Financing risk reduction and social innovation
Rationale for a fund that reduces the investment risks of IB/IGB investors:
When discussing with impact investors and IB businesses, it is always argued that sufficient funding is available in the market, but investors are reluctant or need lots of time to structure the respective deals. This is mainly because of two reasons:
- (a) the proposed project is not investment ready or does not have sufficient social impact, and
- (b) investors perceive risks – real or assumed – and prefer to wait and see the company’s further performance potential, before actually investing in a new business model.
Unleasing impact investing funding:
While business readiness will be addressed through business coaching services, investors’ readiness can be encouraged by establishing a risk reduction financing facility. Often, impact investors are close to making a deal, but there are a few perceived or real risks which hinders them to a final agreement with the company. In such case, a modality that helps reducing the risk for the investor would come in handy. Such risk reduction facility or fund (RRF) would thus unleash investments that are nearly investment ready but do not materialize due to various reasons.
Unleashing additional funding as investment strategy:
One of the 10 emerging recommendations for a strategy in support of IB/IGB is to establish a Risk Reduction and Social Innovation Fund (RRSIF). The fund would help reducing investment risks of impact investors and enhance innovations for deepening social inclusion.
Co-investment:
IB-RRSIF is structured as a public sector fund which would co-invest with impact investors in IB-deals (maybe 10-20%) proposed by impact investors, thereby reducing the investment risks and enhancing social (and environmental) impact.
Structuring the risk reduction component:
The $25 million fund would have two components:
- The risk reduction component where the government investment part could transfer into a grant, when the investment emerges as being substantially less commercially viable as initially plant due to unforeseen reasons, but still achieves its social impact. The risk reduction is similar to a guarantee, but it is more an upfront outcome-based risk reduction financing. In addition
- The RRSIF would have a small social innovation grant ($0.1-$0.3 million per deal) for piloting last-mile expansion to the poor.
The RRSIF vehicle would be run by an investment committee chaired by Ministry of Finance and managed by the Venture Capital Trust Fund (VCTF). No fund managing firm would need to be involved. It is structured as a public sector loan for private sector support, not as a partial credit guarantee given directly to private sector
Expected results in Ghana:
It is expected that the $25 million RRSIF will make investments in 50-60 small, medium and larger IB/IGB deals and thus unleashes a total financing of $118 million in 5 years. The returns from the fund would be re-invested in new IB/IGB deals (revolving fund).
The Africa regional dimension:
The RRSIF will be designed as a regional fund to hedge investment risks in Africa. Total fund costs would be about $50 million or more, of which perhaps 40% would be for Ghana.