BlueOrchard

A Review of Blue Orchard and Microfinance

By Stephen Haskell
Buss 488
Prof Dr. Watkins
May 2, 2008

Introduction:

Dr. Watkins has addressed the concept of a blue ocean market in locations that would
traditionally appear as nonsense to enter into with any pecuniary incentive. An excellent
example that has just recently been popularized by organizations such as Kiva, MarketMix.com,
and other academic, social, and even for profit ventures is the rapidly growing micro-finance
market. Micro-finance operations have existed for hundreds of years by missionaries, private
philanthropic groups, as well as crooked opportunists, and the black market, but not until now
has the field catapulted into the commercial realm with such popularity.
As World leading organizations begin to adopt a spirit of social concern, socially
responsible investment has been evolving and creating blue ocean opportunities for
entrepreneurs and capital funds. With many becoming skeptical of the current financial markets,
theyare turning to alternatives to find financial security. Ironically, many are finding it in the
place many would recognize as anything but safe, the poor.

Term Paper Page 1

 BlueOrchard

Company and Industry:

“Fully 65% of the world makes less that $2000 a year-that’s 4 billion people (Prahalad &
Hammond, September 2002).” The poor are neglected from the investment of large companies
under the consideration that the poor has no money to buy. This is true at an individual level, but
aggregately they have tremendous buying power. “Markets at the bottom of the economic
pyramid are fundamentally new sources of growth for multinationals. And because these
markets are in the earliest stages, growth can be extremely rapid (Prahalad & Hammond,
September 2002).” Muhammad Yunus’ success with the Grameen bank has captured the World’s
attention, and his experience has laid the foundation for research into the new frontier of
banking. His results have provided the following data:

The average per capital income of villagers in rural Bangladesh, for

instance, is less than $200 per year, but as a group they are avid consumers of
telecommunications services. Grameen Telecom’s village phones, which are
owned by a single entrepreneur but used by the entire community, generate an
average revenue of roughly $90 a month- and as much as $1,000 a month in
some large villages. Customers of these village phones, who pay cash for each
use, spend an average of 7% of their income on phone services-a far higher
percentage than consumers in traditional markets do. ()

A company on the vanguard of this new era of business is Blue Orchard Microfinance
Investment Managers. Blue Orchard is a Swiss for-profit company that specializes in
management of microfinance investment products. Jean-Philippe De Schrevel is the founder
and CEO of the company. His background includes years of work as a consultant with
McKinsey & Co., the director of a multitude of MFIs, management a variety of MFI funds, as
well as a consultantfor government organizations including the UN. Through his experience,
Jean-Philippe discovered great need for capital in the micro-finance industry. He then decided to
create his own bridge from the commercial markets to the micro-finance industry and created
Blue Orchard in 2001. The company consistsof 10 finance experts located in Geneva, London,
and New York. Currently, they manage $270 million in 23 countries and loaned to
approximately 60 MFIs. Currently Blue Orchard offers five products:

• Dexia Microcredit Fund

• RespnsAbility Global Microfinance Fund
• Saint-Honore Microfiance Fund
• Blue Orchard Microfinance Securities I, LLC
• Blue Orchard Microfinance Funds for Development (Bold)

Term Paper Page 2

 BlueOrchard

These products are packaged investment capital that Blue Orchard and its subsidiaries
have accumulated or partners have risento invest in MFIs. Blue Orchard claims to have issued
over 350 loans in five years with zero default rate. (Jean-Philipe de Schrevel, May 2006).
Though Blue Orchard has an early mover advantage, many state that the demand for capital is
virtually endless in this field.
"There isn't enough money from donors and development banks to fund MFIs
so the rest has to come from the private world," said Jack Lowe, CEO of
Geneva-based Blue Orchard Finance, a micro financing group that persuaded
Morgan Stanley to handle the offering. "There will be a funding gap and
someone has to take up the banner so growth of MFIs is not slowed."
Lowe said MFIs will face a demand for between $10 billion and $20 billion over
the next five years and Western donors who have provided most of the micro-
credit to date can only provide around 5 percent of that amount.
As borrowers have established a strong record for paying back their loans--up to
98 percent, according to micro financing pioneer Grameen Bank in
Bangladesh--the supply and demand for micro financing has steadily risen. ()

