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For as long as I have been a social sector professional, there has always been a desire to do more partnering with the “private sector.” And, by that I mean traditional, for profit or commercial enterprises like Coke, Toyota or Airbus. In fact, 14 years ago, the capstone project of my Masters degree at American University was, I’m not kidding, “The Role of The Private Sector in Conflict Resolution.” My point here is that this is not a new topic by any stretch. No matter how you’d like to approach it, the reason why we don’t see more traditional investment in parts of the world where its necessary to send aid or development assistance can be boiled down to one word: risk. Money, or more specifically the individuals who control money, large and small amounts alike, do not like to place that money at risk of being lost. Unfortunately, the places where social sector actors choose to align there sights for action can readily be characterized along a scale of increasing risk. But here’s the thing – the money, or again the individuals who control the money, are also constantly on the lookout for new opportunities that offer potentially high rates of return. And, funny enough, you guessed it, the places where those of us in the social sector live and work are also places that offer tremendous potential markets and high-return opportunities. So what’s an investor to do? Luckily, Joan Larrea has agreed to be my guest on today’s 154th Terms of Reference Podcast. Joan is the CEO of Convergence, an institution that connects, educates, and supports investors to execute blended finance transactions that increase private sector investment in emerging markets. Joan has 20 years of experience in emerging markets investing. She led the U.S. Overseas Private Investment Corporation’s efforts to partner with philanthropic and private investors, she was a managing director on the emerging markets team at Global Environment Fund and she began her career as an investment officer at International Finance Corporation. This episode is a fantastic conversation about how Convergence is attempting to breath life into investments that would otherwise be too risky for the traditional private sector. We not only discuss the three ways in which Convergence works, but we also touch on several of the deals they have helped bring to life. We also talk about the reasons why this type of investing can be so difficult for everyone involved and where that trepidation comes from. You can connect with Joan here: https://www.linkedin.com/in/joanmlarrea
IN TOR 154 YOU’LL LEARN ABOUT
- Convergence, the initiative looking to bring Mixed Finance into the mainstream
- The difference between Soft and Hard Capital
- The A&D nervousness and the Financial Institutions skepticism, and how Convergence is successfully staving them off for the greater good
- A second look at the economic rationales of intermediation and their societal importance, with the case of Energy Markets in Africa for the 600 million who live without power
- More cases of financial intermediaries as match-makers, and more examples of innovative financial instruments for social development and conservancy, among others
- The limitations of Convergence in supporting every Mixed or Blended Finance initiative
OUR CONVERSATION FEATURES THE FOLLOWING
Names:
- Convergence Finance
- United Nations (UN)
- UN Addis Ababa Action Agenda
- World Economic Forum (WEF)
- Citi Foundation
- Global Affairs Canada
- Africa GreenCo
- The Rockefeller Foundation
- Match.com
- Global Impact Investing Network (GIIN)
- Toniic
- Nature Conservancy
- Club de Paris
- Brookings Institution
- Credit Suisse
- Cornell University
- International Union for Conservation of Nature (IUCN)
- Coalition for Private Investment in Conservation
- AIDA Finances
- International Finance Corporation (IFC), Blended Finance VP
- IADB’s Inter-American Investment Corporation
- OECD
Topics:
- Blended or Mixed Finance, Mixed (“Hard” and “Soft”) capital
- Investor education, risk
- Development Impact Bonds
- Energy markets, contracts, contractual integrity
- Financial matchmaking
- Blue Bonds
- Transactions, cost of doing business
- Public-Private Partnerships
Places:
- Washington, DC
- Toronto
- New Jersey
- Seychelles
EPISODE CRIB NOTES
Download an automated transcript.April 5th, 2017
04:18 Joan of Convergence Toronto-based Connects, educates, support investors Interested in blended financial transactions Investment with some element of “catalytic support” Designed to pave the way for larger investments later on Starting small, local, focused Similar ideas were floating around the UN for years Use some funds to explore, identify financial access roadblocks Help make deals that otherwise would not be possible 06:32 Welcome to the world of international finance… in A&D Money that does not look for a return, sometimes not explicitly, sometimes not at all Grants for organizations looking for work “Soft capital” “Hard capital” does look for a risk return Hard and Soft don’t often meet08:36Convergence looks to partner them up Taking advantage of the pressure-free Soft Capital to open gates where Hard can come in Why aren’t the partnerships happening? “Why should it happen at all?” Increasing body of research finds places where they could work There’s a lot of evidence also of places where it does not work Limited examples, cost Convergence is looking to centralize information about mixed financing initiatives There’s a lot of activity… yet most people think their lone pioneers Deal funding distribution is spotty Capital