Omidyar-Tufts Microfinance Fund invests in microfinance projects, hopes to increase return rate

Belinda Xian / The Tufts Daily

At the intersection of finance and social consciousness at Tufts is the Omidyar-Tufts Microfinance Fund (OTMF), which gains profits from investing in small businesses and uses the money it earns to help Tufts offer endowments for various initiatives such as support for university faculty, financial aid and scholarships.

The fund, which was established in November 2005, was made possible by a $100 million gift for microfinancing projects from eBay founder and Tufts alumnus Pierre Omidyar (LA ’88) and his wife Pamela (LA ’89), according to Kim Thurler, executive director of public relations.

Edward Kutsoati, associate professor of economics, said that microfinance organizations loan money to small businesses and entrepreneurs around the world.

“To a large extent, it’s not much different from the traditional, formal loan-making process,” he said. “What makes microfinance different is that the loans are smaller. The average is about $200 to $500.”

According to Kutsoati, some microfinance organizations are non-profit, while others are run as businesses with a high return rate, the amount of money the organization gains through its investment.

“That’s one of the big questions of the industry,” Kutsoati said. “There is the one side that believes that this should be a means to lift masses out of poverty and empower them. And there are those who see it as a standard type of market… Then there are folks in the middle, like Omidyar, like Google, like Facebook, that are not so into the profit making, but do believe that this can only be sustained if it’s run as an enterprise.”

The OTMF Director Tryfan Evans explained that the fund has not run into much trouble when it comes to balancing the charitable, socially-conscious side of microfinancing with making money.

“We haven’t found much tension between our long-term goals,” Evans, who is also the director of investments at Tufts, said. “What we’ve found is that the best returns are going to come from really great businesses that have the products and services customers need. Companies that are worse for customers tend to be short-term investments because the business doesn’t perform as well, so the credit quality is lower.”

Kutsoati explained that the investments made by microfinance organizations are often given to a group of people, rather than just one person.

“If the loan were given out purely randomly, you can imagine folks that haven’t had any business experience, don’t have any business plan, have no discipline, taking out the loan, and they would do badly,” Kutsoati said. “This is one of the reasons why a lot of loans are given out as a group liability, because then the institution, which is not really located in the community and cannot do the day-to-day enforcement, [is able to use the] group liability…to delegate that enforcement.”

Rather than directly loaning money to entrepreneurs and small businesses, the OTMF primarily invests in smaller microfinance institutions around the world, which provide loans and support to entrepreneurs and small businesses, according to Thurler.

“We have a wide range of investors in capital, managed by a management team that sets out to invest with specific strategies in mind,” Evans said.

Thurler explained that the OTMF has investments around the world.

“The OTMF is currently directly and indirectly invested in over 50 developing countries in East Asia, South Asia, Central Asia, Eastern Europe, Africa, Central America and South America and over 70 underlying operating businesses promoting financial inclusion,” Thurler told the Daily in an email.

Evans was not able to disclose specific information about the OTMF’s investments, but he did explain the general kinds of investments that the OTMF looks for.

“Our investments support a wide range of business models that are involved in promoting financial inclusion,” he said. “Overall, what we’re looking at is, is the investment going to help the microfinance industry and support the university?”

Sally Dungan, Tufts’s chief investment officer, said that when the fund was started 10 years ago, it hoped to achieve an eventual return rate of around eight percent. According to Evans, the current average annual return for the OTMF is about 2.07 percent.

“The university’s target rate of return on long-term investment assets is constructed based on inflation…and the contribution of the university’s budget,” Evans said. “In any given period, the target rate of return can fluctuate, but we generally use the eight percent figure as our long-term target.”

According to the IRS 990 Filings of the OTMF published by ProPublica, in 2013, while the fund’s net income was -$797,503, investment income made up 81 percent of the total revenue of $1,558,995, whereas in 2012, it was over 100% of the total revenue of that year. 

He said that many of the businesses that the OTMF chooses to invest in are still working on building themselves up to achieve a high return rate. According to Evans, the OTMF hopes to increase their return rates and to make money once these businesses have had time to establish themselves and grow.

“Part of it is the nature of the investments,” he said. “We are a long-term investor, looking to build for the long term. When we invest in a company that is building a bank in Africa, it has been from the ground up. We invest quite a bit in front end and get returns on the back end.”

Evans explained that the nature of microfinance itself is a reason for the low return rate.

“It’s a low interest environment, which has also had an impact [on the return rate],” Evans said.

According to Evans, the OTMF hopes to eventually reach its long-term goal of an eight percent annual return rate, increasing it by six percent.

“There is a lot of turmoil in emerging markets around the world,” he said. “We’re conscious about raising expectations, but we have hopes for our current investments. We are hopeful that we can get back up to the target return rate.”

According to Evans, part of the money earned from investments is reinvested in additional microfinance programs, while the other part is given to the university. Evans said he remains hopeful that the return rate of the OTMF will eventually reach that of the Tufts endowment as a whole, thanks to the investments the OTMF has made and will continue to make.

According to Laurie Gabriel (J ’76), Board of Trustees investment committee chair, Tufts endowment has had a return rate of 5.8 percent per year for the last 10 years, she said in a Jan. 28, 2015 Daily story.

“We invest in businesses that are built to last,” Evans said.