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LuxFLAGSupporting Sustainable Finance
European Microfinance WeekLuxembourg, 16 November 2012
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About LuxFLAGLaunched in July 2006, LuxFLAG is an independent not for profit association which supports the financing of sustainable development by providing clarity for investors through awarding Labels to investment funds which meet specific published criteria.
The Charter Members of LuxFLAG are :
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About LuxFLAG: LuxFLAG Associate Members
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LuxFLAG’s position in the Microfinance industry
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LuxFLAG Microfinance and Environment Label
• Increasing importance and growing interest
• 25 labelled MIVs representing USD 3.72 billion AuM
• More than 50% of worldwide AuM are covered by the labelled MIVs
• 7/10 largest MIVs hold the Label
•Launched in June 2011•5 labelled EIVs with USD 478 million AuM•Increasing number of prospect applicants
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Advantages of the Label
Advantages of the LuxFLAG Label :• Reinforces clarity, transparency and credibility towards the Investors • Enhances visibility of the labelled fund in the international platforms. • Helps reaching international investment community
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Why does a private bank like Banque de Luxembourg offer microfinance investments to its clients?
Microfinance investments meet the needs of the traditional conservative private investor: return safety diversity
They are a valid alternative to our traditional investment offering
Industrialized countries like Greece, Portugal or Spain have become high risk investments
Emerging countries like Bolivia, Azerbaijan, Indonesia or Peru have become investment-grade investments
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BL-Bond EuroBL-Bond Euro BL-Global BondBL-Global Bond CG Bond Euro PlusCG Bond Euro Plus
Why does a private bank like Banque de Luxembourg offer microfinance investments to its clients?
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Public Debt AAA
of the European Monetary Union
Public Debt AAA
of the European Monetary Union
Sovereign Emerging Markets
Hard currencies
Sovereign Emerging Markets
Hard currencies
Sovereign bonds E.M.
local currencies
Sovereign bonds E.M.
local currencies
MFIMFI
Quasi sovereign
Quasi sovereign
Corp Emerging markets
Corp Emerging markets
Why does a private bank like Banque de Luxembourg offer microfinance investments to its clients?
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Microfinance investments are productive, contribute to the local development, and help build and generate wealth!
Why does a private bank like Banque de Luxembourg offer microfinance investments to its clients?
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We don’t invest in the world’s poorest countries (-> we don’t want to replace the sovereigns!)
We try to avoid geopolitical (-> Nicaragua!) and environmental(-> failure of crops!) risks
As a reaction to the recent microfinance crisis: currently no investments in India
How do we choose our investment targets?
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No entry/exit after an initial subscription period ! (-> avoids necessity of early redemptions!)
Fixed-term investment (generally for a 3-year period)
All future currency risks are generally hedged
Selected microfinance institutions are regularly audited by our partners (e.g. Symbiotics, Geneva)
Key features of Banque de Luxembourg’s microfinance investments
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Typical clients…don’t need their money for a certain period…don’t require guarantees (with regard to the initial investment or the promised return)…are looking for a better return than that offered by a traditional best quality sovereign bond investment…want to feel comfortable with the target investment (sustainable investments, etc.)…put safety first (and transparency)…require returns that are more attractive compared to other investments
Microfinance investments – for which type of clients?
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Challenges in the advisory process
• Explaining how the fund works in reality (loan contracts) the risk for principal and yield the cost side (higher costs than a traditional bond funds)
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Detailed periodical reporting Regular contact with the fund manager From time to time, insights from a representative from a
microfinance institution Banque de Luxembourg’s events at its head office in Luxembourg with
representatives from Promujer (Bolivia), Sathapana (Cambodia) and Azercredit (Azerbaijan)
What kind of additional reporting do our clients need?
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Good investment opportunities in Latin and South America will become more and more rare
Microfinance institutions are increasingly using local financing – at lower costs
As a result, net return (after deduction of fees) will decline
Outlook for microfinance investments:
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Investing in microfinance:
How a specialist asset manager can meet investor requirements
Sébastien Juhen, CIIAHead of Portfolio ManagementBlueOrchard Finance S.A.
