Singapore, Southeast Asia's wealthiest nation, is seldom uttered in the same breath as micro-finance. After all, micro-finance delivers financial services to people who subsist on fewer than $2 (€1.42) daily and are too impecunious to get the attention of mainstream banks, insurers and other finan¬cial service providers.

But in July, BV Narasimham will be moving from India to Singapore to seek new micro-finance markets and assets in neighbouring countries such as Vietnam, Indonesia and the Philippines. Thus far, the bulk of the world's micro-finance investment dollars flow into Eastern Europe, Africa and South America. Asia, with perhaps the exception of India, remains largely unexplored.

Narasimham is a director with Caspian Advi¬sors, which was established in 2004 to manage funds that invest specifically in micro-finance institutions. Caspian, based in Hyderabad, launched India's first micro-finance private equity fund, the $20m Bellwether Micro-finance Equity Fund in 2005. The fund has three main investors: the Netherlands' FMO and Hivos-Triodos fund and the US' Gray Ghost Micro-finance fund. Caspian has since launched another India-focused fund that takes equity stakes in micro-finance institu¬tions, with a target capital of $100m. Viswanatha Prasad, founder and manag¬ing director of Caspian Advisors, says recent micro-finance equity funds project gross internal rate of returns (IRR) of 10% to 25%, on a US-dollar basis, which is not far from the 20% to 30% IRR required by most emerging-market private equity investors.

That is a significant improvement from the 4-5% IRR achieved by the earliest micro-finance funds. These days, up to 25% returns are possible over 10 years because micro-finance institutions have gained efficiency. And at Caspian: "We invest in early stage or start-up micro-finance institutions and we work closely with the management and sit on the board to guide development. To help them grow over five to seven years, we have a hand in designing systems, products and operations to ensure there is a solid institutional struc¬ture that can scale," Prasad says.

According to CGAP, a policy and research centre housed at the World Bank, returns from micro-finance investments have been improv¬ing lately. Gross IRR in US dollars among micro-finance equity funds was 12.5% in 2007. Average net return for micro-finance fixed income funds were 6.3% in 2007, an improve¬ment from 5.8% in 2006. In 2008, when most other asset classes slid, euro-denominated micro-finance fixed-income funds returned 5.5%. CGAP's survey of micro-finance invest¬ment vehicles (MIVs) concluded that there are 104 active funds with $6.5bn in assets under management, as of December 2008. CGAP also discovered that although institutional inves¬tors are just beginning to test the water, their numbers doubled from the previous year. Over the three years to 2008, institutional investors' share in MIV funds surged from 14% to 41%.

CGAP's survey showed that private equity investments into micro-finance also acceler¬ated 95% in 2007, when seven new equity funds were launched.

Paul DiLeo, managing partner of Grass¬roots Capital and co-founder of the Gray Ghost Micro-finance fund — the first for-profit micro-finance fund with private as opposed to govern-ment-backed investors — says micro-finance assets can play a role in institutional portfolios: "Research shows they are uncorrelated with other assets classes such as listed equities, pri-vate equities, real estate and fixed income, in institutional portfolios," he says.

Micro-finance investment risks are similar to other assets: Repayment (average 3% default rates in micro-finance), regulatory, emerging-market and liquidity risks, are among the major ones. As IPOs are still rare in the micro-finance world, most private equity investors exit via a sale.

Analysis of micro-finance as a portfolio com¬ponent shows a 20 times sharpe ratio compared with mainstream investment. On an efficient frontier chart one can clearly see how the curve moves to the left when micro-finance is included in the asset mix, suggesting a significant reduc¬tion in the risk profile.

The only risk unique to micro-finance is public sentiment, says Prasad. "If we make 15% out of $200m, people can say we used poor people to make money, especially when microloans' interest rates are typically 20% to 25% per annum. But this risk is diminishing because research shows that the poor prefer to have access to financing and they encoun¬ter far higher interest rates in the alternative channels. Also, the borrowers experience high growth in their businesses; returns on a mobile tea stall in India can be 1,000%," he says.

Institutional investors who have led the way into the micro-finance universe include the Dutch government employees' pension fund, ABP. It reportedly increased its micro-finance investments to $32m as at end 2007, from $7.3m in 2005. ABP had an invested capital of $239bn as at end 2008.

Peter Johnson, a partner in the firm of Devel¬oping World Markets, a leader in micro-finance asset management and capital raising, says: "Although the initial support for micro-finance investing came from the North American foun¬dations and endowment funds, they have been left behind in recent times by US and European pension funds and insurance companies. These people get it, as we say, whereas the original investors still see it as a little side project."

Lately, several micro-finance funds tailored specifically for institutional investors have emerged. They typically serve institutions' needs for financial as well as social returns.

One of these is the SNS Institutional Micro-finance Fund by SNS Asset Management, a Netherlands-based asset manager serving insti¬tutional investors. This fund, which closed with €113 million in December 2008, is the firm's second micro-finance fund for institutional investors. Theo Brouwers, a director of the firm, said it raised slightly more than the tar-geted €100m.

According to CGAP, a micro-finance equity fund launched in April 2009, the DWM Micro-finance Equity Fund I, closed with $82m from four large institutional investors.

Bee Ong is a Singapore-based Contributing Editor of IPA.