Q&A with Pierre Berard
MCE’s Chief Investment Officer on MCE’s response to COVID-19
What is unique about MCE that poises us to weather this crisis?
Our loan guarantee model and the strong commitment of our Guarantors to generating social impact instead of turning a profit make MCE uniquely capable of navigating crises such as this one. The fact that we are not a fund in the traditional sense of the term gives us a lot of flexibility in the way we lend. We have never been in a situation where we’ve had to push money out the door in order to make a return. Our Guarantors and our team are aligned around our mission, which allows us to make targeted investments in strong, high-impact companies that we plan to partner and grow with for many years. That commitment and flexibility remain in times of crisis — we do not have to stop our lending activity. Instead, we are able to adapt to the needs of our clients to ensure that they emerge even stronger. That is our main advantage in weathering the ups and downs of the global economy.
How has MCE adapted to this crisis? How have you and your team been able to pivot so as to continue investing?
Adapted is a good word. With the current crisis, we are unable to travel to conduct due diligence on the ground for new investments. This will likely be the case for the foreseeable future, at least through the end of this year, so we have to figure out a way to keep lending and meet the needs of our clients. Fortunately, we had already developed a system to conduct remote due diligence prior to the COVID-19. While we typically visit every client during our due diligence process, we have a very solid foundation to continue lending during the crisis and plan to improve our remote diligence process along the way.
We also conducted several due diligences in Q4 2019 and Q1 2020, which allowed us to move forward with those investments even after international travel restrictions were put in place. In fact, we were on the ground in Zambia just days before the crisis hit in mid-March. As a result, we recently added a new agribusiness to our portfolio (COMACO) and expect to disburse a new loan to our existing client in Zambia (Good Nature Agro), both of which have a high impact on the livelihoods of smallholder farmers in Zambia.
Another key thing to note is the role that we’ve taken on in attracting additional capital to our clients in order to meet their working capital needs. COVID-19 has negatively affected many of our clients’ ability to raise capital for the coming agriculture season as investors have backed out of potential deals, unable to conduct due diligence themselves. In Moldova, we partnered with Open Road Alliance when our client Prograin Organic was in need of short-term capital. Our investment in COMACO attracted an additional $800,000 from Fundación Netri, Candide Group, and Blink C.V.
This isn’t the first crisis that you’ve managed our portfolio through. What have you learned from previous crises that is helping you manage this crisis now?
The first thing to acknowledge is the resilience of the microfinance model itself. A portfolio spread across many borrowers with small loans is extremely resilient in the face of crisis. We saw this firsthand during the global financial crisis in 2008–09, the commodity crisis in 2014–15, and country-specific crises such as the Ebola outbreak in Sierra Leone, the earthquake in Ecuador, and many others.
Each subsequent crisis has made our clients stronger, more sophisticated, and better prepared to manage their businesses through future crises. For most of our investees, this is not the first significant setback they have faced. These companies are run by experienced leadership teams who are accustomed to the challenging business environments in which they operate. Our role as debt investors is to provide capital that allows these companies to grow and thrive, but in the end we have to trust in their ability to make sound business decisions that ensure their sustainability and the well-being of their clients. More often than not, they demonstrate that they have what it takes.
MCE and our fellow impact investors in the sector have learned from previous crises as well. We know how to coordinate with each other and cooperate to address the issues faced by our shared clients. We now have a strong foundation to deploy the tools necessary to address this crisis quickly. Lenders groups, loan restructurings, handshake agreements — all of this has happened quickly in response to COVID-19, which would not have been possible without our mutual experiences in navigating past crises. We knew where we were going in terms of our response to COVID-19 early on. In many ways, lending in emerging markets is a succession of crises, big and small. Learning how to manage them is part of the job.
What investment opportunities do you see in the coming months? How will MCE’s funds be allocated in terms of supporting existing clients versus new clients?
On the MFI side, we will be quite conservative given the lack of visibility and many potential headwinds, such as remittances, particularly in Central America and Central Asia. We do have a number of very strong clients asking for additional funding and we will cautiously evaluate those opportunities, but we will be working with very few new clients. With the effects of COVID-19, macroeconomic variables come much more into play in determining the success of the MFI to repay the loan. These variables are quite difficult to predict, which makes our investment decision-making process more complex. On top of this, the sheer level of global indebtedness is another factor to consider as we look ahead.
Our SGB lending will have a strong focus on agriculture, and potentially some water deals. We are already working on issuing new loans to agribusinesses in Tanzania, Costa Rica, Nicaragua and Peru. The main issue is figuring out how to conduct due diligence with brand new clients and how to incorporate technology to support MCE’s underwriting. We want to grow our portfolio — there is such a strong need for SGB financing in the developing world, now more so than ever. And with countries increasingly closing their borders in favor of developing their own, more localized products and services, the business environment for SGBs will likely improve and there will be strong opportunities to consider.
Looking forward, how do you think the changes that MCE is making now in response to COVID-19 will strengthen MCE in the future?
MCE has always been a fast and responsive lender. We have a quick turnaround time because we are a small and nimble team, and we are able to innovate quickly. That being said, there are always ways in which we can improve our processes. I think the necessity of conducting remote due diligence now will show us what parts of our process can be accomplished remotely, potentially increasing the efficiency of our due diligence in the future without compromising the quality of our analysis. On the SGB side, we are in the early stages of developing tools that will allow us to do better and deeper due diligence on deals through technology.
Is there anything else you’d like to add?
We are not going to stop doing what we do because of this crisis. The demand is still there, and it’s greater than ever. We have an excellent group of clients and a strong pipeline. So we are going to find ways to work around the current constraints to continue disbursing capital and meet the financing needs of microfinance institutions and small and growing businesses with potential for growth and impact. Back in March, as COVID-19 was beginning to spread rapidly across the globe, we brought this issue to our Board and asked the question directly: “do we stop, or do we continue and move forward?” The answer was unanimous. “We move forward.”
Interview conducted on June 9, 2020
For more information on MCE’s response to COVID-19, check out our recent blog post about how we’re doubling down on agriculture during the crisis.
