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Loic de Canniere


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Measuring the impact of investments remains a main challenge for sustainable finance professionals and, together with Climate Change, an overarching theme at TBLI. Sixteen related workshops offer …

Measuring the impact of investments remains a main challenge for sustainable finance professionals and, together with Climate Change, an overarching theme at TBLI. Sixteen related workshops offer debate on ESG and Impact Investing trends, private equity, portfolio strategy, food production, emerging markets, sustainable energy or philanthropy investing.

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  • 1. Enhancing financial inclusion in rural areas TBLI Conference, Zürich Introduction by Loïc De Cannière November 2013
  • 2. Incofin Investment Management • Leader in rural and agricultural impact investing, strong presence in microfinance and pioneering initiative in Fairtrade • Our mission: Our mission is to invest in companies that increase financial inclusion, in order to generate developmental impact, while generating an attractive return to our investors. • Head Office located in Antwerp, Belgium; four regional offices based in Bogota, Colombia; Chennai, India; Nairobi, Kenya and Phnom Penh, Cambodia Incofin Investment Management ~ 500M USD Institutional Funds ~ 320M USD Rural focused funds RIF I (2007) 38M USD RIF II (2010) 160M USD FAF (2012) 25M USD Retail funds 50M USD Other funds agRIF (2014) 200M USD Strong focus on rural & agricultural finance 100M USD Managed Accounts 130M USD
  • 3. Agriculture plays a pivotal role in rural areas Agriculture plays a pivotal role in rural poverty reduction • • Agriculture plays a critical role in the economies of poor countries (large GDP contribution from agriculture) and in poverty reduction1, especially when focused on small farms It is a major employer of rural labour in developing countries (1,3 B people) • Increasing the return to land raises the value of one of the few assets of the rural poor • Despite its importance, productivity in low & middle income countries remains quite low ... Agriculture growth is inhibited by several factors: • • • • • limited access to improved seeds and inputs declining soil fertility poor connectivity to markets weak infrastructure Increasing food supply from small-scale agriculture is critical in meeting global food demand (+ 50% by 2030) inadequate access to financial services Sources: CGAP – Segmentation of smallholder households: meeting the range of financial needs in agricultural families (2013) 1World Development Report 2005, World Bank: “It is estimated that a 1% increase in agricultural yields reduces the percentage of people living on less than $1 per day by between 0.6% and 1.2%” 3
  • 4. Financing needs from smallholder farmers are largely unmet Market segmentation • Smallholders can be differentiated in 3 categories: # Smallholders There are between 450-600 million smallholder farmers worldwide, they are becoming increasingly important in the global agricultural value chain. • Strong market demand from smallholders 1. Subsistence farmers, ~50% of all smallholders 2. Commercial smallholders in loose value chains (~45% of all smallholders) 3. Commercial smallholders in more structured value chains, aggregated in producer organizations (~5% of all smallholders) Demand Millions 450 USD billions 225 450 Subsistence farmers not included in market estimate Only 10% of smallholders are currently part of P.O. 203 22 Smallholder farms Smallholders only farming Smallholders integrated in for subsistence agricultural value chain 2011 • • Dalberg has estimated the size of the market demand at 450 Billion USD, of which currently only 2% is being met • Currently, only about 10% of the commercial smallholders are integrated in structured agricultural value chains In this market demand estimate, only smallholder farmers that are trading (~225M) are taken into account. It is estimated that each smallholder has on average both ST and LT financing needs of ~1,000 USD Sources: Dalberg – Catalyzing Smallholder Agricultural Finance (2012); CGAP – Segmentation of smallholder households: meeting the range of financial needs in agricultural families (2013) 4
  • 5. Risks & opportunities of engaging in agricultural finance Risks • • Opportunities • • • On Household Level • • Low density of rural population  high operational costs Large  majority  of  the  world’s  extremely  poor   live in rural areas • Majority of the Microfinance Investment Vehicles (MIV) operate in urban areas and compete for same Microfinance Institutions (MFI) • On Market Level Climate risk, deseases Majority of the MFI compete for same customers in urban areas, resulting in higher Over-Indebtedness risks • Rural residents see credit as one of the main enablers of growth • Rural households are as diversified as urban households • Favorable client retention rates among rural clients, with increasing average loan sizes • Very traditional people w/ strong cultural roots & values Poor infrastructure Low level of education in rural areas Inability of farmers to influence or predict the final sale income from crops limits the financial planning of farmers Lack of knowledge about the offer of credit, inexperience in its use and sense of having little bargaining power w/ financial institutions Source: Financial Behavior of Rural residents – Acción 5
