Supporting emerging markets with innovative fund structures

Private equity is a critical tool for addressing some of the biggest challenges of the developing world, from poverty to food insecurity to high unemployment and overall lack of opportunity. Supporting emerging market private equity funds is one of the ways the Overseas Private Investment Corporation (OPIC) has catalyzed capital to address these major world challenges.

The funds we’ve supported have invested in a range of businesses, from small farms in Sub-Saharan Africa that have been able to increase yields, to a school in Egypt that was able to expand and host more Syrian refugees, to a lending institution in Mexico that provided loans to thousands of low-income individuals.

In recent years we also started noticing a pattern. When we issued calls for proposals, some of the applying funds that showed strong promise for having a positive social impact in developing countries had some unconventional features that we could not consider in our formal calls process.

Some of these applications were for funds that were quite small, or had nontraditional features, or unique business models, but which still offered compelling investment propositions to reach populations that were not easy to reach in other ways.

Brooks Preston
Brooks Preston (courtesy of OPIC)

For example, there are some emerging markets where it is not a credible proposition to tell prospective limited partners that you’ll exit your investments in a set timeframe. We’ve seen experimental structures that, instead of featuring a 10-year horizon, are set up as long-hold or evergreen structures. We also see tiny funds that focus on a single small country that are highly developmental, but outside the realm of most traditional private equity investors.

In some cases, a fund might structure its LP capital in an innovative way, sometimes with concessional capital support such as a grant or technical assistance embedded into the strategy. In some of the vehicles that have applied for OPIC financing, we see capital that is willing to accept a very high level of risk in exchange for achieving scale with OPIC support. There may be two or more classes of participants to align differentiated returns to certain capital providers.

Two years ago, OPIC launched the Innovative Financial Intermediaries Program or IFIP, a pilot initiative designed to cultivate and nurture some of these promising yet unconventional investment vehicles that target the same hard-to-reach sectors and regions that are OPIC’s focus.

Through IFIP, we’ve already committed to three somewhat unconventional funds that are investing in poor and underserved communities in Asia, Africa and Latin America.

Last year, for example, we committed financing to Unitus’ Livelihood Impact Fund, a prospective fund that supports a range of small businesses from agriculture producers in India to shopkeepers in Vietnam. Because of this fund’s small size, it was not a natural candidate for OPIC Investment Funds financing. But since it is investing in scalable, early-stage businesses that will help create jobs and increase the incomes of the working poor, it is very much aligned with OPIC’s mission.

First-time funds often struggle to raise sufficient LP backing and these less conventional funds often do not have a lot of doors to knock on. While their focus in hard-to-reach areas of the developing world can help OPIC advance its mission, OPIC is able to help them increase visibility and target other institutional players. OPIC’s experience and embassy presence around the world can bring a measure of additional confidence to investors in frontier markets.

Because of the early success of IFIP, we’ve extended the pilot for another two years so that we can evaluate more of the candidates in the program’s pipeline and continue to collect evidence on its effectiveness to catalyze investment and development through innovative structures. There has been good market uptake and the program is functioning as we designed it, which is to help us look at pioneering and small scale financial intermediaries.

Brooks Preston is vice president, investment funds, Overseas Private Investment Corporation.

Photo courtesy of REUTERS/Afolabi Sotunde