Blended Finance: Perspectives from the stack

Last month, the Wharton Club of Africa organized its 4th Executive Investment Summit in Marrakech. The event gathered Africa’s leading investors – including family offices, HNWIs, institutional capital and heads of family conglomerates – with a common agenda around Africa, investment returns, deal flow and, in particular, impact investing and how to generate commercial investment returns as well as social and environmental impact.

The ThirdWay Africa team was invited to host a panel. We chose Convergence: Mobilizing private capital through Blended Finance, which touches upon the way that investment capital is deployed in Africa, particularly in those areas where it has been traditionally more challenging for investors.

Blended Finance – changing the narrative of risk to unlock the potential of developing countries

Blended Finance, also known as stacking or capital layering (credit to Dimple Sahni from Anthos for the expression) is the strategic use of public and/or philanthropic funding to catalyse private sector investment. In practice, Blended Finance is the construction of a capital structure that blends investment capital – seeking risk adjusted returns – with development concessionary funding – which targets below market returns or even just a return of principal. Blended Finance is often supported by direct grants for technical assistance, which helps to further alleviate risk. The ultimate aim is to combine social and environmental impact with financial sustainability, through the achievement of risk adjusted commercial returns.

According to Convergence[1], Blended Finance transactions so far have mobilized US$51.2 billion. Financial services, clean energy, and climate finance account for half of the deals. Albeit encouraging, these amounts pale in contrast with the United Nations estimated annual funding gap of US$2.5 trillion, well beyond levels of available official development assistance and current international investment. The UN estimates the annual funding target to achieve the Sustainable Development Goals[2] (SDGs) by 2030 at US$3.9 trillion.

Looking at Sub-Saharan Africa, the region accounts for 40% of the total Blended Finance transactions globally, although it only represents 16% of total US Dollar value mobilized by Blended Finance. We need exponential growth of these figures if we are aiming to close the SDGs funding gap. This, while a huge challenge, represents a clear opportunity to think anew and act anew to change the narrative around risk of investing in developing countries.

Impact and Blended Finance practitioners’ perspectives of the future

To understand these trends and discuss how to open new avenues to accomplish such an ambitious goal, we selected a panel with a broad spectrum of different sources of capital. Mimicking a stack of blended finance, the panel represented guarantees from foundations, grant funds from NGOs and donors, debt finance from development financial institutions and direct equity from family offices. Our panellists, senior representatives from their respective organizations and with extensive experience in Africa, discussed lessons learned and how they see the future of Blended Finance in the continent. A brief presentation of our panelists and their key insights are set out below.

Foundation: Dominic Schofield – President GAIN Canada & Senior Technical Advisor, Policy and Programs – Global Alliance for Improved Nutrition

According to Dominic Schofield, based on his years of experience of structuring Blended Finance vehicles with partners like Acumen, IFC or LGT Venture Philanthropy, success relies on the understanding of the different objectives of all stakeholders involved beyond the usual focus on common ground. This is particularly insightful in a context where capital providers may have very different risk-reward profiles.

As a foundation, GAIN participates mainly through grants and technical assistance, contributing its resources to catalyse with the seed capital required to get projects off the ground.

Official Development Aid: Gillian Pais – East Africa Lead Partnerships for Forests (DFID) – McKinsey & Company

From Gillian Pais’s experience, having the right incentives along the value chain is key to a successful Blended Finance model. Using an actual agriculture project she was involved in as a typical example, she described how guarantees provided by a development institution to companies allowed those to extend better payment terms to their suppliers. This helped relieved cash flow pressure, something that local commercial banks often can’t resolve or are unwilling to resolve due to high interest rates.

Private & Institutional Capital: Guy Lafferty – CIO ThirdWay Africa and ex-CEO of a large family office

With more than 20 years of experience of investing using Blended Finance on large scale agriculture and renewable energy investments in Africa, Guy Lafferty described how, beyond guarantees, Blended Finance may also allow investments to be de-risked both by reducing the high costs of infrastructure needed in a developing country, and also providing more patient capital to companies that will not see positive cash flow for 5 years or more when developing greenfield operations. From an investor’s standpoint, this can create a multiplier effect in the amount of investment capital deployed.

Development Financial Institution: Charlotte Salford – Board Member Swedfund

Charlotte Salford pointed out that the quality of all stakeholders involved in each Blended Finance construct is what really makes the difference when building sustainable businesses that can have social and environmental impact.

The ThirdWay…

Reflecting back on the Summit, and quoting a conference participant, “teams underpin good investments”. Teams, and their ability to execute, are the key to success. At ThirdWay Africa we believe that Blended Finance transcends blending capital, and we aim to unlock the power of collaboration by building ecosystems of capital and know-how represented by investors, government, academia, donors and communities that will result in sustainable financial, social and environmental returns. In other words, the ThirdWay is the art of blending development and investment resources to deliver impact.

Panelists Profiles

Foundation – Dominic Schofield is President, GAIN Canada and Senior Technical Advisor of Policy and Programs. The Global Alliance for Improved Nutrition (GAIN) is a global Swiss-based foundation that mobilises public-private partnerships and provides financial and technical support to facilitate access to improved nutrition by those people most at risk of malnutrition.

Official Development Aid (ODA) – Gillian Pais is an Associate Partner with McKinsey & Company’s East Africa office and the East Africa Regional Director for the Partnerships for Forests (P4F), a five-year programme funded by the UK Government that supports forest partnerships. She also leads McKinsey’s Africa Agriculture practice.

Family Office – Guy Lafferty is a Partner and the Chief Investment Officer at ThirdWay Africa. Guy founded Höegh Capital Partners Limited, a family office, served as its Chairman and Managing Director for 19 years, focusing on its oil and gas investments and on the group’s African direct investment, Rift Valley Corporation, of which he was Executive Chairman for 10 years.

Development Financial Institution (DFI) – Charlotte Salford is Managing Director of GrowthCap and Board Member of SwedFund. Charlotte has contributed to economic and social development in emerging markets for more than 20 years, working in the Swedish Ministry of Foreign Affairs, the European Commission, the European Bank for Reconstruction and Development (EBRD) and Sarasin & Partners. She is also currently a ThirdWay Africa senior advisor.

[1] July 2017 ‘The State of Blended Finance’ report from Convergence

[2] http://www.un.org/sustainabledevelopment/sustainable-development-goals/