can’t find deals Nobody knows each other Ask financial institutions.. they know everybody Wish it was the same in Soft and Mixed networks 11:11 What brought Convergence to light? Product of mixed investment itself Part of the Addis Abeba Action Agenda Big meeting about the increase of private sector role in A&D World Economic Forum, Citi Foundation, Global Affairs Canada GAC bankrolled the research that would bring Convergence to light Months of talking with the private sector, organizations large and small Convergence is not-for-profit, independently managed Three lines of work #1 Early stage Mixed deals GAC funding, no questions asked Convergence does not invest in companies, but teams Focus on scale potential, critical A&D problems Coming announcement about grants Development Impact Bonds for Syrian refugees not in Europe Private sector capital pays for social objective, then agencies jump in to fulfill predefined targets The private sector gets rewarded if goals are met Solid design lowers transaction costs Bonds are used for skills training Africa GreenCo: Electrification problems, 600m in Africa underpowered alone Why aren’t private companies going in? Because companies can’t figure out long term revenues Political risk and so forth Private companies charge outsized fees to cover for risk, ends up prohibitive Grant to Africa GreenCo to become an energy market intermediary It will buy and sell energy from multiple partners, and reroute energy in a power pool Contractual integrity The Rockefeller Foundation has funded a lot of programs Convergence published strategies and outcomes, be they successful or not 19:49 Line of work #2 #2 Operate at Fundraising Connect an “Anchor” investment (Soft capital) with supporting partners “A Match.com for deals”, match-making The idea has been through a lot of iteration Lots of ideas, assumptions that have just been kept, slowly being identified, eradicated Sites become deal graveyards Convergence is launching a platform today! (Day of the interview: April 5th, 2017) USD 5MM entry Must have one Anchor investment committed Must be on an emergent market (“Sorry New Jersey”) Compliance with appropriate institutional investment rules Health, Education, Renewables, Crops Over 100 registered institutions 24:44 How can a handful of employees make Convergence run on time? 9-strong team Managing Director for the network, with associates “We can’t give oversight to every deal.” Mostly don’t have to Matchmaking and community building “We try to collaborate with those similar to us” Impact funds, blended or otherwise Global Impact Investing Network Toniic investment deals Convergence: not a unicorn, just a highly specific venture in the populated landscape What kind of blended financing transaction does a country need? Some countries, all of it. Some sectors, all of it also Often reaching this harder places means working with the organization who has taken it upon itself 28:32 And finally, numero #3 Be a place where people can turn to when trying to mix it up with their transactions Convergence knowledge base of closed deals Systematic overview about mixed investment performance The 200 datapoints database is available for network partners Can be filtered, sorted, grouped, researched “Not a definitive list, but indicative” Helps identify regional trends, practices If the deal is interesting, it features a picture! And some copy detailing overview, outcomes, evolution Several cases written already One with the Nature Conservancy with Seychelles Nature bought Seychelles debt with Club de Paris In exchange for creating more affordable payment schemes, the country commits to protect fisheries, conservation Private companies have gone in to buy bonds Upcoming: a “Blue Bond” Research with Brookings New financial instruments with the help of Credit Suisse, Cornell, IUCN “We need to stop tiny conservation deals that don’t really conserve” Coalition for Private Investment in Conservation, with GIIN, World Bank Forestries Brain Power Concertation Imagination “We’re watching it all happen” 35:21 Finance is sexy again… sustainably so Nobody likes change Lots of investors are pretty comfortable with bau All is not roses There’s lots of nervousness in A&D You can do bad mixed finance rather easily “I predict in 3 years we will have case studies of failure” Where organizations don’t put money into structures that “finance fat cats” A genuine concept, but it may neglect overall impact AIDA is looking into, following up Taxonomy of mixed transactions Financial workflows are quite different Aid agencies might not know how to best manage assets, balance sheets A&D can place conditions on deal making for financial institutions out of their comfort “We need to to this deliberately, consciously” and focus on the goal 41:02 How will you measure Convergence’s life, and yours? Convergence will almost definitely will change over time Will keep on tracking every Mixed transaction, and follow-up long-term Performance knowledge base What will happen, report back, find out basic dollar-per-dollar metrics Introduce Blended Finance to the mainstream, just like PPP So A&D professionals know them, how they look Institutionalization as goal New IFC BF VP IIC (private wing of IADB) has a BF lead OECD, WEF generate information about BF A community is in the making 44:54 Where do I sign! Convergence may not have the ability to support smaller scale initiatives But they are important. Many Convergence partners started small The challenge is acquiring good ratingsPlease share and participate
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