Finance in Motion is a global impact asset manager that develops and advises impact investment funds that address social and environmental challenges. These funds use blended finance structures to bring together public and private capital to advance projects focused exclusively on sustainable development in low- and middle-income countries. Topics range from addressing climate change, strengthening biodiversity conservation, and fostering the sustainable use of natural resources, to improving livelihoods and promoting economic opportunities. In addition to their investment activities, the funds provide technical assistance (TA) to investees to build capacity and maximize impact.
Between 2009 and 2020, Finance in Motion has mobilized nearly EUR 5 billion across Southeast Europe, the Caucasus, Latin America, the Middle East, and North Africa. As they set course to expand into new regions with new financing products, we connected with Florian Meister, who became the company’s first Managing Director (MD) in 2009. Today he oversees Finance in Motion’s equity investments, project finance, investor relations and impact and sustainability management.
Can you share what Finance in Motion’s growth journey has been like since 2009, from the early days to where you are today; a global asset manager with more than EUR 2.3 billion of assets under management (AUM), having effectively mobilized nearly EUR 5 billion in low- and middle-income countries?
It all started in 2005 with the idea of creating a tiered fund structure that blends capital from the public sector, development finance institutions (DFIs), and private institutional investors. Eventually this idea contributed to the foundation of the microfinance vehicle The European Fund for Southeast Europe (EFSE), initiated by KfW Development Bank, which remains our largest fund. Founded in 2005 with USD 130 million in AUM, it doubled in size in 2006, allowing the fund to size up to over a billion in AUM today. This was a seminal moment, as EFSE’s growth allowed the team to maintain regional offices, which is a feature that continues to differentiate Finance in Motion from most other players in the field to this day – we now have 17 in-country offices worldwide to serve five impact funds, plus their corresponding sub-funds. The most recent of these funds was launched two years ago: This is the Arbaro Fund, with the European Investment Bank (EIB) as our anchor investor. Arbaro is a forestry fund that invests in sustainable forestry projects in Latin America, the Caribbean, and Sub-Saharan Africa.
Operationally, we are in 30 countries with a workforce of over 250 people. So, it really has been a very good journey.
What can you tell us about your approach using blended finance, and how it has evolved over the years?
We have stuck very much to our initial product – this tranched fund approach where public sector institutions act as anchor investors who offer first-loss capital and may also bear the cost of market research, setting up the structure, and other critical launch activities. This is followed by DFIs in the mezzanine tranche, such as KfW, Dutch development bank FMO, International Finance Corporation, and EIB, all of whom are quite active in sponsoring our funds. Finally, the structure is topped with institutional investor capital, the most senior class. This approach coupled with being close to the market with regional offices and slowly expanding into new regions and new development areas has really defined our recipe for success.
We have deviated slightly from this approach at certain times. The forestry fund is not a tranched structure; everyone is pari passu. This is an outcome of the fundraising process, where we conferred with investors on their preferences and adapted the product to align with their needs.
With regards to how our use of blended finance has evolved, we now use our original tranched funds to generate assets and share them out to offload mature assets into the private sector, which is a novel approach to blended finance. We are starting to offload a little bit with well-known relationship investors of ours. In a few weeks, we will be able to talk more about it, so stay tuned!
Finance in Motion uses multiple types of blending across its various funds. What lessons can you share with other asset managers, that may be operating at a smaller scale, on how to consider different instruments and tranches?
Here is what has worked for us, and we encourage others to do:
Establish a diversely qualified workforce: Anyone wanting to get involved in blended finance must know that it is very complex, so it is important to assemble a good mix of professionals. For example, you will need those who know more about the assets, someone who knows more about investments, someone who knows more about the legalities around fund design, and other compliance professionals, and so on. Having various experts involved helps create strong, well-rounded structures that have the capacity to scale and yield development at scale.
Be patient: Launching a fund takes a while – do not expect the fund to launch in 6 months. Take steps to ensure there is enough of a reserve to help carry through to the closing of that fund.
Prioritize your anchor investor: If you are trying to mix funds in tranches like we do, this approach usually works best. Do not start with the senior investor; it is terrific to find a private individual or company that wants to do something good in Africa, but you must first have the foundation onto which that entity can invest. Find the first-loss investor first, and focus on cultivating that relationship, because it will take time to define your goals and iron out the details before advancing in the process together.
Build good governance: There always needs to be a serious level of monitoring involved when the public’s money is being used, because they are bearing a lot of risk and not likely getting the full return commensurate to the risk taken. At the same time, they are especially attentive to reputational risks. By ensuring good governance, you are making sure every actor is getting the best outcome possible.