To supporters of this new emerging market, Blue Orchard is an example of a vessel that
bridges the European and American resources with the poor of the LDCs where both the rich and
the poor can grow symbiotically. Ideally, this maintains the integrity of the LDC’s culture and
industry, while providing the investors with appropriate return.
Over the last hundred years of industrialization and the past 20 years of rapid
globalization, developed markets have found lucrative opportunity by taking advantage of the
cheap labor in foreign regions. Exploitation and culture devastation has been a major
controversy when “conducting business” within these traditional partnerships. For a time it
seemed that Marx’s prophesy of capitalism would be fulfilled as the free market relentlessly
devoured other’s resources and oppressed the less fortunate. Proponents of micro-finance
believe that capitalism has discovered a manner in which the developed world and LDCs can
partner. Blue Orchard intends on acting as a catalyst of this newly popularized vessel of
economic development by expertly allocating resources to the poor through MFIs (micro-finance
institutions). Blue Orchard’s services also include consulting with banks and other financial
institutions and helping them create portfolios that invest in MFIs.

Overcoming the Obstacles:

After years of experience in economic development both on a micro and macro level,
Jean-Philippe seemed to be well aware of the hazards of creating such an institution, and he has
appropriated his company to address those issues. Issues of maintaining a double bottom line are
tantamount. The obstacles of maintaining a satisfying return on investment while remaining
Term Paper Page 3
 BlueOrchard

faithful to ethical distribution of capital and treatment of the MFI’s can be daunting. If an MFI
defaults on loans, the repercussion may be passed down from the MFI to its clients. Therefore,
the dark side of capitalism has succeeded once again in the exploiting of the weak.
Another quagmire that prevents micro-credit funds from successfully maintaining a
double bottom line is the lack of transparency in the market as well as the MFI itself. Financial
documentation and recordings of MFIs are often sparse, omitting much that would solidify a
secure investment. Many MFIs do not operate in markets that can produce enough return to
support enough cash flow to make payments. Regions that do not have a large rich-poor
dichotomy often cannot take advantage of the resources Blue Orchard has to offer. Therefore,
the poorest nations will never qualify to receive investment. Blue Orchard is obligated to
carefully monitor not only the ability for the MFI to make payments, but scrutinize the effects on
their clients.
Comportamos is an example of an MFI that many believe to have suffered extensive
mission drift through similar circumstances. Comportamos began as a philanthropic NGO that
grew extremely quick, reaping tremendous success both socially and economically. It eventually
switched to for-profit and went through an IPO to gain more capital. The company is now
subject to its stakeholders’ expectations and must maintain above a specific ROE or the company
is vulnerable to litigation by its investors. This has pulled Comportamos away from its target
market to the wealthier clients, and it gives basically no value added educational services to cut
overhead costs (Epstein & Smith, 2007). Though Blue Orchard operates in debt-equity, the
principal applies in that it should be aware of the environment it is prone to create through their
issuing of CDOs.

Blue Orchard appearsaware of these obstacles and is taking the precautionary measures to
avoid the exploitation of its clients. Blue Orchard runs extensive valuation tests and audits
through firms such as Standard & Poor to ensure not only the return of investment, but the social
impact of the investments of which it receives feedback from established network
(BlueOrchard). Blue Orchard also selects very select few MFIsin which to invest. One product
will be distributed to roughly 25 MFIs spread out in a variety of different countries that are
appropriate for their product. This is unlike the credit distribution of the MFI itself in which they
freely distribute funds without extensive research into the client. Many MFIs bank on the law of
large numbers. With the default percentage so low relative to interest rate, a greater return will
result from reckless distribution than cautious discretion to guarantee repayment.
When MFIs default, Blue Orchard has developed another product that offers refinancing
rather than collateralizing the loan. Blue Orchard’s theory is to work with the MFIs and allow
them to grow out of their debt. Blue Orchard’s management claims to maintain a very socially
centered mission. It partners with MFIs, field workers, NPOs, NGOs, and all sorts of social
programs all over the world. Notable agents in their network consist of Ashoka and the Omidyar
Network (FAQ's, 2007). This network offers Blue Orchard feedback on who they loan to and the
Term Paper Page 4
 BlueOrchard

