The Schroders-owned boutique runs the world's largest microfinance fund – and its engine is sputtering. Is Blue Orchard too big for microfinance?
The sale of Blue Orchard to Schroders last year brought the Swiss microfinance manager know-how and expertise to more broadly cover impact and ESG, or environmental, social, and governance themed investments. In turn, Schroders won access to a new and in-demand asset class.
Blue Orchard's shareholders sold 70 percent to Schroders, a second favorable exit for Chairman Peter Fanconi, who in 2005 landed a coup by selling hedge fund Harcourt to Vontobel. Much of Blue Orchard's success is Fanconi's: the 53-year-old banker joined as CEO in 20013 when its microfinance fund managed $200 million.
Largest Microfinance Fund
The Swiss banker and Blue Orchard's sales force helped popularize what was a niche theme at the time for institutional investors. Today, its microfinance fund is nearly $2.5 billion – the largest of its kind – with an annualized return of 3.6 percent in U.S. dollar terms, the strongest in its field.
Blue Orchard's money has financed more than 27 million mini-firms in developing nations of Asia, Africa, and Latin America. It now faces a unique by-product of its success: in November, it shut its microfinance fund to new money – a temporary soft closing – in order to preserve investor interests and to not water down the investment strategy.
No Reopening Planned
The fund currently holds about $500 million in cash – roughly one-fifth of its total volume. More than eight months after its «soft closing,» there are no signs Blue Orchard is in a hurry to reopen it.
CEO Philipp Mueller told finews.com its pipeline is full of potential projects, «but in view of the corona pandemic, we're cautious about reopening.» The fund's high liquidity is due to undisclosed seasonal factors in particular, he noted, and may change quickly.
In microfinance, a market growing at double-digit rates, there is no shortage of potential investments. Schroders wants to deploy its $500 billion in assets sustainably as well – one reason for purchasing Blue Orchard last year.
Growing Loan Book
Ironically, Blue Orchard may be the victim of its own success: its size may be one reason for its seeming difficulty finding new investment projects. Or in industry jargon «style drift»: the growth of a financial institution changes its loan book.
The five largest banks which Blue Orchard has worked with in Latin America and Georgia have grown considerably in the last five years. Microfinance is no longer a primary focus for them, and borrowers have also changed – they now more closely remember small- and mid-sized firms.
Byproduct of «Style Drift»
Mueller, Blue Orchard's CEO, said this is a welcome development. Asked whether the fund is still a microfinance tool, Chairman Fanconi told finews.com «Of course the term microfinance fund is correct. It describes exactly what we do and will continue to do: grant loans in microfinance.» Blue Orchard can massively expand the fund's capacity, he noted.
Another byproduct of the «style drift» is that the fund's more closely correlates other asset classes – an effect investors aren't likely to appreciate, since their decoupled relationship to traditional stock markets is one major draw for this type of investment.
Liechtenstein Split
This may have played a role by Liechtenstein-based EMF Microfinance Funds' decision earlier this year to split from Blue Orchard, which had provided advice in the past.
Blue Orchard had managed the fund, launched by LGT Bank and Liechtenstein's princely family, for the last three years. Now, former Blue Orchard employees run the EMF fund.
