The social — and financial — bottom line

11/2/2010 - Luca Torre ’04 is among those leading a war on poverty, private-sector style.

A founding partner at Ambers Capital Microfinanzas, Torre woos investors who want both financial and social returns on their capital, and he uses their money to help fund microfinance institutions that provide financial services to low-income people in emerging markets.

Poor people typically have low-income, volatile cash flow, and despite the fact that they might have viable businesses, they lack the collateral that would make them good candidates at traditional lending institutions. Over the past 30 years, microfinance has developed a credit methodology that allows these clients to be served profitably.

“They’re a market, just a different kind of market,” said Torre, who appeared at Kellogg on Oct. 18 as part of the Kellogg Net Impact Club’s speaker series. “Without offering commercial financial returns, we couldn’t have raised a penny. But the greater goal driving my partner Agustin Vitorica ’99 and me is the social mission.”

The microfinance industry began as a more charitable mission but has ramped up during the past decade to embrace a double social and financial bottom line, Torre said. The number of institutions in the field has grown from a few hundred in 1997 to several thousand in 2010, and he figures that despite the fact that growth has flattened in the past three years due to the economic downturn, the asset quality at microfinance institutions has remained high compared to traditional banks.

Ambers Capital invests in microfinance institutions that serve the bottom of the pyramid, making sure to keep diversified in terms of industries and geography, and looking closely at the institutions’ credit, risk management and management teams. They focus about 70 percent on debt investments, which generate typically between 7 percent to 10 percent returns, and the rest on private equity investments, which can return 20 percent or more annually.

They’ve generally found smaller, family-run investment houses to be more readily convinced than larger investors like pension funds, Torre said. “You can be face-to-face with the owner and look him in the eye, and tell him the social story,” he said.

While the methodology for measuring the financial bottom line is well established, the microfinance industry is still developing its metrics for the social one. Investors interested in that bottom line typically want to know about the number of people reached, the types of outreach conducted and the transparency of the effort.

“The industry is developing a set of metrics to measure [the social bottom line],” Torre said. “I hope that’s going to help the whole sector provide better performance.”