UN Capital Development Fund
Transcript of UN Capital Development Fund
• 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.
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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 $250m
BUILD Fund Malawi Window
USD 20M – Mezzanine Malawi Tranche
USD 15M – Malawi First Loss Tranche
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Renewable Energy Company
2-year unsecured senior loan (working capital)
Aptech Uganda
US$ 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