  • 6. Incofin’s  flagship  funds: Rural Impulse Fund I & II Rural Impulse Fund I Fund launch Fund structure Fund size Fund model Geographical spread Rural Impulse Fund II 2007 2010 38 M USD 115 M EUR Hybrid – investing in equity investments & debt investments Global fund – developing countries # Equity investments 15 Underlying IRR equity investments 31,5% 9,8% ~ 1,3 M USD ~ 2,7 M EUR* # Cumulative Debt investments 80 39 Underlying IRR loan portfolio Fund Results 3 8,3% 7,7% ~ 1 M USD ~ 1,2 M EUR Avg equity size Average Loan size June 2013 *Including approved deals 6
  • 7. Strong financial performance RIF I RIF II NAV evolution (IFRS) 210 190 199 NAV/share (USD) 136 90 134 100 100 IRR to date: 14,5% 90 88 85 95 81 01-06-10 Underlying MFI performance for RIF I & II is solid:  MFIs’  ROE  excl.  donations:  18,3% 99 96 80 • NAV/share (EUR) 100 95 153 150 110 100 197 170 130 NAV evolution (IFRS) 105 • 31-12-10 31-12-11 NAV increase since 12/10: 22,4% 31-12-12 30-06-13 Some  of  the  Fund’s  investors  include   both DFIs and institutional investors, for example:  PAR30 + rescheduled: 2,1%  Operational Self-Sufficiency (OSS): 120,9% 7
  • 8. Incofin has invested in sustainable, commercially viable MFIs that provide financial services to the rural poor Average rural score* of MFIs in RIF I & RIF II: higher than average 80% 70% USD % Rural 31-12-2012 68% Average loan size of MFIs in RIF I & RIF II: lower than average 67% 2.069 60% 1.896 50% 40% 30% 687 20% 675 RIF I RIF II 10% 0% RIF I RIF II Symbiotics portfolio at portfolio at MIV Survey 31/12/2012 31/12/2012 * Rural score defined as % of points of sales in rural areas Sources: Internal Reporting Incofin IM, MIX market Note: Average Loan size calculated based on Gross Loan Portfolio (USD) divided by total # clients MIX avg 2012 2012 8
  • 9. A strong outreach to the rural poor has been achieved + % Annual growth % Women/Total Clients 1600 branches of RIF investees ... +13% +12% 1.606 1.424 +17% 2012 2010 Source: Internal reporting Incofin IM, Symbiotics MIV Survey Report 2012 76% 75% 73% 2,88 2011 ... of which 2,9M women 3,82 +14% 3,27 1.275 2010 ... reach out to 3,8 M clients ... 2,89 2,44 2,10 2011 2012 2010 2011 2012 9
  • 10. Goal is to act as a catalyst so that rural microfinance becomes an investible asset class Graph legend: # positive scores # negative scores Questions analyzed (for equity investments) Too early to tell Underlying rationale/required answer 1 Is Incofin first International  Do we go where others don’t 2 Do other international investors  Do we attract new Int’l investors for the MFI once invested Scoring of analyzed MFIs Investor? come on board after Incofin does? 9 5 % 5 9 64 36 A strong catalytic effect can be observed for RIF I equity investments; for RIF II equity investments, it is often too early to tell Source: Internal analysis Incofin IM 10
  • 11. A well diversified portfolio of equity stakes Very high selectivity was applied in  the  investment  process  … …  leading  to  a  very  diverse  set  of  investments  in   RIF II Eligible investment universe ~300 desk reviews ~20 investments 2,8 2,6 2,4 2,2 1,9 1,9 1,7 1,4 1,3 1,1 1,0 1,0 0,9 0,8 3,3 3,8 4,2 4,7 5,2 6,1 6,0 Executed deals Approved deals 11
  • 12. Different financial institutions must be addressed to provide financial services to smallholder farmers 1 Access to different financial service providers • Banks, credit unions, licensed deposit-taking MFIs • Input suppliers • Microlenders w/ specialized capacity in agri-lending • Agricultural banks • Nonprofits promoting savings & loans groups • Microlenders using groupbased lending • Licensed pawn-based lenders (incl. Banks) 0 • Purchasing agents along the Value Chain • Producer Organizations • Banks offering specialized products (warehouse finance etc) Subsistence farmers • • Relatively basic financial needs Household cash flows usually not robust enough to ensure loan repayment for agricultural production Clients reached largely through group mechanisms as high transaction costs This is changing as technology gains importance and decreases service costs • • • • Commercial smallholder farmers in loose value chains • • Commercial smallholder farmers in tight value chains Wider range of financial suppliers to meet their wider demand • • Most complex financial needs • MFIs/Banks have to build their skills and/or find knowledgeable partners • Value chain financing (e.g. contract farming) Varied sources of household income Good target for MFIs & banks expanding into rural areas Risk mitigation through diversification across many zones, crops, livestock & markets Diverse sources of income, but significant share of agricultural income may depend on one output or single buyer Source: CGAP – Segmentation of smallholder households: meeting the range of financial needs in agricultural families (2013) 12
  • 13. Fund structure agRIF Key Characteristics agRIF • Luxembourg SA, SICAV-SIF: Restricted to institutional and well-informed investors • • • Targeted Balance Sheet structure agRIF USD denominated Target size of USD 200M Fund has a hybrid structure and invests  In equity and quasi-equity up to the funding equity tranche minus USD 5M  Assets Equity and quasiequity investments (95M USD) Liabilities Equity (100M USD) In senior loans • Investments in financial intermediaries in all countries on the OECD DAC list (and Russia) • Closed-end fund (12 years extendable with 3 times 1 year) • Fund issues:  • Shares  Senior loans (105M USD) Senior notes & loans (100M USD) Senior notes and loans (up to D/E of max 1:1) A significant Technical Assistance Facility will be raised 200M USD 200M USD 13