Eliza Erikson
Venture Partner

Why We Invested: MFX Solutions

March 31, 2017

Last week, one of our investees achieved a major milestone in its growth and global impact: MFX Solutions secured a $120 million increase in its guarantee from the Overseas Private Investment Corporation (OPIC). MFX fills a critical niche in the microfinance and impact lending sector, so we wanted to reflect on why we first invested in the company, and how far they’ve come.

This is a very personal story for me, because I helped found MFX in 2009, and since I’ve joined Omidyar Network, I chair MFX’s board and represent our investment in the company.

MFX helps microfinance institutions (MFIs) and other impact lenders manage currency risks in emerging markets. A group of us—micro-lenders, investors, foundations, and others in the sector—founded MFX in 2009 as a co-op. In many cases, its owners are also its customers: MFIs and microfinance investment vehicles. We formed MFX as a for-profit company, with a double bottom line in mind.
The idea behind MFX was to address a very real problem in the microfinance industry. In the days when the first commercial micro-lenders were emerging, a few currency devaluations in key markets wrought serious consequences for MFIs and their clients. We came together and agreed we had to do something.

At the time, I pitched and helped bring Omidyar Network onboard as an anchor investor in MFX’s Series A round. It was a natural fit from the beginning. MFX is a perfect example of Omidyar Network’s investment theory for making sector-level change.
At Omidyar Network, we understand that some markets, to develop effectively, require critical pieces of enabling infrastructure. Often, no single player wants to assume the cost and risk of investing in this infrastructure, because it usually becomes a partial public good, and the profit potential remains limited.

In the microfinance sector in the early 2000s, the critical piece of infrastructure that was missing was specialized currency hedging. Many MFIs raise capital in hard currency from the U.S. and Europe—dollars or euros—and lend to small entrepreneurs in local, often illiquid, currencies.

As the microfinance market grew, MFI’s currency risk grew as well. If they assumed this risk themselves, and the local currency depreciated, they might not be able to repay their hard currency loans. In the early 2000s, we saw entire MFIs shut down by currency depreciations. Situations worsened when MFIs passed the risk onto borrowers, with loans denominated in hard foreign currency.

Currency hedging instruments are common enough in the global economy, but very few banks offer these instruments for the currencies that MFIs lend in, such as the Zambian kwacha or the Honduran lempira. The industry term for these is exotic currencies. We formed MFX to step into this gap, and offer currency hedging tools for the vast majority of currencies circulating around the world.

For Omidyar Network, investing in MFX was a natural complement to our direct support for MFIs. By giving them the tools to manage risk, MFX allows the microfinance industry to grow in poorer market.
I couldn’t be prouder of how much MFX has accomplished toward that goal—and beyond. It has hedged more than $1B in exotic currency trades, supporting more than 1 million entrepreneurs operating in over 45 currencies worldwide.
By making currency hedging easier, the company has expanded from microfinance to spark a positive shift in the way most impact lending is done. Today, it hedges impact debt serving the agricultural, affordable housing, healthcare, and renewable energy industries.

The expansion of OPIC’s guarantee from $48 million to $168 million will allow MFX to continue growing the number of clients its serves through hedging to nearly $2 billion. This is exciting for MFX, for Omidyar Network, for me personally, and for the entire impact lending sector.

 

 

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