three years."
Size versus opportunity
"We were also looking for funds with a decent size that could accommodate the larger investments we typically prefer. On the other hand, we didn't want the size of the fund to restrict our ability to invest in the most promising deals," said Anton Kramer, a portfolio manager at Aegon's TKP Investments.
But the biggest single challenge, according to Marcel van Zuilen, a portfolio manager at Aegon Asset Management, was reporting requirements. "Solvency II regulations require strict and far-reaching 'look-through' reporting requirements. Basically that means that the microfinance funds need to report on their investments in a great amount of detail so that the investor can literally 'look through' the fund and demonstrate to the regulator that it is compliant. If you consider that data needs to come from microfinance institutions in places like Cambodia, Nigeria and some 100 other countries you realize that's no simple task."
Having identified solutions for these issues, the Aegon Risk & Capital Committee who approved the mandate concluded that microfinance was a good fit within Aegon's portfolio, stating that: "In the current low interest rate environment the returns from microfinance are attractive, the risks and timeframes are acceptable, and there is essentially no correlation with other asset classes Aegon invests in."
To truly understand the microfinance investment chain and to select the microfinance funds that can handle Aegon's demands necessitated the development of a new area of expertise, which according to Harald, can now also be leveraged to service Aegon and external investment clients in a sustainable manner.
Triodos Microfinance Fund actively contributes to the growth of an inclusive financial sector in developing countries by providing debt and equity to microfinance institutions and SME banks in Asia, Africa, and Latin America. These institutions then provide financial services to underserved clients. These investments aim to improve living conditions and stimulate local entrepreneurship in developing countries.
responsAbility is one of the world's leading asset managers in the field of development investments. Its investment vehicles supply debt and equity financing to non-listed firms in emerging economies and developing countries. ResponsAbility has put into practice sound investment concepts and business models that have helped populations meet their basic needs and drive economic development.