effects it is having on the community in which it invests. Blue Orchard’s advisory board is made
up of MFIs that hold the company accountable as well. Return on investment is a key indicator
of success, while Blue Orchard’s network consistently claimed to hold Blue Orchard accountable
and reports and their effectiveness amongst the poor.
Blue Orchard mostly loans to the MFIs in the currency of the region in which they reside.
This reduces the risk of exchange for the MFI but places greater risk on the investors who will be
receiving the return in USD, British Pound, or Euros. The interest rate is also very modest set
around 8%. Many would expect these bonds to hold extremely low reputation as secure
investment vehicles, but the bonds have been receiving respectable ratings of AA and BBB
(MicroCapital, 2007). The high bond rates are mostly due to the securitization for the
Netherlands Development Finance Company (FMO). The FMO has special arrangements with
the Dutch government which allows them to engage in ventures that most others would find too
risky (van der Wiel, 2006).

Future Development:

Microfinance is not the answer to the world’s poverty. It is a tool to help address the
issue. Blue Orchard knows that, and it continues to develop new subsidiaries that can tend to
existing and developing niches. Jean-Philippe and the rest of his team will continue to grow
their company and adapt to the emerging markets while remaining accountable totheir network
and advisory board. The next steps seem to be changing the culture of investing on a global
level. Blue Orchard is leading a new era of capital allocation. Soon, governments, fortune 500
companies, pensions, and large investment banks will be looking to invest in the poor. Sap, a
microfinance researcher stated:

“A new investment scheme led by the investment banking arm of Morgan

Stanley and Swiss investment shop, Blue Orchard Finance, will make it possible
for British pension funds to inject money into the microfinance industry. The
pension fund markets in developed countries such as the United Kingdom, the
United States, Canada and Iceland carry significant weight, with total
investments greater than half of the respective country’s gross domestic product.
Access to this money could yield a significant inflow of capital to
microfinance.” ()

Blue Orchard may have found a way to harness the capitalist market in a manner that no
longer takes advantage of the week, but allows the rich to become richer with the success of the
poor rather than at the expense of the poor. It will be interesting to see what sort of institutions
Term Paper Page 5
 BlueOrchard

will evolve that will address this issue. Watchdog programs and regulating bodies will inevitably
come about to maintain accountability. Though many are hopeful, there are plenty of skeptics
that see these operations as just another road to the same destination of exploitation and
opportunism. If nothing else, Blue Orchard seems to be starting this new era of investing out on
the right track.

Term Paper Page 6

 BlueOrchard

Works Cited
BlueOrchard. (n.d.). Biographies. Retrieved april 22, 2008, from BlueOrchard, Microfinance
investment Managers: http://www.blueorchard.org/jahia/Jahia/site/blueorchard/pid/23

Term Paper Page 7

 BlueOrchard

Term Paper Page 8

 BlueOrchard

1. Industry analysis

• What are the challenges facing the industry due to trends in global warming,
petrochemical exhaustion, falling water tables, etc. and the associated impacts on the
poor both in the U.S.and in developing countries? Pick an industry that interests you
(e.g., consumer electronics; corporate building and/or real estate development;
agriculture; transportation; energy, etc.)
2. Pick one or more of the key challenges, and then address how a trend-setting firm in that
industry is addressing those challenges, e.g.,

• What business are they in?

Term Paper Page 9

 BlueOrchard

• Background of sustainability/corporate responsibility initiative. (i.e., how and why

did they get involved)? Role of leadership, other stakeholders?

• Problem(s)/opportunities that they are attempting to address

• What are they doing? How are they addressing the opportunity? Critique their effort.
Is it “Green washing”, business as usual or a real change in how they are doing
business?

• Measures of success? How are they measuring performance and well are they doing?

• Challenges encountered.

• Next steps.

Term Paper Page 10