Waterloo agency’s blended finance program aims to change lives
November 25, 2016
By Brent Davis (@DavisRecord)
Originally published in The Record
WATERLOO — In Colombia, improved oil filters on a rental vehicle fleet are slashing costs while saving hundreds of gallons of oil each year.
In India, an organic farming initiative has boosted productivity and opened new export markets while attracting more female farmers.
There are dozens of other success stories like these in frontier and emerging markets around the world, thanks to a homegrown program managed by Mennonite Economic Development Associates.
Commonly known as MEDA, the economic development organization is headquartered in Waterloo and employs about 250 people worldwide. Founded on Mennonite principles such as sustainability, transparency and a desire for social justice, the organization strives to create business solutions to poverty in developing regions. Historically, MEDA has focused on sectors such as agriculture and financial services and issues like women's economic empowerment.
One of its projects, Infront (Impact Investing in Frontier Markets), is considered a trailblazer in the field of blended finance.
"The concept revolves around bringing public and private capital together in order to increase scale," explains senior project manager Majid Mirza.
When Infront began in 2013, the program paired $15 million in federal funds from Global Affairs Canada with $150 million from private investors, the Overseas Private Investment Corp. (the U.S. government's development finance institution) and project partners MEDA, Sarona Asset Management and the MaRS Centre for Impact Investing. Sarona is a for-profit company that was spun off from MEDA.
The $15 million in federal funds is first loss capital, intended to mitigate against any potential investment losses.
"That de-risks and incentivizes private investors to enter the market," Mirza says.
The Infront program invests in local private equity funds that in turn invest in dozens of small and medium-sized enterprises that have high development potential. Working in about 21 countries in Asia, Africa and Latin America, Infront has invested in about 16 private equity funds representing about 80 businesses.
"MEDA embraces the notion that profit is good as long as attention is paid to social, economic and environmental considerations," says Helen Loftin, MEDA's senior vice-president of communications and marketing.
"The level of due diligence that goes into the selection of these funds is really rigorous."
Equity ownership in these funds means there's also an ownership stake in the companies they represent. Investors in the program reap both financial returns and a sense of doing social good.
Along with the investment component, the Infront program is working to make a difference in other ways, too.
The Sustainability Innovation Grant Fund provides grants to small and medium-sized businesses to improve environmental, social and governance practices.
On a one to two investment ratio (businesses receive $1 for every $2 they contribute), the grants are supporting 31 businesses, including Avis Colombia and its oil filter program, and the Khyati Foods organic farming initiative in India.
Other grants are helping to upgrade the skills of plumbers in India, develop an advanced training diploma for nurses at an Egyptian hospital, and provide small business training for micro-finance clients in Mexico.
There's also a global fund manager mentorship program, where managers of local equity funds that aren't accepted into Infront's investment program are instead offered mentorship from experienced fund managers in North America and beyond.
The sustainability grants and the mentorship program are supported by an additional $5 million investment from Global Affairs Canada.
Program leaders are also intent on quantifying its success, with the development of a new evaluation system to measure impact.
As the businesses touched by the Infront program grow, improve their practices and expand their client base, it's hoped that as many as 15,000 jobs will be created. While some elements of the Infront program wind down at the end of 2017, the long-term investments that have been made will be in place for another decade or so.
Loftin says this type of blended finance program is becoming even more critical as the world tries to achieve the sustainable development goals adopted by the United Nations. It's estimated those goals face an annual funding gap of $2.5 trillion.
"The only way we're going to get there is by blending government capital with private capital," she says.