How have you seen the blended finance market change in the last 5 years?
Our model of tranched funds is being replicated, and we are happy to see it. It is encouraging to see big creators of development funds like the DFIs drawn to this cost structure and use it again in tenders. But it is not the only thing that is going on. There are new actors coming in, sometimes surprising, with more agile structures, offering risk guarantees rather than giving capital. I see the U.S. International Development Finance Corporation (DFC), another member of Convergence, now doing some creative things on guarantees, for example. And, private sector investors too are being bolder, coming in as anchor investors of a fund or second-loss investors rather than only looking at the senior tranche to invest.
All these developments are promising because they bring capital to bear on difficult problems in places where it may not otherwise go in an unblended way. Once pension funds, for example, learn that they can be involved, let’s say through our private equity fund in the MENA region (SANAD Fund), and see the money coming back with a 7% yield on it, maybe they will be inclined to be more courageous and go to the next structure with less intervention from the public sector. That kind of attitude is what blended finance and these sorts of new practices may encourage to allow for development at scale.
If possible, can you talk about how Finance in Motion has helped advance gender awareness, and integrated gender considerations in its investment decisions?
So here might be some good advice for other asset managers interested in blending capital. From the beginning, we have incorporated a TA facility, which is a separate pot of money for support beyond investments, with solid governance, to prepare markets, strengthen the possible investee, or prepare the investee for investment readiness. This has worked well for us, among others, in advancing gender awareness. Other initiatives to grow gender consciousness and equality outcomes includes the work we have through EFSE and Sanad.
Through the EFSE Development Facility, the Entrepreneurship Academy was launched to provide entrepreneurs, including specific programs for women entrepreneurs of MSMEs, with guidance, resources, mentoring and networking opportunities to advance their businesses. The SANAD Entrepreneurship Academy has offered a Womenpreneur tour, a joint initiative with the Womenpreneur Organization to facilitate investment in women and girls in the MENA region. In addition to these initiatives, we work with banks and other institutions that have a focus on gender, and we ask our TA partners to report gender disaggregated data.
EFSE and SANAD invest in some specific financial institutions that have a targeted approach to financing female business owners, and the longstanding relationship EFSE has with an MFI in Bosnia and Herzegovina also focuses on financing female business owners.
In regions where there may be higher risk, real or perceived, what is needed to pull institutional investors and commercial capital into blended finance?
First and foremost, it is important to have a good structure and good assets, or a strong ability to find them by being on the ground. From our perspective, having a strong track record also really helps. By now, we have been doing this work for nearly 15 years, and out of the 700 transactions we have lent, we have only ever written off half a million dollars, which encourages investors to continue to engage and be involved with future initiatives.
You need to be able to demonstrate you can responsibly invest and offer a line of return, whether that is through your existing funds or your team.
Recently, we have seen a lot of interest in the potential for blended finance to enable scaled opportunities and impact. Could you share your insights and advice based on your experience managing funds of a significant size?
The bigger the fund, the more impact you should have, and if you are not then you really need to examine what is going on. Also, the bigger the fund, likely, the more due diligence is needed. I would caution people who want to build larger funds against focusing solely on one country. That creates a tremendous amount of exposure to the volatility that may transpire in that one country, due to market downturns or political unrest or social conflict, which in turn worries investors. From the beginning, each of our funds has covered at least 10 countries, which has helped us reduce the risk profile of each of those funds.
In most of our funds we have a performance bonus, and a third of that is usually measured by certain impact benchmarks. For more information on what we target and how we have tracked performance to date, one can look at this year’s Impact Report, which is the 6th report on impact we have published, and at our disclosure statement for Operating Principles for Impact Management.
What can you tell us about what is ahead for Finance in Motion?
The SANAD Fund for MSME has officially added Sub-Saharan Africa now that we have received shareholder approval. The fund will expand both its debt and equity operations and TA into the region to promote entrepreneurship, job creation, and access to finance for MSMEs. We might branch out further, perhaps with funds that are both private debt and publicly traded debt. We may also have a fund that invests in liquid assets.
Thinking about your time at Finance in Motion to date, what has stood out to you?
I think it is been great to see the firm grow and maintain a strong culture. Everyone is on the same page. Today, the markets are stressful for everyone, but the team continues to be united and working with clarity towards a common goal to promote growth, sustainability and equality. I am happy to be a part of a firm that helps move some of the excess liquidity from the western markets into developing countries towards social and climate issues with strong attention to gender outcomes and good governance. I am definitely looking forward to the work we are yet to do.
By Namrata Narayan, former Communications Lead (Interim) at Convergence