Creation Investments’ Patrick Fisher: “Blockchain technology has a great role to play in assigning land rights”

Patrick Fisher, founder of Creation Investments Capital Management (Creation) quit his high-flying corporate job at JP Morgan and started Creation to prove that one does not have to trade off financial returns and social impact. He commented that COVID has accelerated digital transformation and people are using technology that they never would have otherwise. Therefore, he thinks this is the opportune time to invest in financial inclusion and Creation has benefited from this turn of events.

Creation has demystified the belief that financial inclusion comes at a higher cost and Fisher corroborates this the returns that come from the growth of enterprise value. A bigger customer base and higher efficiency from the use of advanced technology lead to lower costs. Fisher also spoke about the current investment focus on Mexico and India.

Creation currently manages several private funds for individuals, family offices and institutional investors. They aim to provide financial access to the unbanked in the emerging markets, and are also working on creating positive environmental impacts through green loans.

He shares insights from the book, Mystery of capital, on the nearly $9.3 trillion of wealth in land rights which the poor can’t access due to lack of records.

Following key points were discussed:

• Most of Creation’s capital is deployed through private equity funds.
• Social and financial goals are not mutually exclusive.
• Capitalism should be used for scale and to transfer efficiency into gains for all.
• Market forces can create better value for customers.
• The risk never has been lower for financil inclusion.
• It is critical to work with regulators on innovations that work for the poor and unbanked.

Below is the edited transcript:

Foo Boon Ping (FBP): Thanks for taking time to join us for this interview. Wealth and Society is a platform where we cover mainly impact and the areas of philanthropy, how wealth is being deployed, to improve society. So, it’s very interesting in terms of the programme that you've been running with Creation Investment, it was set up in 2007 amidst just around the global financial crisis, when there was a lot of investment, subprime and so on, so forth. What was the motivation for getting started back then? Obviously, it predates all this interest towards impact investments, responsible investing and so on?

Patrick Fisher (PF): Thank you for recognising that. We've been at this for over 14 years, which predates many of the big movements of capital into impact. I think this shows our authenticity, as well as our commitment to the space. We feel like we're just getting started. This is a fantastic time for impact investing in particular financial inclusion.

FBP: And we see that in recent years your organisation has been doing very well, growing at a compound rate of 42%, reaching the total assets under management (AUM) of $1.5 billion in 2021. Who are your investors, especially as you serve the, the underprivileged, the underbanked, 29 million of them including micro and small, medium sized enterprises?

Most of Creation’s capital is deployed through private equity funds

PF: Creation manages private funds, and our investors deploy capital through our private funds into financial inclusion. About half of our investors are institutional investors, including insurance, endowments, pensions, and foundations. And the other half are family offices. Both sets of investors want to deploy their capital not just for the financial returns. Yet, the financial returns have been wonderful, with our funds average gross return on investment exceeding market returns since inception. Along with this, we’ve also had a very substantial and measurable social impact. And that's why we continue to grow. The 42% compounding takes into account what we've earned on our funds, but also adds the new capital that we've brought into the market, which is one of our best achievements. Creation has brought a lot of new investors into the space, a lot of investors who might be interested in ESG and impact but hadn't actually made an investment. But with Creation, they have made their first impact investment and have done quite well, which I think it really sets the stage for growing the industry. And that's really our goal - to grow the industry through rigour, robust investment, analysis, but also a deep commitment to the social metrics, showing how they come together in business.

FBP: That tell us a bit about the products, so you have five different equity funds, right? Social venture funds, as you call them, the first starting in 2007, and so on, so forth. And you have launched a credit fund as well. Are they equally distributed? You have $1.5 billion in assets under management, and you have about 18 portfolio companies that you invest in?

PF: Yes, most of our capital has been deployed through our private equity funds. We just launched our private credit fund strategy this year, in the first half of 2021. Correct, our private equity pools are deployed within the 18 portfolio companies today. We've had more portfolio companies and sold them over the years as a way to realise gains and distribute capital. And then in the private credit fund, we have four investments currently in that vehicle. But through those portfolio companies, we sit on boards, we enhance and enforce governance. We add tremendous value through a variety of ways, for example helping obtain bank licenses so that we can move our entities up the ladder, to become fully licensed banks that offer savings as well as insurance and other payments tools. We have digital initiatives where our apps offer financial literacy training as well as give greater access to data and other tools that both small businesses and individuals need to help manage risk and increase income. Our clients now have full access to complete banking platform, like ones we all enjoy, like you enjoy in Singapore, like those in the US. The rest of the world, in particular those at the bottom of the economic pyramid, should have access to these kinds of tools. Through them, our clients gain agency, access, and power.

FBP: And all the portfolio companies are financial institutions, either bank or non-banks that provide lending, payments, deposit and insurance. And they are mainly in India, Mexico. And of course, there's TBC, which is in Georgia, right?

