UN Capital Development Fund

Ambassadorial Retreat

in Preparation for LDC5

22 October 2021

Table of Contents

Blended Finance in LDCs

UNCDF Offer

BRIDGE Facility

BUILD & IMIF

• LDCs continue to receive the lowest, although increasing in volume, share of only 6% of private finance mobilized by

official development finance interventions. Between 2012 and 2018, approximately USD 13.4 billion was mobilized in

LDCs. • Few Development Finance Institutions and Multilateral Development Banks offer development finance in the

poorest and most fragile countries: transactions too small, investments seen as too risky, geographical experience

limited.

Systemic funding gaps persist in Least Developed Countries (LDCs)

Source: Blended Finance in the Least Developed Countries Report 2020 – OECD & UNCDF

• Macroeconomic

• Political

• Regulatory

• Business

• Hard & Local currency

• Liquidity

• Tax Conditions

• Market Segmentation

• Seniority

• Tenor /Exit

• Liquidity

• Volatility

• Growth Rates

• Costs

• Sector performance

• Leverage

Frontier Market Risks

Return Determiners

…If risk-adjusted returns are less attractive

relative to other markets, investors will not

allocate capital to emerging and frontier

markets

Private capital providers have a

fiduciary duty to maximize risk-

adjusted returns …

Blended finance is needed so private capital can be leveraged

to bridge the SDG financing gap

Public investors can mitigate risks and enhance returns for

the private sector, spurring new investments

Public investors can mitigate risks

for the private sector, including:

• 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

• Providing support with government

Mitigating Risks

Public investors can also apply

mechanisms that enhance returns for

the private sector, including:

• Absorbing transaction and project

preparation cost

• ‘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

• Extending or deferring terms

provisions

Managing Returns

RISK Return

SMEs and small projects are fundamental to achieving the SDGs in LDCs

• SMEs in LDC economies are fundamental

to the LDCs’ growth prospects

• SMEs can contribute to achieving the

SDGs (e.g.: agribusiness, solar, fintech,

etc.)

• SMEs

1. create employment

2. build the middle class

3. grow demand for local

goods/services

4. expand the local fiscal space

• SMEs can create millions of formal jobs

but often lack access to finance to

develop their businesses

Why they matter

US $4.5T unmet credit needs for SMEs in developing countries

35% SMEs in LDCs have limited access to loans and credit

The Facts

Key challenges in blended finance are defining and measuring impact, the lack of transparency and standardization within transactions

Misaligned return expectations

Returns on an investment are difficult to define, particularly regarding measuring social impact of a transaction in LDCs

Lack of transaction transparency Blended finance stakeholders are generally not consulted during investment process, leading to fundraising difficulties

No standardized approach DFIs and other organizations take different approaches to blended finance deals, resulting in different impact expectations

Few bottom-up strategies DFIs and MDBs often lack the field-level expertise and data that is necessary to de-risk investment opportunities

Grant Funding

(Challenge funds)

Commercial Finance

(Commercial banks, PE funds)

Development Finance (DFIs,

MDBs)

Impact finance (Impact

investors)

Small Large Medium

High

Low

Ticket size

Risk

BUILD Fund IMIF Fund

BRIDGE Facility

UNCDF’s investment solutions can help fill the gap in the development finance architecture

UNCDF’s approach to investment is to leverage its concessional resources to unlock additional private capital

Third-party managed

investments

(Blended Finance

investment vehicles)

UNCDF direct

investment operations

(Blended Finance

transactions)

UNCDF two-pronged approach: On Balance Sheet vs. Off Balance Sheet

Characteristics: - IN: Donated Capital (grants) - OUT: Grants, Concessional Loans and

Guarantees (but no equity) - Ticket sizes between $50k and $500k - Higher risk appetite (subordinated

transactions possible) - Aimed at attracting private capital,

either through blending at transactional level or through sequential unlocking of follow-on finance

Characteristics: - IN: Blended Capital (first-loss,

mezzanine, senior) - OUT: Semi-commercial loans (and

potentially equity) - Ticket sizes between $250k and $2.5m - Leverages prior UNCDF’s preparatory

work (TA & Concessional Capital) - Provides “next investment step” for

projects in need of larger tickets and able to provide better risk-adjusted returns

• ON Balance Sheet: create demonstration effects

• OFF Balance Sheet: scale-up what works

Mature stage

UN

CD

F &

UN

DS

SOU

RC

ING

CA

PAB

ILIT

Y

(O

pen

co

mp

etit

ion

s/P

ub

lic P

artn

ers

hip

s)

Direct investment opportunity

Co-investment opportunity

UNCDF & UNDS TECHNICAL ASSISTANCE FACILITIES

UNCDF direct investments (ON Balance Sheet) Investments from third-party managed fund/vehicle (OFF Balance Sheet)

BUILD Loan/ Equity

IMIF Loan/ Bond

Stage of project

Commercial Investments

(managed by domestic and international

financial institutions ,

including DFIs, commercial banks, PE

funds, impact investors, etc.)

