Design Funding in Emerging and Frontier Markets

By Serena Guarnaschelli, Dalberg

Design Funding in Emerging and Frontier Markets

Earlier this year at the World Economic Forum in Davos, we welcomed the launch of Convergence: a platform that helps public and private investors find and connect with each other to co-invest in “blended finance” deals in emerging and frontier markets. Blended finance is the use of public and philanthropic funds to attract private capital towards investments delivering development impact in emerging and frontier markets. Analysis suggests that this way of mobilizing funds for development financing can lead to as much as a 10x increase in overall investment, and fundamentally change the trajectories of developing economies worldwide.

Investors on Convergence gain access to a global network of like-minded organizations looking to co-invest in emerging and frontier markets. Uniquely, the Convergence platform provides investors with crucial information based on real market experience – a historical deal database, case studies, research, relevant reports, workshops – to ensure that deals originate from a base of full understanding and transparency among parties. Collaboration tools also include a messaging function and deal rooms where deal providers can create checklists of relevant activities and share documents via secure data rooms.

Beyond the matchmaking and knowledge features, one of the fundamental components of Convergence is design funding. As a pioneering hub for blended finance deals, Convergence aims to lead the way by providing over $7 million in grant funding for the design and testing of new blended finance products. The first review of funding applications has just begun, and grants will be awarded in the coming weeks.

So how does Convergence design funding work? Let’s say an organization providing youth with post-high school training is looking to expand its presence across sub-Saharan Africa. The organization requires significant amounts of capital to expand its operations, and wants to be judged on how many of their youth find and remain in jobs for at least two years.

The organization could partner with a financial intermediary to form a consortium, and apply to Convergence to design a financial mechanism to raise capital for their efforts in one of two ways:

1. If this idea is in its earlier stages, the consortium could apply for feasibility study funding (in the range of $50k-200k) to explore potential solutions, for example, a development impact bond-like structure. In this structure, investors would provide capital to fund the organization’s expansion, and corporates (who commit to hire youth in the program) would pay investors back their principal and a market-rate return only if a certain number of youth are hired and retained for at least two years.

2. If the idea has already demonstrated its potential – for example, if the development impact bond structure is deemed feasible with corporates already committed to the idea – then the consortium could apply for proof of concept funding (in the range of $200k-750k) to design the development impact bond, test and size the market, and price the blended finance instrument.

In either situation, Convergence would facilitate collaboration between the awardee and a learning partner to ensure the key learnings from structuring the development impact bond are codified and shared publicly. The results from Convergence design funding will pave the way for new blended finance deal structures. In fact, grant recipients are chosen based on the potential for their blended finance product’s replicability and scalability, impact, and alignment with Convergence’s mission to catalyse private sector investment into development.

While Convergence’s design funding aims to surface the next generation of blended finance models, it will also build on existing blended finance mechanisms that already proven successful in a sector and have the potential to be replicated and scaled in other development sectors. One example of this sort of mechanism is the pneumococcal advance market commitment (AMC), in which a buyer – typically a government or international organization – agrees to a predetermined purchase price for a good or service with a provider – typically a private company. Another is World Bank Green Bonds, first issued in 2008.

The world currently faces a $2.5 trillion annual funding gap for the Sustainable Development Goals, which will guide the next 15 years of global development. A gap this large calls for new ideas, new resources, and new partnerships to channel money where it is most needed, and wisely invested. Blended finance investments will magnify the impact of both public and philanthropic investors’ funding, channeling private capital towards investments that lower risk and enhance returns for private investors.

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