PF: Correct. Yes, we also have Caja Los Andes, where we own 90% of fully licensed bank in Peru. And we just sold our portfolio company in Indonesia in the second quarter, which was a very nice exit.  Creation has made investments in about 10 other countries. But at this point, the main countries of focus are India and Mexico, where we have offices and staff and continue to make further investments. We are about to deploy another $100 million this month into new investments and that are going into growth.

FBP: The performance of your funds debunks this myth or this perception that there is no money to be made from financial inclusion, and from an impact investment because it's for social good that it will affect financial returns.

Social and financial goals are not mutually exclusive

PF: Correct. That's precisely why I started the firm in 2007. I left JPMorgan and started Creation to prove that you don't have to trade off social and financial returns. And yes, we've had very good returns since inception, but of course we've had a lot of volatility. It’s emerging markets and private equity. We've had deals do not so well, some deals do very well. But you take the average return for every dollar invested. And we've done that, which is fantastic. It's the way we build the industry. Just like you're talking about at Wealth and Society, you need these success stories that show that these goals – social and financial - are not mutually exclusive. There are multiple bottom lines, including employees, community, environment, and in our case providing access to financial services.

FBP: There might be a perception because of the high returns that those high returns are paid for by the users in terms of fees, charges or interest rate. Is there a high interest rate such that you can generate high investment returns?

Capitalism should be used for scale and to transfer efficiency into gains for all

PF: It's a very good question. No, our returns really come through the growth of enterprise value, which is based on the growth of customers, the use of technology and efficiency. Actually, what we've seen over time is that market forces, regulations and competition have lowered interest rates and expanded access drastically. Take a market like India. In 2010, the average interest rate customer would pay would be about 38%. Today, the average interest rate is 18%.  So in 10 years, the interest rate has dropped dramatically, especially powerful for the bottom of the economic pyramid. That's all come through technology and process. All of the gains of efficiency, risk management and scale have really been passed on directly to customers. And that's then led to the real stability of the industry. And that's one of the things we like about financial services is that they are regulated businesses. They have strong regulators who enforce strong consumer protection laws, similar to what you would see in Singapore as well as in the US. Add to that our involvement - Creation is a signatory of the Smart Campaign, which is enacts all sorts of client protection principles including rate protection, transparency, client education and grievance mechanisms. What you see is that the interest rates are rock bottom for the country and risk profile, and we've seen them continue to slide downward as we gained in efficiency, and that's a wonderful thing. Again this shows actually, that market forces can generate better value for customers, giving greater access, then other kinds of uses of force or non-market forces. So, I think it really goes into our belief that there is a way to reimagine capitalism and to use capitalism for what it can do quite well, which is scale, provide access and use those efficiencies to give gains for all.

FBP: Talk to us about your investment approach in some of your portfolio companies in terms of do you kind of mandate a minimum percentage of stake? Or do you require a majority stake in the companies that invest in that you sit on the board? How involved are you in terms of directing the business or influencing where? In terms of how its funded, and so on? And then how long do you stay invested for your exit? Once you hit a certain target, you exit?

Market forces can create better value for customers

PF: Great questions. Our first equity fund exclusively invested for majority stakes or control stakes in businesses. With our second fund in 2012, we decided to look at minority stake investments, where we would own 30-40% of a business. This is quite common in financial services. In many countries, including the United States, there are limitations on how much a group can own, in particular, of a full, deposit taking bank. Some markets actually prohibit ownership over 50%. So there may be limitations. But even with those limitations, where we own either full, outright majority, or whether we own a minority stake, we're always on the board. We're always very engaged. We use WhatsApp all the time, and all sorts of other tools to stay very engaged in our portfolio companies. We're on audit committees, remuneration and risk committees, in order to bring the G (which is governance) of the ESG. So we're very involved, which is exactly why management teams and companies really want to work with us. They are in high growth periods of the life cycle and they need a partner who can bring financial capital and human capital, with timely support and speedy decision making. But generally, we're staying involved in a company for 5 to 10 years, which is a very standard amount of time to achieve scale. Then, we find the next group of long-term owners to help these businesses continue to scale and grow. We've taken the number of companies public, including as you mentioned TBC Bank, which is listed on the LSE. Our company Fusion, microfinance, which has 2.3 million customers, 100% are women. It's going public in India soon. We've seen Equitas Small Finance Bank go public as well. And so that's been a fun way for us to exit our position while transitions ownership after we've done a lot of the heavy lifting of creating the strong, good governance for long periods of time.

FBP: How do you see the outlook for institutions that are involved in an ESG financial inclusion? Now with the increasing focus on impact in sustainability? And with COP26 in November? Are you seeing a lot more opportunities a lot more from the investor side or the investment side? companies or institutions to invest in?

