MV Investment Approach: The Three C's Philosophy

MicroVests's success has its foundation in our ability to successfully execute on a valid investment thesis. We believe that we have done an excellent job in evolving and adapting our due diligence process to better underwrite our investments. We have built an effective three “C” framework to highlight important risk aspects of a Country, the Credit process of a successful financial institution and the Character of a well governed institution. 

Employee should understand the Company's investment approach and meaningfully discuss the philosophy behind the three C's.

Country

Before looking at the specifics of a potential deal, we conduct a thorough macro-economic analysis of the target country, to make sure we are comfortable with the operating environment. The local expertise of our employees combined with a proprietary country scoring model leads to a robust assessment.

Investment Officers are responsible for determining Countries most attractive for investment in their respective regions, conducting a desktop analysis using research from Economic Intelligence Unit, rating agency reports, in-country contacts and other sources. Assessment includes analysis of the following areas of risk:
 Political
 Economic
 Financial system
 Business environment

Another input into this research is the countries Sovereign Risk Score, a proprietary rating that is calculated and maintained by the MicroVest Risk Department. The Risk Officer updates the country scores semi-annually. Inputs are updated from the identified external data sources. The Risk Officer may propose and implement modification to the sovereign rating model to enhance efficiency and relevance, subject to the approval of Managing Director of Risk and the Chief Investment Officer. Material changes in relative rankings, based on updated data inputs, are analyzed by the Risk Officer to capture relevant trends and risk issues. Regional Managers may also propose adjustments (positive/negative) based on their view and knowledge of countries in their region. The Risk Officer incorporates proposed adjustments from Investment team into the model. When ratings are adjusted they must be approved by the Internal Investment Committee, which is composed of the CIO, MD Risk, Deputy Director of Investments, Equity Manager, and Regional Investment Managers.

In conjunction with the periodic update of Sovereign Risk Score, Regional Investment Managers propose general Exposure limits per country within the general statutory guideline of each Fund (as a % of maximum allowed concentration: up to 100%; 50-75% , 25-50%, <25%, nil). Proposed Exposure Limits are submitted for review and approval by the internal Investment Committee, at the same time Sovereign Scores are reviewed.

Countries considered for investment will have a minimum Sovereign Risk Score of: 2.0

Who is responsible for the maintenance of Sovereign Risk Scores?

  • Internal Investment committee
  • Risk Officer
  • Regional Investment Managers

Who approves changes to Sovereign Risk Scores?

  • Managing Director of Risk
  • Chief Investment Officer
  • Internal Investment Committee
  • CEO

Character

Character is the second of the three C’s. Despite being the most difficult to evaluate and to quantify, we believe that the assessment of the character of an organization, owners and staff is the most important part of our due diligence process. When assessing the character of a company we are looking at three main parts.

• Character of the founders and management: Who are the people that run the business and what were the intentions of the people who founded it? Do they have the skill level to grow a sustainable business?

• c What motivates management and the owners, and how is success defined?

• Corporate governance: Are proper corporate governance structures in place? Is the board effectively monitoring the management?

We use our personal and professional networks to conduct extensive background checks before sending our team out on due diligence. When in country we are continually taking in information to provide a holistic picture of the Character of the target company.

For potential clients Investment Officers contact senior management to
determine:
 Vision of the CEO, clarity of goals and objectives
 Transparency (regulatory oversight, external auditor, rating)
 Affiliation with microfinance networks and other funders
 Strength and nature of social impact of the MFI
 Conduct reference checks on Management and Board of Directors

How do we assess the character of an institution?

When assessing the character of a company we are looking at three main parts: of the founders and management, alignment and corporate

Credit

Credit builds the final part of the 3 C’s assessment. The credit assessment looks at the financial robustness of the portfolio company, internal controls and the appropriateness of the underwriting process. Due to the large number of small loans, our due diligence is focused on systems and processes, and on ensuring that the underwriting process is consistently applied across the institution.

For potential clients assess Credit using the Obligor Score model. Proxy
Obligor Score should be assessed for proposed investments in institutions that fall outside of our models. Assess credit by obtaining additional information to include financial statements, agency ratings, reference checks, etc. Conduct preliminary assessment of the following risks:
 Capital adequacy
 Asset quality
 Management / institution
 Earnings
 Liquidity

 Target (Minimum) score = 3.0

What is the target Obligor score in order to proceed with an investment?

  • 100
  • 5
  • 3.0
  • 1.0