Triple Jump’s Financial Inclusion Resilience Fund is focused on providing subordinated debt to financial intermediaries servicing micro, small, and medium sized-enterprises and low income borrowers in emerging markets.
- The Financial Inclusion Resilience Fund has received $48m from the US International Development Finance Corporation and is anchored by the Dutch Good Growth Fund which committed capital of $16m.
- It is focused on supporting entrepreneurs and women in particular.
- The investment manager believes that subordinated debt is a speedy solution to meeting market needs.
- Investee company Pahal Financial Services has a 98.8% outreach to women.
It began with the global pandemic. In March 2020, when the world was locking down, Amsterdam-based impact investment manager Triple Jump started to think about the liquidity crisis that small borrowers in developing countries would be facing. Without business income, those borrowers would not be able to repay their loans to microfinance institutions or SME lenders, who in turn would not be able to repay the money that provided them with debt funding.
Solving the liquidity crisis during COVID required all the big microfinance investment vehicles to work together, points out Orsolya Farkas, equity manager at Triple Jump. Broadly, the strategy worked, but it did highlight a key need. “From our side, at that point, we’re thinking, okay, liquidity is a priority, but at some point there will be a capital need for financial institutions in developing countries, same as in larger economies,” she says.
Launch of FIRF
In December 2022, the firm launched its Financial Inclusion Resilience Fund (FIRF), focused on providing subordinated debt to financial intermediaries servicing micro, small, and medium sized-enterprises (MSMEs) and low income borrowers in emerging markets. The fund held a first close with capital commitments of $72m (€66m). It received $48m from the US International Development Finance Corporation (DFC), and is anchored by the Dutch Good Growth Fund, which committed capital of $16m. Since launch, the fund has disbursed $35m, with an additional pipeline of over $90m.
FIRF has focused on supporting entrepreneurs – and women in particular, and Triple Jump argues that subordinated debt is a speedy solution to meeting market needs, with loans having the potential to be disbursed quickly with up to five times leverage effect.
“It is much faster to deploy than equity would be. And the idea is that with this fund we give a boost of capital to these microfinance or SME banks that allows them to get back to their pre-crisis levels of lending,” says Farkas.
She also points out that subordinated debt is a very small percentage of the allocation of a portfolio in a microfinance vehicle, an offering limited by most other funds in the market. Triple Jump has a 15-year track record with subordinated loans as an instrument, with over $80m disbursed and excellent portfolio quality throughout the business cycle, it says.
The fund has a target IRR of 9%, and Lisa van Splunteren, manager, investor relations and business development at Triple Jump, says that it is open for additional investors in the equity and mezzanine tranches.
“On the asset side, we are not limited to working only with investees we have worked with before, but it is important that they are performing well, so that subordinated debt catalyses their lending activities,” she says.
Pahal Financial Services
One example is India’s Pahal Financial Services. The company extends primarily unsecured microloans to women from low income households in rural areas. Founders Kartik Mehta and Purvi Bhavsar have 29 years’ experience each in the banking, financial services and insurance industry.
Pahal’s gross loan portfolio stood at $162m as of end September 2023, and included a product mix of group, individual, and MSME loans. The company operates in eight states with a network of 222 branches and 1,947 employees. It caters to 92% rural and semi-urban India, with a 98.8% outreach to women.
Triple Jump says it is exactly the type of company that fits in with FIRF’s criteria – it has been in operation for more than a decade, and has been tested in times of crisis, and its portfolio quality has remained better than those of major microfinance institutions.
With FIRF’s support, Triple Jump believes Pahal will be able to maintain its capital adequacy ratio levels, which stand at approximately 19%. The subordinated debt from FIRF will support 8% of net operating cash requirements for 2024, and will also support long-term funding growth.
Triple Jump worked with 20-25 institutions at its first closing, and expects to work with 30-35 investee institutions when the fund reaches its target size of $120m.
The fund has built a geographically diverse portfolio to meet its impact, risk, and return objectives. No more than 40% of fund assets are invested per region, and country exposure limits are set based on country ratings, with a maximum of 15% of fund assets allocated.
Laura Ospina, investor relations manager at Triple Jump, argues that subordinated debt is sometimes considered more high risk than it actually is.
“Investing in emerging markets is key to achieving the UN SDGs, and we are far from reaching those goals. If you look at our track record, we have been providing sub debt for some of the other funds we manage and it is actually performing better than some of our senior loans in some cases. I am not saying it is not a risk, but the perceived risks are sometimes higher than they really are. Emerging markets are a good diversifier, and really super important when you look at impact investing.”