The risk never has been lower for financial inclusion

PF: I would say both. We're seeing a lot more excitement on both sides. I'd say number of investors in impact have grown dramatically. There's more capital coming into ESG and positive impact strategies. I will say that they're coming in because it's been around and people have heard of it. Interestingly, the risk has never been lower to be investing in financial inclusion, given the developments and track record. This is the best time to be investing in financial inclusion, because there's now more adoption of digital technology. That technology might have existed even 5 years ago, but due to COVID is has now adopted. People have had to use their smartphones for things that they wouldn't have used before. The tools are better and the customer is not going back. So this is the best time absolutely to be investing in financial inclusion space, and new investors are coming into the space. But I do think there's a broad sense of what impact means and others are looking for maybe more environmental strategies or other kinds of ESG. But I think the most potent opportunity is within financial inclusion. We're getting the benefit of that shift at Creation.

FBP: And for financial inclusion, the ESG impact is more social, more in terms of access to financial services, alleviation of poverty and so on, so forth.

PF: Creation is working in the “E”, the environmental side, as we have a number of green loan products. Our portfolio companies lend money to small stores for them to buy a new refrigerator unit, which is much better for the environment as they are vastly more energy efficient.  So, there's a financial component where there's a cost savings on energy, but an environmental savings because it's much more efficient. We have solar panel loan products, that provide the upfront cash to put solar panels on small houses. These are typically $800 to $1200 loans. Our company has done about a million E loans since our inception. We have a variety of green loan products, which we're very proud of. But they come through at the portfolio company level. And in some markets, those will be much more useful than others. The “E” is embedded in our business, but the “S” is clearly very prominent, as well as the “G”, because of how closely we work with our management teams on governing these companies. We sit on boards, we set policies, we drive terms, we force and enforce adoption, including client protection principles, and certain modes of activity. So the “S” and the “G” are very, very big. But the “E” is in there too.

FBP: And you invest mainly in regulated financial institutions that serve the end users. Do you invest in technology companies, especially now with the financial technology companies, the peer to peer or marketplaces?

It is critical to work with regulators on innovations that work for the poor and unbanked

PF: Several of our businesses are technology companies, but that play very much as a marketplace and provide financial inclusion. Most of our businesses that are technology parent companies, need a subsidiary that is a regulated finance company or bank. Creation helps them establish these, which creates the perfect marriage of the two. That's what fintech is. It is a marriage between the “Fin” and the “Tech”. TBC Bank in Georgia, even though we only own a small percentage of the bank, is seeing 97% of their transactions now go through digital channels. So, it's one of the biggest technology companies in the region. And yeah, it has a multi-billion-dollar balance sheet. So, we love the marriage between the fin and the tech. But typically, even with our tech businesses, they still have a financial subsidiary and that's been a part of our belief about how this needs to go forward. By being regulated, we actually help pave the way back to what Creation wants to do for the industry. The impact investing industry, industry of financial inclusion, needs to be working with regulators to create structures and policies that really do allow for massive adoption. How are we going to reach 2 billion people that still lack access to capital? You have to work with regulators and update and innovate upon these existing systems to really work for the poor and the unbanked.

FBP: Another angle as looking at serving the underserved, apart from increasingly disrupting the regulated the traditional financial system is the kind of emergence of distributed ledger technology (DLT) or decentralised finance (DeFi), so to speak, that uses this technology like blockchain and crypto assets. What's your view of those developments? Do they provide a better alternative to traditional finance? Especially in in the area of payments today?

PF: Well, first, I'm thrilled to see DeFi grow and grow in adoption, in particular blockchain. I think blockchain has such a tremendous role to play in the future in particular for the poor. I think it probably has its best to use in property.  In our markets, getting property titled and ownership transferred is a difficult process. There's a great book called Mystery of capital, which covers how the poor have assets, which is the land they occupy and own. But they can't access it, because it's not titled or in a form where they can use it as collateral.  I think the poor, according to this book have $9.3 trillion of wealth that they can't access. So accessible, legal title of property would be the best use of blockchain technology.

FBP: Do the poor own land?

PF: Yes, they do. Okay, it's where they live. They own that land but there isn't plat of survey or what we call a registered, recorded PIN- a property identification number. They don't often have that. So, it can take a long time to sell a property because you don't know who owns it. And that's what blockchain solves – it establishes the chain of ownership.   And to help these countries really develop, land rights would be one of the best uses of blockchain, in my opinion. So, I'm very excited about that.

FBP: Now, you crossed the $1 billion AUM threshold, what's the future for Creation in the two to five years?

PF: Our five-year plan is where we'd have $2 to $3 billion in our private credit funds. So we're really seeing big growth of AUM along with new opportunities. With our private equity funds, we're already actually at $1.5 billion in our equity funds and should enter next year over $2 billion. So seeing that continue to grow to be about the same size, but 5 years and $5 billion, that's our goal. And seeing that through a mix of private credit and private equity, and really being a leader and bringing in all this institutional capital that wants to be involved in ESG and align their capital with their values, but needs really rigorous strong team to stand behind in a big industry like ours, that are going to lead to really tremendous results.

FBP: Thank you so much for talking to us.