I had the opportunity to speak on a panel at this week’s esela Virtual 21 conference about investing for impact in emerging markets alongside a fantastic set of leaders including Laurie Spengler, Rana Joy Basu and Lynn Roland and a great moderator Christopher Garner. The panel touched on a number of trends that we are all seeing in terms of structures and transactions that are driving the impact investing arena forward, particularly during the COVID-19 pandemic.
One topic that I delved into is the increasing number of private capital transactions in the impact space that are turning to blended finance structures that bring together different types of financing from a variety of for-profit and not-for-profit organizations across the capital spectrum. These actors normally operate in entirely separate spheres but come together in blended finance deals in pursuit of a common goal – using more novel financial structures to solve a particular social or environmental challenge.
A case in point is a transaction we recently structured with Malaria No More (MNM), a nonprofit organization that aims to end death caused by malaria. My colleague, Heather Eisenlord, has written extensively on the innovative structure of the MNM transaction, but it’s worth calling out some of the learnings for other impact investors and investees that are considering blended finance transactions.
But by way of brief overview, MNM was a fascinating transaction where we created a double guaranty facility that leveraged grant capital from some significant foundations including Rockefeller Foundation, Skoll Foundation and MCJ Amelior Foundation as well as a guaranty facility backed by the US Development Finance Corporation (US DFC) to support Medical Credit Fund (MCF) which provides loans to medical service providers working with MNM in a variety of countries in Africa. Due to demands arising from operating facilities during the pandemic, many of these clinics were in desperate need of capital but had exhausted their existing credit facilities.
Here are a few considerations for investors and investees on how to approach blended finance transactions in emerging markets:
Success lies in finding alignment among players with very different objectives – There’s a tension inherent in every blended finance transaction by virtue of your bringing together parties with very different risk / return objectives, missions and so forth. The trick is finding the areas of alignment. Lawyers need to be focused on anticipating these tensions and structuring transactions accordingly while also managing expectations.
In the case of MNM, you have the foundation players who are looking to achieve impact outcomes (defined in terms of addressing the patient populations), the performance metric that was most relevant to them. But they were also very deliberately and consciously interested in the idea of fostering new structures to catalyze additional capital to come into the impact space.
At the same time, the US DFC, the development finance arm of the US Government, is not a not- for-profit, and has a mandate that includes generating fees and market-based returns.
A lot of work went into the up-front of the transaction to manage expectations and build cohesion and trust, and ultimately the deal structure was able to meet the impact objectives of the foundation parties as well as the return objectives of the DFC.
The need for speed – creative blended finance structures offer investor and investee flexibility – The innovation of a double guaranty structure solved a challenge that none of the parties could have solved on their own. The foundations were able to move more quickly than the DFC while the larger guaranty finalized. As a result, MCF was able to deploy capital quickly, ensuring that that patient populations continued to be served at this critical time.
Bringing the right players together is a valuable de-risking intangible – This is so critical in blended finance transactions where you are bringing parties together in spheres that don’t typically intersect. In this case, MNM had a clear and pure set of objectives so they were able to establish trust quickly. Having someone act in this role as coordinator and facilitator is the kind of intangible that cannot be negotiated or baked into an agreement, but it’s a valuable asset part of the approach to a blended finance transaction.
Blended finance mechanisms like the guaranty structure in MNM are still on the cutting edge of impact deal development and don’t yet have the resonance and prevalence of other types of credit structures like impact bonds. But credit supports are an important addition to the impact tool box and a great pathway to deploy capital quickly, and we hope to see investors and investees alike turn to them with greater frequency.
Chintan is a Founding Partner at RPCK and head of the firm’s New York office where he focuses on corporate and finance transactions, with an emphasis on impact finance, private investment funds, and family offices.