Convergence Looks to Convert Risk into Reward for Global Development Financing
An interview with interim CEO Andrew Stern
For the past few months, Andrew Stern has been serving as interim CEO of Convergence, a brand new platform designed to connect and support private, public and philanthropic investors for “blended finance” deals in emerging and frontier markets. The big idea is to bring these disparate players together to back deals that, on their own, would be deemed too risky or complex to chase. Convergence officially launched Wednesday at the World Economic Forum’s annual meeting in Davos, with the announcement that Joan Larrea, of the Overseas Private Investment Corporation, will take the helm as the first CEO (more on this below). Separately, Convergence also plans to provide more than $7 million in grant funding to practitioners to design innovative finance products.
Stern’s day job, so to speak, is the founder and executive director of the Global Development Incubator (GDI), an organization that aims to build startups and strengthen existing organizations focused on social impact. He was one of the people behind Aspen Network of Development Entrepreneurs (ANDE), which supports public and private organizations that invest in and build small and growing businesses in developing countries. He also serves as board member for mothers2mothers and has consulted social enterprises in developing strategic plans. In short, he knows all too well the financing challenges at both the enterprise and investment level.
I sent Stern a few questions about the ambitious Convergence project and what it could mean for funders, enterprises and the overall impact investing climate.
Scott Anderson: We’re seeing more platforms for investors (public and private) as well as entrepreneurs to connect in recent years. What makes Convergence different in terms of its approach and mission?
Andrew Stern: When it comes to mission, Convergence is the only platform focused exclusively on blended finance, which will help fill the gap between impact investing platforms and purely commercial platforms. Blended finance, for those unfamiliar with the term, is the strategic use of public and philanthropic funds to attract private capital towards investments that can deliver development impact in emerging and frontier markets. We designed Convergence’s services and offerings to support blended finance deals at various stages of maturity, no matter their sector or region.
In terms of approach, we hope the Convergence platform will underpin the broader blended finance ecosystem. It will play a complementary role to existing platforms, tackling specific challenges that we identified as not being addressed currently – for example, high design costs, lack of knowledge and data, and high search costs associated with blended finance deals. But Convergence will also be working directly with like-minded initiatives to aggregate relevant deal pipelines and knowledge products, especially when other initiatives have capabilities that we do not.
SA: Can you briefly walk me through a scenario wherein a private or philanthropic investor, a private investor and/or a public investor would use Convergence?
AS: Sure. The whole idea of Convergence is that it’s a win-win-win platform: for private investors looking to expand into new markets, for public or philanthropic sector funders looking to support projects with impact, and for people in developing countries who will benefit from the outcomes of blended finance collaboration.
To use one quick example, a private sector investor – for example, an asset manager who wants to invest in a chain of low-cost hospitals targeting the poor in West Africa – could post the opportunity on Convergence’s Investment Network. There, he or she could quickly find and connect with a public co-investor who has relevant experience and networks in the region and is willing to provide a risk mitigation mechanism for the investment. With that, the private sector investor has been able to expand their networks, simplify the screening process, and de-risk the investment, while the public investor has attracted private sector money for social impact that may have previously been unavailable.
A philanthropic investor – for example, one that wants to catalyze more private investment around agriculture in sub-Saharan Africa – could find deals and co-investors on the Investment Network, but could also fund a grant window as part of Convergence’s Design Funding that is specifically geared towards the design of next-generation investment products for agriculture in sub-Saharan Africa.
SA: Are there any past deals involving government and private investors that you would point to as the types of partnerships/deals that you would like to see emulated on Convergence?
AS: Yes, in aggregating data on the 150 closed blended finance deals I mentioned earlier, we’ve seen some great examples we hope others will emulate on the platform.
One is the Africa Agriculture and Trade Investment Fund, an open-ended fund that invests across the entire agricultural value chain in Africa through direct investments and indirect investments in financial institutions and other intermediaries in the agricultural sector. Interestingly, the fund uses a first-loss layer (capitalized by Germany’s Federal Ministry for Economic Cooperation and Development) and a mezzanine layer (capitalized by KfW and Deutsche Bank) to encourage private investment in it. So far, the fund has attracted $54 million from private investors, including many institutional investors who would not have invested in agriculture or Africa. We published our first case study on AATIF here for people who want to learn more.
