Francisco Noguera

Four Questions for IGNIA’s Michael Chu

Michael ChuWhile attending the SEKN research colloquium a few days ago, I was able to sit down and talk to Harvard Business School Professor Michael Chu. During his tenure at ACCION International, Mr. Chu played a major role in the development of Mexico’s Banco Compartamos. He currently co-leads the Ignia Fund, a for-profit BoP private equity fund focused on the Latin American region.

Following is a four-question summary of the notes I took during our hour-long conversation about Ignia and its prospects of transforming the BoP/SME investment landscape in this region of the world.

Francisco Noguera: What is the background of the team behind the idea of Ignia?

Michael Chu: My partner Alvaro Rodriguez holds an MBA from Harvard Business School, and his first job out of School was with ACCION International. He then moved on to be CFO of Grupo Vitro (one of the world’s largest glass manufacturers), CEO of Farmacia Benavides (Mexico’s largest pharmacy chain) and then CFO of Grupo Elektra. He also held a seat at the board of ACCION. For my own part, I worked for the Boston Consulting Group after earning my MBA from Harvard, and then did leveraged buyouts in the private equity industry with KKR before joining ACCION, by the time Bancosol was launched. I also served as President and CEO of ACCION and also started an investment fund in Argentina called Pegasus capital.

What countries and sectors will Ignia invest in?

Ignia will be opportunity driven. Our main office is located in Mexico but we expect to invest in other countries of the region as well, in companies working in education, helthcare, housing, nutrition and basic services for the poor. We will develop our pipeline through local networks that my partner Alvaro Rodriguez and I built over the years we worked in microfinance with ACCION.

FN: How would you describe the opportunity that led you to conceive and start Ignia?

MC: Here are two ideas that frame what lies behind the idea of Ignia: First, the experience of Compartamos was the closing of a full circle –it was founded as an NGO, then turned into a commercial financial institution and ultimately tapped into capital markets. It proved that market-based solutions to poverty could be viable, profitable and that markets would value this kind of venture.

Besides that, we see tremendous opportunity in improving the value proposition for the poor in many sectors. They are already paying high fees for products and services that are often of bad quality. We believe that the microfinance and the Compartamos experience can be brought to other sectors. That’s why we created Ignia.

FN: Compartamos has been the protagonist of a debate around the profit motive when serving the poor. Will Ignia follow the same for-profit approach?

MC: Yes. We believe that high profits are integral to social impact. They will help mobilize scalable market-based solutions to address poverty. We believe that any effort seeking to eradicate poverty must comply with four criteria:

  1. It must achieve huge scale; be able to serve millions;
  2. It must consider inter-generational responses. Many poverty-related outcomes will not be visible until the next generation;
  3. It must be continuously efficient – i.e. become cheaper and cheaper over time;
  4. And it must be continuously effective – i.e. become better and better over time

The vibrant microfinance industry in Bolivia is one example of this. Bancosol by itself has not been the main character; it has been the industry it helped create by proving that high returns could be made and high scale could be achieved while providing a valuable service to the poor. This experience attracted many others to compete for this market, which has resulted in a constant decrease in prices (interest rates) and constant increase in return for investors, which reflects increased efficiency and efficacy. Millions of clients have been reached in Bolivia, prices keep going down and margins keep going up.

A similar phenomenon is taking place in Peru and is starting to take place in Mexico after Compartamos’ IPO -licenses for new institutions are growing like never before and we will soon see a fierce competition in that microfinance market. Sure, at the beginning there will be some wounded (as the result of customers exceeding their debt limits, for instance) but the long term outcome will be a healthy, efficient and effective microfinance system. We expect Ignia to ignite a similar phenomenon in other sectors.