ReDesigning Development FinanceBlended Finance: The Road to Addis and Beyond

March 2015

Terri ToyotaWorld Economic Forum

2

VisionBlended finance is a systematic and structured approach to finance and investment in emerging

and frontier markets

Objectives

• Extend the reach and effectiveness of ODA through the complementary deployment of philanthropic and private capital investment

• Expand private investment in developing countries through the complementary deployment of risk mitigation and concessional finance tools by official and philanthropic institutions

• To this end, expand the pool of foreign and domestic capital available for economic development, including small and medium enterprises, agriculture, infrastructure and key public services

ReDesigning Development Finance Initiative (RDFI)The World Economic Forum and OECD-DAC are institutionally committed to advancing the Blended Finance ecosystem through a multi-year initiative

A scaled-up market where… private investment flows

beyond niche units

A liquid market with… standardized products and

investments

A transparent market that… connects all players on a

virtual active platform

3

Impact

Returns Leverage

Impact: investments in emerging and frontier markets that deliver transformative social and economic progress

Leverage: systematic and strategic use of development and

philanthropic funds to mobilize and engage private capital at scale

Returns: market-based, risk-adjusted returns that meet business goals and fiduciary

duties

Blended FinanceThe deliberate and strategic alignment of public-private capabilities and capital to accelerate social and economic growth in emerging and frontier markets

4

Investment Barriers to ScaleThere are seven key reasons why supply of capital does not flow at scale to emerging and frontier markets

Business Case Not Viable

Not an intermediated

market

Limited local market

knowledge

Asset and capability gaps

Development needs

outpacing capital flows

Lack of mandate and

incentives

Difficult local investment

climate

Private sector challenges largely stem from the difficulty to realize risk-adjusted returns…

…while public sector challenges are largely due to mandate and

funding constraints.

Both public and private sector face challenges that hinder exponential capital from flowing to emerging markets and ultimately limit development impact and business goals

5

Variables Affecting Risk-Adjusted ReturnsThe most significant barrier to private capital flow in emerging and frontier markets is that returns are often not commensurate with the high level of risk (real or perceived)

RisksEmerging and frontier markets face a number of unique risks:

• Macroeconomic

• Political

• Regulatory

• Business

• Hard & Local Currency

• Liquidity

• Tax Conditions

• Market Segmentation

ReturnsReturns in emerging and frontier markets are realised based on several variables:

• Seniority

• Tenor / Exit

• Credit Spread

• Liquidity

• Volatility

• Growth Rates

• Costs

• Sector performance

• Leverage

Private capital providers have a fiduciary duty to maximize risk-adjusted returns….

….if risk-adjusted returns are less attractive relative to other markets, investors will not

allocate capital to emerging and frontier markets.

6

An Approach to Mitigating Risks and Managing ReturnsHowever, in blended finance, public capital can mitigate risk or manage returns bringing risk-adjusted returns in line with investor requirements

Mitigating RisksPublic investors can mitigate risks for the private sector

• Improving credit worthiness

• Limiting downside loss exposure

• Insuring against unforeseen market and catastrophic events

• Providing technical assistance and other advisory services

• Eliminating funding shortfalls

• Encouraging necessary risk taking

• Among others….

Managing ReturnsPublic investors can also apply mechanisms that enhance returns for the private sector

• Absorbing transaction and project preparation costs

• ‘Topping-up’ returns by sharing or forgoing any returns to public capital

• Providing incentives for successful performance outcomes

• Providing low cost leverage

• Taking subordinate positions

• Among others….

RETURNRISK

Note: Blended Finance does not seek to eliminate risks, but rather to encourage necessary risk taking at acceptable levels relative to opportunities in other markets and investor tolerance

7

Five Institutional Barriers to Scaling RDFI has identified five key barriers that must be addressed in order to scale up blending finance as a core business for both public and private sector investors

Blended Finance currently lacks… …impacting success by…

Institutional readiness that provides a clear mandate to engage the private sector, along with internal assets and capabilities…

…impeding ability to communicate and collaborate and the execution of investments in a streamlined, structured fashion

Education and awareness of the potential for blended finance to meet return and impact goals, through evidence and analytics on results of existing models…

…hindering adoption of best practices without a champion and evidence to support the business and impact case

A platform to connect return- and impact-oriented capital providers for early co-design of structures and alignment on purpose…

…leaving blended finance fragmented and duplicative and development challenges persistent

A common language and understanding between development and private funders…

…missed opportunities and a steep learning curve for every new opportunity that slows down timeline

Standardized deals and opportunities, as well as a pipeline of bankable projects…

…limiting commitment of capital due to high transaction costs and limited opportunities to invest creating high competition for capital

