Challenge Fund characteristics

Challenge Fund characteristics

The SHIFT Fund sits at the heart of a market development programme, and its goal is both to maximise the development impact of its investments and also to facilitate greater change in the market. One way that it does this is by leveraging its own investments to incentivise increased investment by others.

In addition to the challenge fund instrument, the design of the SHIFT Fund Facility is intended to also focus more on exits and brokering partnerships than is conventional for challenge funds with the aim to successfully ‘tee up’ grantees for larger funding – such as through private equity, venture capital impact investors or other debt and equity agreements, and to demonstrate to these players a vibrant and varied pipeline of projects exists that can generate the types of commercial return they are seeking.

.  While it is conceivable that SHIFT will have adequate funds of its own to pursue a part of such an agenda, it will also be important for the Fund to position itself in such a way that it can ‘crowd in’ and leverage the complementary expertise and kinds of non-grant funding that other development partners, foundations and private sector actors can provide, whether in the field of loans, guarantees, credit lines or other sources of liquidity.  Such arrangements should also allow the Fund to assist grantees in accessing TA and other non-financial support, and thereby ‘hit above its weight’.

Internal leverage is the co-funding that SHIFT derives from co-investing with grantees. By insisting on matching funds, SHIFT ensures that incentives are aligned, the grantee has some of their own ‘skin in the game’ and the total value of the investment is maximised. The SHIFT Fund expects a minimum of 50% co-investing from grantees.

External leverage refers to the resources that SHIFT can crowd into the inclusive finance space in ASEAN through its funding and its activities. To do this, the initial funds from UNCDF and the investments that they make play a strong demonstrative role, showing other donors, foundations and other capital sources of the potential of the fund for addressing financial inclusion challenges.

SHIFT is aimed at taking the conventional challenge fund grant co-funding model to a new area. The Fund Facility under SHIFT would seek, rather like private equity investors do, to place as much emphasis on the exit route of the grant funding as with the point of entry. Thus, commercial viability becomes an explicit measure of success, along with other metrics used to measure success, such as ‘impact’ and ‘additionality’.  It is important to stress that the role of SHIFT money is not to directly provide finance, but to act as a broker of partnerships with the various types of facilities indicated in the diagram below.

Figure 19: Facilitating partnerships to deliver scale

Thus in order to assist grant recipients, the SHIFT team will work to establish connections with suitable private equity, venture capital, impact investors, angel networks, business incubators and other sources of commercial funding (including strategic investors from the financial industry).  It is important to highlight that not all projects would be thus passed on through this facility, but it is likely that at least the top 30% or more of the highest performing projects within the SHIFT portfolio will utilise this facility. Thus, the Fund would be seeking to create a network of commercial funding relationships focused on the CLMV, from which a greater ‘deal flow’ may then transpire.

It is hoped that the SHIFT Fund Facility, will over time be regarded by donors, governments, and regulators as a valuable tool to engage financial sector organisations / businesses to deliver a range of public goods to support financial inclusion for women, businesses and the poor within the CLMV. The SHIFT fund facility has the added advantage of complementing existing programmes and interventions, such as the credit guarantee facilities run by USAID’s DCA through to leveraging donor financing to target a particular aspect of financial inclusion through the targeting of specific windows.  

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