If there’s one thing microfinance projects and small-cap developing-world investments have in common, it’s that they’re small and fragmented. But if there’s another thing they have in common, it’s a low rate of default and lack of correlation with established investments.
By the end of this year, a new trading platform hopes to have taken a step towards eradicating the first commonality – by amalgamating small and microcap public and private companies and microfinance projects and bringing them onto the radar of accredited investors across the United States.
Dubbed “AXess”, the new alternative trading system (ATS) is the brainchild of Mike van Patten, an investment banker specialized in standardizing fragmented markets who has spent his career building a network of contacts in the developing world.
“My interest doesn’t specifically lie in emerging markets, but in fragmented markets where we can bring standardization,” he says. “I’m not talking about Telecom de Mexico and groups like that, but smaller cap private companies that investors don’t know about, and where local brokers don’t get enough exposure.”
The ATS is regulated as a broker-dealer and is segmented into different areas – all of them fragmented markets. Some segments, like clean technology and biotech, cover industries located in the West, but others cover so-called “frontier markets” and microfinance – small loans, like those made by India’s Grameen Bank, to poor people in the poorest countries on the planet.
Such schemes are generally low-risk – with several studies showing that microfinance borrowers have a lower default rate than do highly-rated corporate bonds.
“People in the West tend to hear frontier market and think high risk, but that’s not the case with microfinance – and it makes sense,” says Scott Stark, who led the team that developed the Euro-MTS pan-European bond indexes. “People who are getting microfinance loans are in the situation they’re in because of lack of opportunity – which is something you can’t usually say about some of the big corporates.”
Van Patten, however, says two things will have to change before westerners begin to see microfinance as a viable investment.
“First, people need to stop seeing this as philanthropy and second, microfinance institutions have to pay higher returns.”
That, he says, isn’t difficult – the end borrowers already pay higher rates to the institutions, but the institutions keep some of the money to cover risk. He believes they should pass more of the risk and more of the return on to the end buyers.