8

Education & Awareness

Blended Finance Network

Formalized Blended Finance Network with online collaboration space

Webinars and knowledge sharing

Thought leadership provides evidence and

high-profile forums generate commitment

and spark big ideas

The RDFI Blended Finance ToolkitRDFI seeks to overcome these barriers by influencing policy, raising awareness, creating enabling assets & capabilities and curating a diverse community

The RDFI seeks to overcome barriers to scaling blended finance…

Primers for private capital and development investors

Catalogue of existing models and analysis of results

‘How-To’ Roadmap for development funders

Curated community of pioneers and

influencers facilitates innovation, and new

partnerships

EcosystemInfrastructure

Embedding blended finance in narrative for policy and reform and

other ecosystem infrastructure

GAC on Sustainable Development working papers

Engagement on the 3rd International Conference on Financing for Development the Financing forcument

GlobalFinance ExchangeProvides a platform for diverse stakeholders to

connect and deal facilitation

Pipeline of transactions and marketplace liquidity

Incubator for new opportunities

Development and maintenance of necessary systems

Concrete Opportunities

Creates results and new partnerships by

placing ideas and opportunities in front

of investors

Current ideas and opportunities for blended investment

Large, signaling opportunities

Scalable, replicable opportunities

‘Blended Finance Marketplace’ sessions

…by providing stakeholders with a “blended finance toolkit”

9

Scenarios for Applying Blended FinanceFive identified scenarios for blending that vary based on the maturity of the challenge at hand are complemented by three supporting mechanisms across the lifecycle

Early stage, high business model risk and transaction costs. ‘Soft’ capital with little to no return expectations used for testing innovative products or business models, and advisory services in order to absorb the highest risks

High upfront costs and binary risk a project will not happen creates bottleneck. Grant funded upfront costs and activities reduce uncertainty by creating bankable projects

Some perceived macro or sector risk, funding needed to achieve a ‘first-close’ or demonstrate viability. Public needed to ‘crowd-in’ private fund

Public capital seeks exit from mature investments to commercial actors, provides a pipeline

High perceived sector or other risks and expected returns below market. Public capital will take a subordinate position and may top-up returns to attract commercial capital

Explore Build MatureGrow

SUPP

ORT

ING

M

ECH

ANIS

MS

SCEN

ARIO

S

TECHNICAL ASSISTANCE – New or distressed markets require incentives. Public investors attract private capital by offering incentives or contingent payment in exchange for upfront investment in new products and services

RISK UNDERWRITING – credit-enhancing instruments that fully or partially protect investor capital against various forms of risk

NEW MARKET INCENTIVES – New or distressed markets require incentives. Public investors attract private capital by offering incentives or contingent payment in exchange for upfront investment in new products and services

PREPARING PIONEERING FACIILTATING ANCHORING TRANSITIONING

Set goals for blended finance

Buildcapabilities

Benchmark your starting point in blended finance

Build buy-in and awareness across the organization

Partnerand invest

5

1 2

3

6

Each step has:

Purpose—objectives to initiate or scale blended finance

Principles—an approach to achieving these objectives

Practical steps—a series of actions a blended finance ‘champion’ can carry out

A How-To Guide for Development FundersSeven steps to initiating or scaling blended finance

4. Assess gaps in capacity for

blended finance

Learn and scale up across the organization

4

7

11

Select, Concrete Examples from Davos Blended Finance Marketplace (1 of 2)

Abraaj Growth Markets Healthcare StrategyOpportunity: While demand for affordable, high-quality, mass market healthcare in South Asia and sub-Saharan Africa is large and rapidly growing, supply lags and healthcare businesses require substantial capital, deep operational expertise, and access to high quality clinical staff.

Structure: Purpose-built team to deliver strong financial and impact returns. Impact objectives integrated into the investment strategy and governance framework. Invest in scalable healthcare services models in low- to middle-income markets that provide measurable improvements in health status of the underserved low- to middle-income population segments. Work with various funders to maximize impact.

Danish Climate Investment Fund (DCIF)Opportunity: While investment opportunities in renewable energy and energy efficiency in developing countries exists, few projects initially offer risk-return profiles in line with institutional investors’ investment criteria.

Structure: DCIF provides risk capital, including a preferred return for institutional investors, for climate-related projects to mobilize further financing from both public and private investors. The fund will be an active minority investor and contributes only part of the total project financing in the individual projects.

Mobilizing Institutional Investments in African InfrastructureOpportunity: Africa needs significant investments in energy and infrastructure but faces a significant investment shortfall. Pension funds have considerable capital but limited access to and knowledge of African infrastructure investment opportunities and risk-mitigation tools.

