The benefits of backing financial services in emerging markets

^{Tim Crijns (left) and Florian Bankeman (right), Fund Managers, Triodos Investment Management}

Fintech and financial services are at the intersection of profit and impact. Analysis by PwC reveals fintech accounted for a 25% share of the total value of the top 100 global unicorns in 2024. The sector has helped deliver sustainable economic and social development by expanding access to financial products. 

Netherlands-based Triodos Investment Management has been at the forefront of financial inclusion investments for over 30 years, leveraging Triodos Bank's retail customer base and £20bn-plus AUM. Fund managers Florian Bankeman and Tim Crijns spoke with Jayda Etienne, Deputy Editor of Preqin First Close, about building an impactful financial inclusion and fintech investment portfolio and the importance of a strong performance track-record. 

What is your role at Triodos Investment Management? 

Florian Bankeman: We manage the financial inclusion investment strategy, which consists mainly of two vehicles: Triodos Microfinance Fund and Triodos Fair Share Fund. Each provides private debt and equity to financial services providers that empower people and SMEs globally.  

Tim Crijns: These funds are open-ended with daily and monthly liquidity. One is a Dutch fund offered to retail investors in the Netherlands, and the other is Luxembourg-based, open to professional and institutional investors. But both have the same objectives impact-wise. Our hybrid strategy of private debt and equity allows us to enjoy the lower risk from our fixed-income debt investments and the upside from the equity portion of our investments. 

How do you measure impact?  

Tim: The impact objectives are measured on three levels. First, the wellbeing of end clients of any microfinance institution we invest in must be a priority. It’s often women and the rural population that are underserved by mainstream banks, so as part of our impact assessment, we track how much of our target demographic is being reached. Second, fostering equitable and sustainable local economies, often through the number of agricultural, affordable housing or education loans being provided. And third, we try to have a positive impact on the financial institutions themselves – ensuring that they have minimum standards in place, aren’t investing in sectors with negative impacts, and offer their clients financial literacy training that will benefit the wider community.

Florian: Within each investment proposal, we must have a clear impact narrative. In addition, every quarter, businesses provide impact and financial data reports, and if we see any material changes, we will investigate and engage more intensely on these points. This distinguishes us from other GPs, because if the return on equity jumps from 20% to 50%, for example, a regular manager will simply say: ‘This is amazing. I don’t care what you’re doing but keep it up’. Whereas for us, such a change can trigger an inquiry at the company level to ensure that the people they set out to help are still getting the support they need and both parties have a fair margin.  

Is it a challenge to prioritize impact and returns? 

Tim: We really don’t see a trade-off between impact and return. In a way, financial inclusion delivers different types of returns that are stable and not very volatile. What we see with our track record is that the investments have a low correlation with market downturns. For example, during the Global Financial Crisis in 2008, our financial inclusion portfolio continued to deliver a positive return. That’s a key differentiator and reason for a lot of investors to invest in our funds. The fund structure also makes our vehicles much more accessible for retail investors. To invest in private markets as a retail investor is quite difficult, but our open-ended liquid structure allows them to do so with relative ease.

Can you give an example of the kind of businesses you've invested in?

Tim: We’ve been in this field for over 30 years. In the 1990s, we became shareholders in a Uganda-based financial institution called Centenary Bank. What started as a grassroots organization has grown into one of the top three financial institutions in Uganda, while retaining the social mission of providing financial services needed by all people in all regions of the country. We provide ongoing support to our portfolio companies to help them scale and professionalize. This creates positive returns for their shareholders, and positive returns for investors in our funds.  

How do you source your investments?

Tim: We have an extensive team with great connections in the emerging markets we target. We also have a well-established track record in this space which means we get approached by prospective portfolio companies. At the same time, our investment managers go to the regions and visit conferences there, actively looking for opportunities.  

How have the opportunities for financial inclusion investments changed over 30 years?

Tim: In the 1990s, microfinance had more of an impact and developmental focus. Now, it's matured and regulation has played a huge positive and risk-mitigating role. Today, almost all countries we invest in have dedicated microfinance regulation, and established credit bureaus where microfinance institutions can check if clients already have loans outstanding somewhere else. There’s also been tremendous professionalization across the market. What in often cases started as a group model, where borrowers personally guaranteed one another because they didn’t have sufficient collateral, has evolved into a tech-enabled, innovative, profitable industry. 

Florian: Pre-pandemic, a lot of the more traditional microfinance institutions were still operating the old-school model of going to markets and collecting loans, while slowly digitising. With the multiple lockdowns, they had to develop much quicker and utilize technology to offer also digital mobile loans – which are actually much more efficient. Now, product offerings have expanded to include savings and insurance. However, huge financial gaps still exist. Two thirds of SMEs in emerging markets have financing needs that aren’t being met. We recently did an investment in Romania, where 31% of adults don’t have a bank account. Demand hasn’t gone away, but the landscape and operations have matured.   

Jayda Etienne is Deputy Editor of Preqin First Close. It’s quick, easy, and free to subscribe here. 

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_{The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin accepts no liability for any decisions taken in relation to the above.}