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New case study by Convergence highlights OPIC-supported blended fund targeting SMEs across 20 countries

By Chris Clubb, Managing Director of New Products and Knowledge, Convergence

In the world of development finance, we often hear the same question: how can public funders use their capital more catalytically to attract private capital in order to close the estimated $2.5 trillion annual gap in funding the Sustainable Development Goals (SDGs) – which address major world challenges from food security to climate change?

A new case study provides a behind-the-scenes look at one private equity fund doing just that: Sarona Frontier Markets Fund 2 (SFMF2). SFMF2 is a $150 million “fund of funds,” managed by Sarona Asset Management that invests in frontier and emerging market private equity funds, which in turn invest in small to midmarket companies.

Sarona began developing SFMF2 in early 2012. Soon after, Sarona responded to – and was selected by – an OPIC call for proposals for impact investing funds. OPIC provided SFMF2 a credit guarantee, which supported fundraising from private investors by improving expected returns because of its low cost and moderate upside sharing. Fundraising for SFMF2 was further enhanced when the government of Canada provided first-loss capital to SFMF2, which mitigated risks for private investors by absorbing losses of principal invested in underlying funds.

Impact and financial returns

SFMF2 was able to attract investment from OPIC for several reasons, in particular because of the fund’s emphasis on and measurement of social and environmental values and impact. As a blended fund drawing on capital from both public and private investors, SFMF2 targets both strong financial returns as well as positive ethical, social, and environmental outcomes for public and private investors.

Sarona believes that applying ethical, social, and environmental values to each investment decision builds a better world for current and future generations, as well as helps generate strong financial returns. SFMF2 tracks over 30 Impact Reporting & Investment Standards (IRIS) metrics, including job creation, gender equity, and environmental impact. The fund has also begun linking its investee companies to achievement of the SDGs.

SFMF2 requires all investee fund managers to undergo a Global Impact Investing Rating System (GIIRS) Fund Manager Assessment prior to investment, and investee funds must also report on the performance of portfolio companies annually. To sum up the various impacts of its investments, Sarona publishes an annual values report that features environmental, social, and governance and other non-financial data from their portfolio fund managers and companies.

The investee funds in SFMF2 deploy capital across a variety of sectors, including healthcare, education, financial services, ICT, consumer goods and services. SFMF2 seeks impact through all investments, either through a portfolio company’s inherently impactful products (such as healthcare), or through the way in which a portfolio company improves the social and environmental outcomes of its operations. As of June 2016, SFMF2 had invested in funds that invest in small to midmarket companies across 20 countries including Peru, Ecuador, Nigeria, Egypt, Vietnam, and Indonesia. These funds have invested in a range of portfolio companies, including a Mexican financial institution that provided loans to more than 100,000 low-income individuals and a school in Egypt that created a special program to subsidize tuition for Syrian refugees.

Sharing practical blended finance knowledge

Convergence, a platform built to focus exclusively on blended finance, released the SFMF2 case study as part of its knowledge sharing efforts, which aim to provide deal sponsors as well as investors with practical guidance on structuring blended finance transactions to streamline the investment process and make more deals happen.

In keeping with the spirit of education to advance the field of blended finance, the case study highlights insights that others who are considering structuring or investing in blended funds can learn from, including:

i) Catalytic capital from public funders attracts private capital to emerging markets by enhancing risk-adjusted returns to acceptable levels for private investors

Fundraising for SFMF2 accelerated significantly after it received the first-loss capital from the government of Canada, thanks to the risk protection it offered investors. The OPIC-supported leverage also improved expected returns because of its low cost and moderate upside sharing. Based on the experience of SFMF2, public sector investment truly does catalyze private capital to emerging markets.

ii) Determining the appropriate amount of catalytic capital is currently more of an art than a science

There is still little evidence around blended finance structures and the appropriate amount of catalytic capital required to attract private capital. The amount of catalytic capital is often driven by donor preferences and the maximum amount of capital they can deploy to a single program.

iii) Many aid agencies are comfortable issuing grants but lack appropriate policies and processes to participate in blended finance investments

Aid agencies mostly deploy grants and many are not equipped with the structures, authorities, and capacity to deploy investment capital, unlike DFIs, which are designed to provide investment capital and have clear and transparent processes for doing so. The question of whether aid agencies should incorporate appropriate structures and authorities for blended finance, or whether grant authority and budgets should be given to DFIs, remains outstanding.

iv) To secure aid agency funding, it is important to build trust

Blended finance as an approach tends to be controversial in the public sector, as many worry about the private sector profiting from aid agency capital. Because it involves many stakeholders with divergent values and objectives, trust among partners is critical – each party must believe that the other partner respects its goals, is committed to achieving them, and can credibly and efficiently do so.

Convergence hopes that these lessons and the more detailed advice in the case study will inspire others to structure or invest in blended funds that can support small businesses in tough markets – ultimately driving global development outcomes while also producing financial returns.

Read the full Sarona Frontier Markets Fund 2 (SFMF2) case study


ABOUT CONVERGENCE: Convergence is a platform that connects and supports private, public, and philanthropic investors for blended finance deals in emerging and frontier markets. Visit to learn more.

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