Structure: A task force was created to address this investment shortfall through public private collaboration. Joint efforts by public and private institutional investors, donors providing risk mitigation tools, and multilateral agencies with access to project pipelines offer significant potential to lever up infrastructure investments and financing in Africa.

Citibank and SMBC Infrastructure Investment Partnership Opportunity: In order to effectively implement infrastructure projects that promote real prosperity, quality of life, and opportunity for emerging market countries, players must utilize the best available expertise and arrange for the most cost-effective funding, credit enhancement and capital resources.

Structure: The U.S. Government, in partnership with SIDA, Citi, SMBC, and Capitol Peak Asset Management, launched a $10B Infrastructure Investment Partnership to fund and fast-track critical infrastructure projects in emerging markets, with an initial focus on Africa and Asia as well as Latin America.

12

Select, Concrete Examples from Davos Blended Finance Marketplace (2 of 2)

Bank of America (BofA) Catalytic Finance Initiative (CFI)Opportunity: BofA committed to help meet the challenge of scaling up investment in sustainable energy around the world. At the United Nations Climate Summit in September 2014, the bank launched its Catalytic Finance Initiative (CFI), designed to catalyse at least $10 billion of new investment into high-impact clean energy projects.

Structure: BofA will commit $1 billion to investment structures that employ a range of de-risking tools, developed in conjunction with development finance institutions, insurance providers, foundations and institutional investors. The goal is to make clean energy investments more financeable, particularly in emerging markets where project impact is often amplified – addressing other large-scale issues like health, education and job creation.

Women Entrepreneurs Debt Fund (WEDF)Opportunity: Women-owned SMEs are an untapped and attractive market in developing countries with a $300 billion estimated credit gap and as many as 70% having unserved or under-served credit needs. Working with lenders in developing countries, WEDF accesses a market segment with higher product cross-selling, deposit growth and loyalty, benefiting from the lower risk tolerance of women-owned SMEs.

Structure: Seeks to empower women entrepreneurs in developing countries through investing in a portfolio of senior loans to commercial banks. It provides a platform for investing at scale in commercial banks in developing countries, playing a critical role in bridging the financing gap for women-owned SMEs and achieving a greater reach.

The Patient Procurement PlatformOpportunity: Significant opportunities exist across agribusiness value chains in developing markets. In Africa alone, food systems currently valued at $313 billion are forecast to grow threefold to $1 trillion by 2030. Smallholder financing also represents a vast untapped market estimated at $450 billion, 80% of which is currently unmet.

Structure: Addresses risks of all stakeholders, in particular inconsistent large buyer engagement and insufficient financing, through a multistakeholder consortium of input companies, distributors and dealers, traders, buyers, capital providers and smallholder farmers. The platform aggregates demand from large buyers using longer than typical forward contracts to secure access to finance and inputs.

Atlas Mara (ATMA)Opportunity: Opportunity to create a local financial institution that provides leadership, liquidity and technology. Combining global institutional knowledge with extensive local insights to create innovative, well-designed products can reach underserved customer segments (women, rural areas and youth) that represent a large commercial opportunity .

Structure: Financial inclusion focus and goals align ATMA with development investors and suppliers of finance. Partnering with the private sector enables development finance institutions to mobilize large amounts of capital quickly for target markets in sub-Saharan Africa. Low-cost debt financing from development institutions catalyses product innovation in servicing SMEs, trade finance and mobile banking.

13

Blended Finance Coalition of the CommittedThe growing blended finance network includes diverse stakeholders who are pioneers in blended finance and actively applying blended finance in a mainstream fashion

Hon Christian Paradis (Chair)Canadian Minister for International Cooperation and La Francophonie

Julie Sunderland (Vice Chair)Bill and Melinda Gates Foundation

Dale MathiasPartners Forum for Private Capital

Charlotte Petri GornitzkaSwedish International

Development Cooperation Agency

Tom SpeechleyAbraaj Group

Gavin WilsonIFC Asset Management

Corporation

RDFI Steering Group

Corporations & Operating Partners

Development Finance InstitutionsDiversified Financial Institutions

Developing country governments

Financial Intermediaries

Institutional Investors

Philanthropic Foundations

Donor Governments and Agencies

Coalition of the Committed

Private Sector Capital Providers Development and Philanthropic Funders

14

14

Engaging in the Forum’s Blended Finance InitiativeAs Blended Finance gains momentum, there are numerous ways for players to get involved—and the Forum and OCED-DAC can help you get started

For further information please contact:

Terri Toyota, Director, Foundations and Development Community, World Economic Forumterri.toyota@weforum.org

Jens Sedemund, Executive Advisor to the DAC Chair, OECDjens.sedemund@oecd.org

Thank you