Public, private lending mash-up offers lifeline to virus-hit African firms
By Tom Arnold
LONDON, July 16 (Reuters) - Blended finance, a mix of public and private capital, is set to boom in Africa to meet funding demand from businesses cash-strapped in the wake of COVID-19 and as investors seek safeguards against financial risks.
Africa has been hit hard by the pandemic, pushing it into its first recession in 25 years and likely to drag 27 million people in the sub-Saharan region alone into extreme poverty.
Businesses across the continent have struggled as banks and other financiers have slashed lending at a time when companies facing plummeting revenues need cash to pay suppliers.
Blended finance, which gained traction in recent years to help governments respond to long-term challenges such as climate change and food security, is helping fill the void.
Proponents such as the World Bank's private sector investment arm IFC and the Bill & Melinda Gates Foundation have in the past helped mobilise up to $50 billion for Africa, more than a third of the global market.
But with the continent facing an estimated $44 billion fiscal gap, such funding is being used to help fix short-term challenges, like trade finance for medical supplies or working capital to keep businesses afloat.
For example, the IFC says it is allocating twice as much funding to blended finance as in recent years.
"What we're seeing is a tremendous amount of demand from distributors for some sort of working finance to help their customers," said John Simon, founding partner of U.S.-based TOTAL Impact Capital, which aims to invest for social good.
TOTAL Impact Capital and another firm, Cardano Development, aim to harness blended finance in countries including Kenya to help buy thousands of pharmaceutical sales invoices where goods have already been delivered.
By advancing only a portion of the invoice value, with the balance paid at collection, the investment ensures returns for investors, while alleviating cash flows for the companies by shortening payment cycles, said Nico de Nijs CEO of IMFact, a company set up by the pair.
Demand has surged in the pandemic's aftermath, said Ladé Araba, Africa managing director for Convergence, a global network for blended finance, noting more interest from institutional investors such as pension funds and insurance companies.
Comparing the demand in 2020 to spikes after the 2008-9 financial crisis and in 2015, she said many of the deals involved loans which offered more generous and flexible terms than those from a bank or institutional investor.
Calculating returns for blended finance can be tricky.
As they involve a "concessional funder", returns for private investors were often limited by the need to avoid the perception of subsidising private profits, said Simon.
Araba said such funding attracted private investment by either transferring risks to soft loan providers or providing an additional risk premium - and a more attractive upside - for investors.
International banks are striving to play a role, either through lending or by pulling in private investors.
Japan's MUFG was one of several banks involved this month in a loan, backed by a 359 million euro ($409.5 million) guarantee by MIGA, part of the World Bank Group, to help the Eastern and Southern African Trade and Development Bank offer trade and project finance to its 22 member states.
JPMorgan in January launched a unit through which it aims to finance more than $100 billion annually in development activities from investment banking deals, with extra contributions from its markets businesses.
IFC is using blended finance to support cash-strapped companies it deems have a sustainable future with a focus on International Development Association (IDA) countries, many of whom are in Africa, said Martin Spicer, IFC's director of blended finance.
"We've had a shrinking of the immediate pipeline of projects, but an increase in the COVID funds part of the business," said Spicer, adding that the timeline was uncertain for the delayed projects.
Before the coronavirus outbreak, about 50% of blended finance investment targeted energy and financial services, said Araba.
This was partly because much of the focus had been on helping governments meet global targets to improve education, infrastructure, food security, climate change and health by 2030, requiring $5 trillion to $7 trillion per year.
($1 = 0.8766 euros)
Blended finance investment by regionhttps://tmsnrt.rs/38ZPVMH
Top private investors in blended financehttps://tmsnrt.rs/2DB1vlF
(Additional reporting by Karin Strohecker; editing by Emelia Sithole-Matarise)
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