Another example that readers might be more familiar with is the Pneumococcal Vaccine Advance Market Commitment (AMC). In an AMC, a buyer – typically a government or international organization – agrees to a predetermined purchase price for a good or service with a provider – typically a private company. Under the Pneumococcal AMC, donors pledged $1.5 billion to fund the subsidized purchase of 2 billion doses of pneumococcal conjugate vaccine beginning in 2009. The AMC created incentives for vaccine research and production for developing countries, because donors have committed funds to guarantee the price of the vaccines once they’ve been developed. Essentially, the AMC used donor money to create a market where there was none, while incentivizing vaccine producers to distribute their vaccine in markets that otherwise couldn’t afford them. It is yet another angle of blending public money with private capabilities to drive development impact.
I’ll add here that we know instruments like these are hard to pull off. Convergence will offer grant funding for practitioners to research and design financial instruments like the AMC and help them get these instruments together, convene stakeholders, set up appropriate structures, and coordinate other steps. We hope the Design Funding will help inspire, test, replicate, and scale more innovative mechanisms like the AMC.
SA: Part of Convergence’s mission it seems is education, by providing aggregated case studies, research and other reports, as well as offline training. How do you hope these resources will help produce better blended investments?
AS: We view educational resources as a critical step in driving the blended finance field forward – with more knowledge of the space, more and better blended finance deals will get done.
One of the most common responses we heard in our initial design-stage interviews with investors was that they were interested in the concept of blended finance, but didn’t fully understand how it works, when to use it, or where to look for examples of instruments and structures to use.
With these challenges in mind, Convergence will feature targeted knowledge and educational resources curated specifically to help investors improve their blended finance understanding and capabilities and ultimately help streamline the investment process. We also have a very robust database of closed deals – over 150 already – which provides data from past blended finance transactions, to help investors identify benchmarks for prospective deals and review case studies to understand how similar deals have come together in the past.
SA: What role will businesses have, if any, on the deals listed on Convergence? That is, if I’m an entrepreneur hoping to take my socially inclined startup business to the next level, can I use the platform to connect with potential investors?
AS: Convergence has been primarily designed to bring institutional investors from the public, private, and philanthropic sectors together to co-invest in deals in emerging and frontier markets. Any business, fund, or project focused on emerging or frontier markets with a minimum deal size of $5 million and an anchor investor that is committed in some way to the deal is eligible for posting for fundraising on Convergence. Typically in a transaction like that, a business seeking investment would be posted by an existing co-investor. So in general we expect to see more late-stage business engaging with Convergence, but this could include startups as well.
SA: According to the organization’s FAQ: Anyone can access Convergence’s Design Funding and Market Building Tools, but Investment Network (Investor and Deal Databases) is limited to eligible institutions. How do you define eligible institutions and is there a possibility of exceptions for newcomers?
AS: That’s correct, and we put that restriction in place to ensure that the investors on Convergence’s Investment Network are credible and the deals high-quality, as well as meeting regulatory requirements. To be eligible for the Investment Network, private institutions must be a legally registered institution in their country of domicile; be registered as an investor, investment advisor, or local country equivalent; have been in operation for a minimum of two years; and have a referral from another registered user of Convergence’s Investment Network.
In most markets, large foundations and public institutions such as aid agencies and development finance institutions that are not required to receive accreditation will also be eligible to join. And yes, institutions that do not meet these criteria may occasionally be approved on an exceptional basis by Convergence’s leadership.
SA: Who are the primary stakeholders in Convergence and who will take ownership of the platform for the long term?
AS: Under the initiation leadership and funding from the government of Canada, Convergence was created as part of the World Economic Forum and OECD-DAC’s ReDesigning Development Finance initiative, and designed and launched by the Global Development Incubator (GDI) and Dalberg Global Development Advisors. Convergence’s funders include the Government of Canada and Citi Foundation. (Note: The Citi Foundation is a NextBillion sponsor.)
At GDI, we launch startups like Convergence that are focused on social impact. A key part of doing this well is ensuring these startups are ready to stand on their own after incubation. We’ve kept that in mind throughout the last 12 months as we’ve taken Convergence from idea to launch, and now it is an independent entity registered as a nonprofit corporation in Ontario, Canada.
Today we’re thrilled to announce that Joan Larrea will be Convergence’s first CEO starting on Feb. 15. Joan joins us from Overseas Private Investment Corporation (OPIC), the U.S. government’s development finance agency, where she led efforts to partner with private sector investors. Before that, she was managing director at Global Environment Fund, a global alternative asset manager dedicated to the energy, environmental, and natural resources sectors. We know Convergence will be in good hands under her leadership moving forward and are excited to continue supporting in the post-launch phase as well.
Top image credit: Rubin Starset via Flickr.
Scott Anderson is managing editor of NextBillion.