BUILD Fund

(SME fund)

Financial Institution co-investment

UNCDF or UNDS Grant

(seed money)

UNCDF Grant/Loan/Guarantee

IMIF Fund (Municipal

Fund)

UNCDF BRIDGE Facility

UNCDF Loan/

Guarantee

UNCDF Loan/

Guarantee

Growth/Expansion stage Start-up Early stage

The UNCDF BRIDGE Facility is part of an “investment

continuum” for SMEs, FSPs and municipal projects in LDCs

UNCDF BRIDGE Facility - Key Features

A revolving investment facility hosted on UNCDF’s balance sheet

Category Terms

Facility Size Initial capitalization of $50 million, with possible future replenishments

Funding Grant funding from donors (member states, foundations, other philanthropy)

Investment Instruments

Loans: Concessional loans (senior “pari-passu” or subordinated), Mezzanine debt, etc. Guarantees: Loan guarantees (senior “pari-passu” or subordinated), Portfolio guarantees, Volume guarantees, Equity capital guarantees, etc.

Deal Size Ideal is “missing middle” – between USD $100,000 and $1,000,000

Geographic Focus Any of 46 LDCs with priority for countries where UNCDF has personnel to lead transactions and where UNCDF has programmatic presence

Currency Both hard and local currency, with preferences for local

Sector Focus Food security & nutrition, financial inclusion & digital innovation, green economy & renewable energy, local public infrastructure, blue economy, women’s & youth economic empowerment

Key Principles Adherence to UNCDF Strategic Framework, no risk of market distortion, contribution to market development, minimum concessionality, additionality

Eligibility Criteria Prospect is an SME, an FSP, a Municipality, a PPP, or SPV. Prospect is a formally registered legal entity and must have revenue generating activity. Prospect must be creditworthy and have sound financial management practices.

15

Early commitment from

Senior and Mezzanine tranches protected against potential losses by First Loss tranche,

which acts as a cushion

Catalytic 1st loss tranche receives principal after senior and

mezzanine tranches

$50m – Catalytic First Loss Tranche (Class C Shares)

$75m – Mezzanine

Tranche

(Class B Shares)

$125m – Senior Tranche (Class A Shares)

BUILD Fund (OFF Balance Sheet)

The BUILD Fund: a blended finance vehicle targeting $250m

BUILD Fund Malawi Window

USD 20M – Mezzanine Malawi Tranche

USD 15M – Malawi First Loss Tranche

14

Renewable Energy Company

2-year unsecured senior loan (working capital)

Aptech Uganda

US$ 250,000 in UGX at 15% p.a. concessional interest rate

Renewable energy off-grid (PV system/solar pumps)

Blended Finance in Action

BRIDGE Facility

(UNCDF loan)

BUILD (impact investor

loan)

Commercial

funds (domestic bank loan)

UNCDF grant

1

4

3

2

1. UNCDF provided US$110k innovation grant (H1 2018)

2. UNCDF provided first loan ever (H2 2018)

• Loan fully repaid in February 2021

3. UNCDF support unlocked US$700k follow-on

financing from Stanbic Bank, then increased to US$1.2m

4. BUILD Fund considering new US$300k long-term loan

Case study: APTECH (unlocking of additional finance)

Solar Energy Solutions Through Pay-Go

Mwezi (Kenya)

Proposed tenor –

Clean Energy sector (solar lighting, energy efficient cookstoves, solar powered applications for productive use)

Intended Usage of Proceeds: Mwezi will use the investment to:

1. Drive expansion into solar productive products and solar agri-business products

2. Support product expansion into Uganda, Ethiopia and Rwanda, in addition to Kenya

3. Enable customers to benefit egg incubators, solar biodigesters, solar drip irrigation systems and solar maize mills.

BUILD Fund

(OFF Balance Sheet)

Case study: Mwezi Solar Ltd

Blended Finance in Action

• Total debt financing need =

• BUILD Fund disbursed financing = $500,000 (Senior Term

Loan-Working Capital)

79% Of Mwezi customers are accessing solar products for the first time

<$3.5 Nearly half of Mwezi’s customers live below this amount per day.

International Municipal Investment Fund (IMIF) - Investing in

Municipal Projects

Represents and defends the interest of local governments

Membership of over 200,000 local governments worldwide

Represents over 70% of the world’s population

Unlocking public and

private finance for

the poor 53+ years of

working in LDCs + local presence

in 31 LDCs

Pre-investment technical assistance provider through the

IMIF Technical Assistance Facility

A Partnership to Serve

Municipalities

EUR 350M

Accessible by all cities

within the non-OECD

market.

Meet a standard related to

resilience and sustainability

in line with the

implementation of the Paris

Agreement.

Develop municipal capital

market access to cities in

developing countries

Meet financial return targets

THANK YOU