Innovative Finance Partnerships
Meds and Food for Kids (MFK), a non-profit dedicated to saving children’s lives by fighting malnutrition in Haiti, had a problem. It saw an opportunity to produce high quality therapeutic foods locally and at a scale significant enough to reach thousands of children with this life-restoring product, but to do so it needed financial support to build a modern factory in the country. MFK was already working with Haitian peanut farmers to improve the quality of their peanuts, a central ingredient in these therapeutic foods, and had the potential to secure a large order for its product. Yet its fundraising efforts were not generating funding fast enough to meet its ambitious goals for constructing the factory.
The Global Alliance for Improved Nutrition (GAIN) wanted to support MFK’s efforts in Haiti, where one in five children suffers from malnutrition, but recognized that financing was a major constraint. However, GAIN quickly spotted the opportunity to support sustainable local production of therapeutic foods by using grant money to attract investment capital. GAIN’s Innovative Finance Program has piloted various models for partnering with investors who focus on generating both a social impact and a financial return from their investments, including LGT Venture Philanthropy (LGT VP), a Swiss-based impact investor. Based on a detailed financial analysis that LGT VP conducted on MFK, both it and GAIN decided to pool their funds in order to extend a loan to MFK to construct its factory. Within nine months of making the loan, the factory was complete and MFK’s production of therapeutic foods had commenced, enabling it to reach over 30,000 children in its first year of operations.
MFK’s financing challenge is not unusual. Many businesses looking to achieve social impact in low-income economies have difficulty accessing the capital needed to scale up. At the same time, many development actors (the “public” in public-private partnerships) are usually reliant on grants to support interventions. By partnering with investors, including those who seek a social impact in addition to a financial return, development actors can utilize their grant money to reduce the risk of investing (in a way that attracts, rather than substitutes for, private capital) and thereby generate a wider range of financing solutions.
Through its work with investors, GAIN has found that such partnerships offer several advantages to organizations working along the entire agriculture-nutrition value chain to make nutritious and affordable products available to those who need them.
Promoting sustainability and scale
Investors bring additional capital to the table, generating “leverage” for the support provided by development actors. This investment capital has several benefits. By coming in the form of a loan that must be repaid, or as an equity investment in a business, it creates incentives for the market-based intervention to be implemented in such a way that it can be sustained over time. In addition, this investment capital can help an organization achieve a greater scale of impact than would have been immediately possible through grant support alone. Achieving both sustainability and scale will allow agriculture-nutrition interventions to expand their impact.
Addressing a range of financing needs
When it comes to investment capital, there is no one size fits all. Companies require different types of financing at different stages of their growth and to fund various aspects of their business, so GAIN has structured partnerships with a range of investors who complement each other. This has ensured that appropriate forms of financing (e.g., debt and equity), from small to large amounts, can be made available to firms that operate in different parts of the agriculture-nutrition value chain and have diverse funding needs.
Amplifying the impact of scarce resources
By providing financing for activities that otherwise may have been paid for through grants, or for which no grant money was available, investment partnerships can allow the development actor to stretch its scarce resources across more interventions, thereby broadening its impact.
Adding a complementary skill set
Access to finance is not the only benefit of working with investors; they also bring a set of skills and capabilities that, when complemented by those of a development actor, can make interventions more effective. Development actors often have deep expertise in a certain sector (e.g., agriculture, maternal health) and knowledge of generating and measuring social impact, which is attractive to investors who may not have that level of domain knowledge. Investors, on the other hand, have business and financial expertise that can help ensure that a new product or service will be viable in the marketplace. Development actors also have broad networks in the sectors in which they work, and often interact with policymakers, academics, civil society organizations, and others who can affect the impact of development interventions. Investors have an additional set of contacts, many of whom are experts in various business competencies (e.g., marketing, distribution, financial management), who can be helpful in ensuring that an intervention is well-designed and can succeed in the marketplace.
Reducing risk for innovators
Creating an innovative, market-based product or service can entail risks that may prevent a company from developing it in the first place. Technical expertise and grant funding, when combined with an investor’s know-how, can help address this challenge. For instance, GAIN and the the International Finance Corporation (IFC), the private sector lending arm of the World Bank, worked with an Ecuadorian food company that was interested in creating a fortified yogurt for low-income consumers but lacked information about potential demand. By using a matching grant to cover a portion of the cost of a market study, GAIN and the IFC reduced the risk to the company while gaining valuable knowledge about consumers’ preferences for nutritious food. This laid the groundwork for several subsequent stages of support, including advice on product formulation and marketing and assistance with the development of a business plan. This purposeful use of grant money within the context of an investment partnership reduced the financial risk to the company and ultimately led to the launch of a new product largely financed by the IFC and the company’s own capital. These are just some ways in which partnerships between development actors and investors can be mutually beneficial in achieving impact in the agriculture-nutrition sector (and beyond). It is important to keep in mind that working with investors is not an all-purpose remedy to address malnutrition or any other development issue. Such partnerships are an additional tool, however, to support market-based interventions with positive development outcomes. When used appropriately, they can help development actors take one more step towards achieving a sustainable impact at a scale that could not be reached through grant money alone.