Calvert Impact Capital veered off the beaten path with its latest impact investment — buying a stake in a $175 million pool of loans made to fund microfinance borrowers.

Calvert, part of Eaton Vance Corp., bought the stake in the loan securitization, also known as a collateralized loan obligation, sold by responsAbility Investments AG. The $175 million will provide capital to 26 microfinance institutions and small and medium enterprise banks in emerging markets. The deal, which closed last month,was arranged by JPMorgan Chase & Co. 

For Calvert, with about $400 million in assets, the transaction stands out for a few reasons. It’s the first microfinance CLO issued since 2007, according to Bloomberg, when such financial instruments were revealed to be masking high levels of risk and played a role in triggering the 2008 financial crisis. Also, securitization is rarely applied to the impact sector. 

 Even so, Calvert is bullish on CLOs, arguing they hold “important potential to catalyze investor participation and ultimately, get more capital to communities that need it,” according to a post from Calvert analyst Daniel Ford. “We hope this deal can provide a template for the field going forward.”

The deal helps microfinance institutions achieve the scale required to access global capital markets, responsAbility said in a statement. Investors buy into “financial inclusion in developing countries, earn a commercial return, and diversify their exposure across multiple borrowers and geographies,” Zurich-based responsAbility said. 

The proceeds will go to fund 26 bank and non-bank financial intermediaries in 17 developing countries from Botswana to Kyrgyzstan. From there, loans will go to 30,000 small businesses and 5.6 million microfinance borrowers, 81% of whom are women.

Calvert isn’t the only investor participating in this CLO, and it’s far from taking the most-exposed position. Overseas Private Investment Corporation, a U.S. government development finance institution, took the majority stake at $150 million, Bloomberg said. And a Swedish pension plan purchased the riskiest tranche, the so-called “equity piece” which puts them first in line to take a haircut.

Impact investing now

Still, Calvert’s unusual position in the market poses some questions. Why CLOs in microfinance and why now? 

On its website, Calvert positions the investment as falling within the “sustain” leg of its “build-grow-sustain” portfolio strategy. The firm says “sustain” means reducing the costs and complexity of raising capital for partners, fueling continued innovation within mature platforms, and crowding in additional private investment in existing sectors and targets.

Other sustaining investments in this vein are Calvert’s interest in MicroVest + Plus, a financial inclusion fund that has provided over $1 billion to more than 200 low-income financial institutions in over 60 countries, and the African Local Currency Bond Fund, which has invested in bond issuances from countries such as Botswana, Ghana, Kenya, Cote D’Ivoire and Zambia. 

Their partnerships with financial intermediaries in the microfinance sector seem to have paid off, at least in terms of their impact goals. Calvert exists to create both “financial returns and sustainable social and/or environmental outcomes,” according to its 2018 Impact Report. That means any financial instrument that strengthens “the capacity of organizations that can affect change on the ground” is achieving the target impact. 

This strategy is a growing one. In 2017, Calvert closed $64 million in 18 new loans to financial intermediaries, who in turn leveraged that amount into $5.42 billion in loans to their clients. That’s a pretty significant market presence.

But Calvert isn’t a traditional investor. They exist to push the impact investing sector further. As they see it, capital markets can shift how capital is allocated overall “to consider measurable social and environmental impact in private companies.” 

It’s certainly a good time to be making this shift. As the climate crisis heats up, more and more people will seek investments that satisfy “environmental, social and governance criteria,” according to Bloomberg. Funds like Calvert, responsAbility, and BlueOrchard are stepping up to meet the growing demand for capital to deliver these nonfinancial goods.  

A template for good?

When these types of microfinance CLOs were last issued — by Swiss impact investor BlueOrchard in 2007 — they were rated as high as AA by S&P Global Ratings. However, the financial crisis complicated things.

The very quality that made these deals appealing led to crowding in the marketplace — which meant overindebtedness among low-income borrowers who were by definition less able to pay. As the 2008 financial crisis applied stress to institutions globally, political developments such as the “No Pago” movement in Nicaragua began pressuring microfinance lenders. The BlueOrchard loans eventually returned their principal and interest, but the market shut down for more than a decade.

Now, conditions are ripe again. According to Bloomberg, the new deal does not use leverage, and the overindebtedness problem has been solved by the development of local credit bureaus in participating countries, which oversee due diligence and governance.

Calvert chose to partner with responsAbility for its initial foray into microfinance CLOs for a reason. Calvert’s goal of closing the $2.5 trillion investment gap globally by moving capital “with urgency and at scale” means it needs to find new instruments that may not yet be established on the market. “The securitization model enables a broader range of investors with differentiated risk and return preferences to participate in the deal,” Calvert’s Ford writes. “While the practice of securitization has not been widely applied in impact sectors, it holds important potential to catalyze investor participation and ultimately, get more capital to communities that need it.”