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Private credit

Investing in the future: The power of microfinance

4 min read 29 Oct 24

Private credit can be a powerful tool in promoting economic growth and fostering prosperity in the world, while providing investors with income potential over a fixed term. Set up in 2005, the European Fund for Southeast Europe (EFSE), seeks to make a positive impact on society by providing finance to underserved geographies. The fund helps support businesses and individuals on revenue generation, improving living conditions, and creating employment.

As the private markets landscape continues to evolve, we believe opportunities in the space are becoming increasingly attractive for investors such as pension funds. Beyond the diversification and possible outperformance benefits, investing in private assets could play an important role in improving the world we live in. This is exactly what KfW Development Bank set out to do when it established EFSE in 2005, receiving significant support from the European Union, as well as the German, Swiss, and Austrian governments.

“EFSE is a microfinance fund with a mission. It is categorised as Article 9 under Europe’s Sustainable Finance and Disclosure Regulation  meaning that the fund has sustainable investment at the core of its objectives.” 

Since its launch, the impact fund has had a strong track record for contributing to economic development in countries across eastern and southeast Europe, including Ukraine, Albania, Romania and Kosovo to name a few. It is one of the longest running microfinance funds of its kind, with over €1 billion of capital in its outstanding portfolio.

Strong diversification

Although EFSE invests in emerging market jurisdictions – which by nature can carry a higher level of risk – the fund itself is well-diversified across 17 countries and 72 individual borrowers. This strong diversification compared to other blended finance options makes it a compelling opportunity, in our view. 

We believe EFSE’s governance structure is notably strong, with ownership by the European Commission, as well as a robust impact asset manager with over a decade of specialist experience underwriting and originating for the fund. Its portfolio is public and transparent and in general risks seem to be low, hence the AA- rating, another reason behind M&G Investments’ decision to invest a total of €32 million with a maturity of five years. But how could this microfinancing fund help create a better world?

Supporting business, supporting communities

Since inception, EFSE has supported over 2 million indirect jobs in micro, small and medium enterprises (MSMEs), 933,000 of which are held by women1. The fund has also contributed over €1.2 million sub-loans to MSMEs and private households in 2023. Over half of the sub-loans were disbursed to end-borrowers in rural communities.

Through carefully selected local financial intermediaries – such as commercial banks, microfinance institutions, and non-bank financial institutions – EFSE provides three types of loans to be used for financing MSMEs, rural areas, and housing. In 2022, the fund approved over €34 million in loan investments that partially targeted MSMEs engaging with sustainable agriculture.

Highlighting that the transition to sustainable agriculture is more crucial than ever in its 2023 Impact Report, EFSE typically provides technical assistance alongside investment. This helps to scale capacities and increase farmers’ awareness of the benefits of “sustainable and resilient agricultural practices” which can help reduce rural poverty, while improving food security and increasing social equality.

Making an impact

EFSE is a microfinance fund with a mission. It is categorised as Article 9 under Europe’s Sustainable Finance and Disclosure Regulation, meaning that the fund has sustainable investment at the core of its objectives.

As part of its mission to promote sustainability, EFSE actively contributes to six of the UN’s core Sustainable Development Goals (SDGs):

  • SDG 1: No poverty
  • SDG 2: Zero hunger
  • SDG 8: Decent work and economic growth
  • SDG 9: Industry, innovation and infrastructure
  • SDG 10: Reduced inequalities
  • SDG 17: Partnerships for the goals

We believe it has a strong capacity to drive positive change, supporting the backbone of regional economies, while also providing a potential source of income to meet client needs as loans reach maturity.
 

1 EFSE, ‘Impact Report 2023,’ (efse.lu), 2023.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast. 

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