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Source: Eurosif Study “High Net Worth Individuals and Sustainable Investment 2012”
Microfinance is recognized as a high-impact investment solution attracting « financial first » and « impact first » investors
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Private wealth holders put social impact first
Source: Credit Suisse Microfinance Capacity Building Initiative in collaboration with the Microfinance Communications Council: Taking Stock of Microfinance:Perception Survey Among Wealth Holders and Their Advisers in the US, Europe and Asia (White Paper, 2011)
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Institutional investors apply stringent criteria when selecting asset managers across asset classes
Source: IPE European Institutional Asset Management Survey 2011
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BlueOrchard applies a state-of-the art investment process with clear responsibilities and strict governance
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The first pillar of the BlueOrchard investment and underwriting process: rigorous financial research and due diligence
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Risk management: clearly identified risk areas and mitigants
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Source: Eurosif Study “High Net Worth Individuals and Sustainabley Investment 2012”
The second pillar of the BlueOrchard investment process: social performance management and monitoring
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Social performance management and reporting: required by investors, certified by independent agencies, rewarded by peers
Source: SPIRIT 4.0 (Social Performance Impact Reporting & Intelligence Tool developed by BlueOrchard) applied to 110 MFIs in 2012
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A service of
Luxembourg Microfinance WeekPanel Discussion
Sebastian von StauffenbergMicroRate CEO
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A service of
36Click to edit Master title style
Opportunities
Positive returns Debt: 2.5-4.5% average
returns
Equity: Historical P.E. averages 11.4 for MFIs
Low volatility
Low correlation
Double bottom line
Challenges
− Limited available data
− No objective analytical source
− No standard reporting requirements
− Lack of understanding of underlying microfinance assets
Diversity of microfinance fund structures, models, pricing, as well asperformance, risk, social, and management
Opportunities and challenges for investors
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A service of
37
What is the most important criteria to you when analyzing a specialized microfinance fund?a) Financial Performance
b) Risk
c) Social Performance
d) Management and Governance
Question
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A service of
38Luminis analytical framework – PRSM™
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A service of
39
The first service to provide data and analysis on microfinance funds
Search 100+ fund profiles
Compare side-by-side comparison
Evaluate 20+ PRSM profiles and 14+ reports
Monitor regular data and analysis updates
The Luminis Solution search - compare - evaluate - monitor
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A changing regulatory environment for MIFs and their managers
Update on AIFMD and EuSEF regime
16 November 2012
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The AIFM Directive - The key questions
► AIFM is entity whose regular business in managing one or more AIF► Managing AIF means providing at least the investment management
services of portfolio management or risk management► All EU AIFM managing AIF► All non-EU AIFM managing EU AIF and all non-EU AIFM marketing
AIF in the European Union under a tailored authorisation process introducing the Member State of Reference
► Any collective investment undertaking which raises capital from a number of investors, invests in accordance with a defined investment strategy, for the benefit of those investors and not UCITS authorised
► Services provided by AIFM or delegated► Open or closed ended ► Regardless of legal structure► Can be external manager or AIF itself► Member State may authorize external AIFM to provide additional
services
► Marketing: any direct or indirect offering or placement of units or shares in an AIF by or on behalf of the AIFM to or with investors domiciled in the Union
► Authorised EU AIFM have a passport to market EU AIF to professional investors in their home Member State and in other Member States
► Exemption criteria► Transitional provisions► Authorisation and marketing requirements► 3rd Country rules
Who is the AIFM?Do we have AIF (s)?
Do I market within the EU?
Do I plan to launch a new fund with EU investors?To what extent do I need to comply?
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The AIFM Directive - Key provisions at a glance
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AIFM Directive: Where do I sit on the compliance map?
Situation How does the AIFM Directive apply?
AIFMs managing closed ended AIFs before 22 July 2013 not making any additional investments after that date
• The AIFM may continue to manage such AIFs without authorisation under the AIFMD
AIFMs managing closed ended AIFs whose subscription period for investors has closed prior to July 2011 and will be liquidated by July 2016
• The AIFM may continue to manage such AIFs without needing to comply with the entire AIFM Directive. Only provisions related to Annual report and ,where relevant, major holdings and control and asset stripping provisions shall apply. Alternatively, the AIFM may apply for authorisation under the AIFM Directive
What are the rules in relation to the AIFs managed but no longer marketed to EU investors (Under the assumption: AuM above de minimis thresholds and no grandfathering applies)
• The AIFs are managed by an EU AIFM: • For EU AIFs, full directive applies (except for Chapt VI – marketing provisions) in return for
management passport from July 2013 • For non-EU AIFs, full directive, except for Art 21 and 22 (depositary and annual report) +
cooperation arrangement• The AIFs (EU AIFs) are managed by a non-EU AIFM• Pre 2015 (Member State of Reference regime): dependent on each Member State rules• From 2015: in return for full compliance with AIFMD through Member State of Reference
autorisation process, management passport available
The AIFM manages portfolio of AIFs whose AuM in total fall below the de minimis thresholds (EUR 100 millions if the AIF is leveraged; EUR 500 millions when the portfolios of AIFs consist of unleveraged AIFs with no redemption rights for 5 years following the date of the initial investment in each AIF)
• The AIFM shall register with the competent authorities of their home Member State• At the time of registration with the competent authorities:• Identify themselves and the AIFs that they manage• Provide information on the investment strategies of the AIFs• Regularly provide the competent authorities with information on the main instruments in
which they are trading and on the principal exposures and most important concentrations of the AIFs that they manage (for systemic risk oversight)
• May opt in => full compliance in return for passports
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► Open to managers of collective investment undertakings (Voluntary regime) established in the EU; subject to registration in their home Member State; and managing EuSEFs with assets under management not exceeding €500 million
► A qualifying ‘EuSEF’ is a fund that invests at least 70% of its aggregated capital contribution in qualifying investments (equity, securitized and unsecuritized debt instruments) issued by a ‘qualifying portfolio undertaking’, that is, an undertaking which meets the following criteria:
It is not listed on a regulated market (note that AIM is not a regulated market; a company listed on AIM could therefore fall within the definition of ‘qualifying portfolio undertaking’ provided it meets the other criteria listed below);
Has a primary objective of achieving measurable, positive social impact; Uses its profits mainly to achieve this primary objective (vs distributing them); and Is managed into an accountable and transparent way
► When may a fund be designated as a ‘European Social Entrepreneurship Fund’?► Managers of qualifying venture capital funds may use the designation ‘European Social Entrepreneurship Fund’
when marketing such funds in the EU if they comply with certain conditions including, among others, the following:
Portfolio composition, eligible investment targets and eligible investment tools– No more than 30% of the fund’s aggregate capital contributions shall be used to acquire investments in non-qualifying portfolio undertakings;
Eligible investors– Units or shares of the qualifying social entrepreneurshipfund may only be marketed to:* professional clients, and* other investors such as high-net worth individuals provided they meet certain criteria such as, for instance, a commitment to invest at least €100,000.
The alternative route to the passport: the EuSEF
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Contacts
Axelle FereyDirector, EMEA AIFMD Subject matter expert Ernst & Young LuxembourgPhone: +352 42 124 [email protected]