Manager's Reflections on Ten Years of the Gray Ghost Microfinance Fund

Gray Ghost, Since conceiving of and launching their pioneering microfinance fund-of-funds a decade ago, Gray Ghost and Paul DiLeo have played a critical role in shaping the microfinance landscape and expanding the pool of private investors providing liquidity to the microfinance industry.  Now that the Gray Ghost portfolio has exited more than half its investments, Paul DiLeo reflects on the successes and challenges of their groundbreaking work and the implications for the industry going forward. The paper is available here. Click "Read more" below for the manager's comments.

The Gray Ghost Microfinance Fund, conceived by Bob Pattillo and David Weitnauer in 2003 and launched and managed by Paul DiLeo and Grassroots Capital, has reached the ten year mark.  At the time of its launch, Gray Ghost was the largest fully private, for profit microfinance fund in the world.  Gray Ghost’s focus as a fund of funds was on creating and supporting other microfinance investment vehicles that could help deepen private investors’ engagement with the sector.  

During its active investment period 2003 - 2008, Gray Ghost committed to 23 MIVs and committed nearly $100mm.  Eight of these investments were MIVs that Gray Ghost created alone or working with a small group of co-founders.  In several other investments, Gray Ghost was an anchor investor, or filled a critical gap in the capital structure without which the initiative would have failed to proceed. In total, Gray Ghost played a critical role in the launch of 11 vehicles which together have redrawn the microfinance landscape in ways that helped achieve Gray Ghost’s primary goal of bringing private investors into microfinance in a substantial and influential way.  

The Gray Ghost portfolio is over half exited, and its history is sufficiently complete that the broad outlines of its performance are clear:

• Gray Ghost’s industry-wide influence was substantial and ubiquitous, providing critical support to fledgling and established players alike:  Deutsche Bank, Calvert Foundation, DWM, Blue Orchard, MicroVest, Caspian, and others.  It invested in over one quarter of the 80 MIVs in existence as of 2008.
• Gray Ghost operationalized the concept of “balanced returns” early on, integrating a social value model into its investment process in 2004.  
• Gray Ghost leveraged its capital eight times, in many cases taking subordinated positions or anchoring new investment vehicles which went on to become industry models.  With respect to private investment specifically, Gray Ghost’s $97mm in investments was associated with nearly $500mm in commitments from other private investors, representing well over half the total capitalization of the vehicles in which Gray Ghost invested. 
• Because of Gray Ghost’s multiple, interacting objectives and heterogeneous portfolio, interpreting financial comparables is not a straightforward exercise.  Nevertheless, Gray Ghost’s realized and projected return of 5% represents a reasonable financial performance, falling in the neighborhood of MSCI World Financials of 0%, S&P 500 of 7% and US Treasuries of 4% for the comparable period but well below the JPMorgan LIFI (Low Income Financial Institution) index of 23%. 
• Gray Ghost placed a strong emphasis on developing local MIV management capacity and promoted roughly half of the local management teams that had emerged as of 2011.  
• As intended, Gray Ghost played a significant role in promoting liquidity in microfinance assets at both the MIV and MFI levels; during 2006-2008, it accounted for 10-20% of all reported PE transactions, and a much higher proportion of secondary markets purchases and sales. 
• Gray Ghost has been very active in governance, sitting on Boards and / or Investment Committees of 19 of its 23 investments, and guiding and influencing the strategies and performance of a significant swath of the total industry; 

While these contributions to the microfinance sector are significant, Gray Ghost’s experience is also of broader relevance to the impact investment community more generally.  Specifically, with microfinance often cited as the poster child and model for other emerging impact investment sectors, a number of lessons and observations are of relevance to efforts to engage investors more systematically in impact investing:

• Gray Ghost’s results which are broadly representative of the 2004-2008 vintage of microfinance assets and most likely current vintages as well, suggest that double bottom line investors should expect a moderate financial return on principal from a diversified portfolio of microfinance assets, but not significantly more or less. Of course, there are also social returns and these need to be fully recognized and in some way measured to provide a more complete picture of return on investment. 
• While focusing on low income clients can be quite profitable, the discrepancy between Gray Ghost’s returns and the performance of the LIFI index suggests that focusing on low income clients with the objective of balancing or prioritizing social goals will be significantly less financially remunerative than engaging these clients on a profit maximizing basis.  This observation has useful implications for impact investing, suggesting that “Bottom of the Pyramid” investments can usefully be differentiated between those that are profit maximizing and impact maximizing.
• Private investment, while undoubtedly stepping into an important role, remains in a symbiotic relationship with public and philanthropic support.
• As impact sectors engage new investors, careful and candid investor education will be crucial to building stable and reliable relationships, even if this process may slow the rate at which capital is engaged. 
• To the extent that the impact investing industry is successful in raising capital in excess of what existing managers can intermediate, results are likely to disappoint and discourage continued capital flows to the sector. Developing fund managers at the local level can noticeably enhance prospects. 

Overall, Gray Ghost has met its goals and played a significant contributing role in shaping today’s microfinance industry. But while the microfinance industry and Gray Ghost can take great satisfaction in all that has been accomplished in the past ten years, there are important qualifications to that success which suggest important shifts in emphasis going forward.  Perhaps most important is the crucial role of investor education:  What does it mean to be an impact investor?  And how do such assets fit into an overall portfolio?   Answering these questions and engaging investors with clear expectations is an important task for Grassroots and the entire impact investing community going forward.