Pension funds that want to contribute to employment in developing countries through impact investment should focus on private equity rather than microfinance, a study by the European Bank for Reconstruction and Development (EBRD) has suggested.

The bank told a Dutch publication, ESB, that people who had received a micro loan were less likely to have started a business than others who hadn’t received micro credit.

People with a micro loan tended to spend the money on consumer goods, such as a television or a fridge, it said.

The EBRD based its observations on seven projects, including two in Mongolia and Bosnia Herzegovina, in which it was involved as a lender.

By contrast, it found that the impact of private equity on job creation was much bigger in the more than 400 small and medium-sized businesses it invested in through approximately 100 private equity funds.

Ralph de Haas, director for research at the EBRD, said: “As a consequence of the private equity investment, companies could [more easily] obtain a bank loan for extending their production capacity.”

After five years, firms with such a financial injection had increased their staff numbers with 30 on average relative to their peers without a bank loan, he said.

In his opinion, this was quite remarkable, “as private equity has the reputation to cut jobs after the takeover of companies”.

De Haas said the conclusions were also relevant to pension funds, as they increasingly focus on impact, in addition to financial returns.

This relates in particular to investments linked to the United Nation’s sustainable development goals (SDGs), which mention microfinance explicitly as a way to fighting poverty. Creating employment is part of the SDG for sustainable industrialisation.

As a result of the survey, the EBRD said it has increased the focus of future investment decisions on larger SMEs instead of microfinance.

Statistics of pensions supervisor De Nederlandsche Bank (DNB) show that several Dutch pension funds, including SNS Reaal, the pharmacy staff pension fund (Medewerkers Apotheken) and the public transport scheme (SPOV), had combined investments in microfinance of €281m at the end of October.

In its annual report for 2018, the sector scheme for bakers (Bakkers) said it had gradually reduced its stake in microfinance since 2012, citing high monitoring requirements as well as the limited impact on its investment portfolio.