ImpactAlpha, Sept. 19 – When the U.S. Development Finance Corp. opens its doors on Oct. 1, it will be equipped with new investment tools to support female fund managers in emerging markets.
The replacement for the Overseas Private Investment Corp., or OPIC, will have expanded authority to catalyze private sector investment, including the ability to make equity, as well as debt, investments.
The agency’s $60 billion investment cap more than doubles OPIC’s $29.5 billion limit and the new structure is better integrated with the State Department and the U.S. Agency for International Development. It will also have an explicit focus on lower and middle-income countries.
Expanded U.S. development-finance institution will make equity investments, too
The expanded mandate is raising expectations for one of OPIC’s signature initiatives: the 2X Women’s Initiative, part of the 2X Challenge collaboration with other development finance institutions, to expand investments in women-led businesses and funds around the world. Even without equity authority and little technical assistance capability, OPIC has already catalyzed at least $1 billion for women’s financial inclusion.
Globally, still only about 10% of fund managers are women. Yet the benefits of women’s leadership in investing and business are becoming better understood. The new U.S. Development Finance Corp. now has a much wider suite of tools to overcome real and perceived risks – and seize new opportunities – to unlock the value of investing in and through women.
The passage of the BUILD Act came on the heels of the launch of the 2X Challenge, a commitment from OPIC and other development finance institutions to mobilize $3 billion in capital by 2020 to fully engage women in the global economy.
To help close the fund management’s gender gap, 2X requires any business it invests in to be 51% women-owned or women-founded, and any fund it invests through to have 20 to 30% female leadership on its investment committee.
“When 2X was launched after 46 years of [development finance] work without recognizing gender in our investment strategy, it was a counting exercise: How many women are we investing in? How many jobs for women are we creating?” Kathryn Kaufman, head of OPIC’s Office of Global Women’s Issues, told Impact Alpha.
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In its 2016 portfolio, says Kaufman, only four out of 137 investments had a component of female ownership.
The 2X Challenge has helped improve the ratio. To date, nearly $2.5 billion has been committed to 2X; 33 of those commitments meet the 20-30 percent leadership threshold. OPIC investments helped catalyze $1 billion of the total.
“OPIC has played an absolutely catalytic role in getting [2X] off the ground, but one of the challenges OPIC has had – and what’s exciting about this transition – is that they haven’t had all of the tools in their toolkit,” Suzanne Biegel, founder of Catalyst At Large and an expert on gender-lens investing, told Impact Alpha.
“They did it with no equity and with no technical assistance or programmatic support,” says Biegel. “Now they will not only have more capital, but more of those kinds of tools.”
The new U.S. development agency will have women’s economic empowerment at its core, says Kaufman. “We now have the Office of Global Women’s Issues sitting on the investment committee, so everyone has looked into my eyes and explained the gender specifics of each transaction.”
Mitigating perceived risk
With new financing capabilities, the U.S. Development Finance Corp. has new leverage to incentivize private capital commitments to women’s leadership around the world. Still, the agency will need to confront longstanding norms in the development finance community, including an aversion to investing in first-time fund managers.
“Most [development agencies] are not willing to invest in first-time fund managers, and many women will be first-time managers,” said Kirsten Pfeiffer, a gender-lens specialist at consulting firm DAI.
Development agencies may be leaving good deals on the table. “We see growing evidence that funds with more equitable management outperform ones that don’t and are more likely to invest in female-run companies or products that benefit women,” says Pfeiffer.
Structures that are designed to incentivize and support female fund managers can help – and there is some evidence that OPIC, in the run-up to its transition to the U.S. Development Finance Corp., has actively sought out those types of transactions. In June, OPIC provided $10 million in senior debt to anchor Deetken Impact-Pro Mujer’s Ilu Women’s Empowerment Fund, a debt fund for Latin America financial institutions that serve low-income women with a range of financial services and gender-smart investments in high-impact businesses.
“They’re in a very good position to anchor deals like that because they interact with so many different players,” says Beigel. “And part of what we need to solve the problems we’re aiming to solve is for different kinds of talents, capital, and areas of influence to be brought to bear, instead of the classic ‘I’m just going to back a fund manager who knows how to run a fund.’”
OPIC has historically paired its debt-based financing and private sector relationships with USAID’s grant-based aid and technical expertise across the range of sectors and geographies where the two operate.
Now, with the U.S. Development Finance Corp.’s wider scope of offerings and USAID’s stated commitment to unlocking more private sector capital, the two agencies are looking to a dynamic approach in emerging markets under the 2X umbrella.
“Part of our ability to meet our development objectives as the (U.S. Development Finance Corp.) is leaning into radical collaboration with USAID,” said Kaufman. That collaboration includes integrating with USAID’s Development Credit Authority, as well as identifying new investments and monitoring ongoing ones through the staff and networks of USAID, the U.S. Department of State, and U.S. embassies around the world.
In practice, coordinated projects in the new era could look a lot like the Women’s World Banking Asset Management (WAM) blended finance fund, which seeks to raise $100 million to invest specifically in women’s financial inclusion. In June, OPIC announced that it would provide $25 million in financing to the WAM alongside $500,000 in grants and $100,000 in technical assistance from USAID.
“The Women’s World Banking deal is actually not a traditional OPIC deal – it’s a traditional 2X Women’s Initiative deal,” explained Kaufman. “There, we sought to find impactful female-focused fund managers. I’m not sure we would have been investing like that back in 2010.”
Another likely scenario is a regional focus. Both Pfeiffer and Biegel cited Africa and Latin America as sites of needed regional collaboration to unlock capital.
“OPIC’s involvement has been to say ‘we want you to double down on the gender piece,’ so this gives [regional actors] the impetus to say ‘yes, we wanted to do that but we needed to know we had a backer,’” said Biegel. “They need those kinds of [development finance] actors to come in and say ‘we want to be part of that.’”