Development and Development Finance Bridging the Gap

Bridging the Gap: Unlocking Synergies between Private Sector Development and Development Finance

BRIDGING THE GAP
Unlocking Synergies between Private Sector Development and Development Finance
April 2022

INTRODUCTIONS
Commissioned by:

Supported by:

Arjun Bhoopal Head of Partnerships Gatsby Africa

Alex Kucharski British International Investment (formerly CDC), Market-Shaping Technical Assistance Lead (BII Plus)

Justin van Rhyn Research Study Co-lead (PSD)

Irene Hu Research Study Co-lead (Investment)

POLL 1
What types of work are you currently involved in? (Select all that apply)

AGENDA
1. Introduction 2. Findings and recommendations 3. Conclusions and way forward

1. INTRODUCTION

INTRODUCTION
Rationale: • BII and Gatsby Africa recognise that development finance and PSD often aim to achieve similar objectives around poverty
reduction and sustainable growth in lower- and middle-income countries. • Examples of approaches to reach these goals becoming less transactional and more transformational, with growing interest
from both sides in supporting lasting, sector-wide change. • Transformational change relies on multiple enabling factors – such as markets, investment, and policies – coming together
to unlock growth. • In theory, alignment between development finance and PSD can support this, however in practice this did not appear to be happening to a significant extent.
Aims of the study: 1. Explore examples to better understand the drivers of / barriers to successful alignment 2. Provide recommendations for both sides that could strengthen alignment moving forward 3. Further dialogue and provide a springboard for action
Methodology: • Study ran August – October 2021 and comprised a literature review, 38 interviews and a rapid survey, with a global scope • Exploratory approach and few ‘model’ examples

DEFINITIONS: WHAT DO WE MEAN BY “PSD”?
• The study focussed on market-shaping PSD - initiatives that work to address underlying, market-level constraints to inclusive economic growth, including systemic barriers to responsible investment. Particular interest in high-impact sectors. Also looked at other types of PSD with transferable lessons.
• A variety of models with some common features:

Thinking systemically about development challenges Understanding the root causes of underperformance
Developing context-specific solutions Facilitative approach to build local ownership
Flexible, iterative delivery

Sustainable outcomes (beyond the period of
intervention)
Large-scale impact

• A mainstream approach within donor PSD strategies (FCDO, USAID, Sida, SDC, etc.). Growing interest in applying the approach to challenges like economic transformation and youth employment.
• Increasing interest among DFIs (like BII and FMO) in thinking beyond transaction-level TA.

DEFINITIONS:WHAT TYPES OF “INVESTMENT” ARE INCLUDED? WHAT DOES AN INVESTMENT PROCESS LOOK LIKE?

INVESTOR TYPES
• DFIs (direct and indirect investment)
• Impact investors funded by DFIs or other concessional capital sources; focus on both impact and returns; ability to invest at “missing middle” ticket sizes
• Investment arms of foundations & other donor programmes making high risk, early-stage investments

INVESTMENT PROCESS

Origination

Due diligence

Structuring & negotiation

Post-investment value creation

▪ Investors: Identify pipeline matching investment criteria, likely a mix of commercial & impact criteria

▪ Investors: Conduct in-depth review of business performance, growth potential, management quality, ESG risk, etc.

▪ Investors: Decide investment instrument (e.g. debt, equity) & structure, and other terms, e.g. valuation, investor rights

▪ Investors: Close transaction & begin post-investment support to drive company growth & value creation

▪ Companies / investment targets: Identify likely sources of financing

▪ Companies / investment targets: Prepare investment materials and respond to investor inquiries

▪ Companies / investment targets: Negotiate investment terms

▪ Companies / investment targets: Grow & prepare for next round of investment (or exit)

DEFINITIONS:WHAT TYPES OF ALIGNMENT DID WE EXPLORE?

PSD
• Firm level TA – e.g. skills, technology upgrade, investment readiness
• Value chain TA – e.g. business advisory services
• Enabling environment – e.g. policy and regulation, infrastructure

ALIGNMENT
Success: Defined as closed investment transactions, or the two sides working effectively towards this goal
Types of alignment (strategic to tactical and ad-hoc): • Systems change initiative that has created the
underlying conditions for more / better-quality investment • Project TA, and / or guarantees and other blended finance tools, that have been used to de-risk investment • Matchmaking, deal-sourcing, information sharing (e.g. market studies, feasibility assessments, etc.), or similar arrangements

INVESTMENT
• Direct debt and equity investments
• Funder of funds • Firm level TA – e.g.
management capacity, skills