The Brief | September 17, 2024

The Brief: Lessons from billion-dollar blended funds

ImpactAlpha
The team at

ImpactAlpha

Greetings Agents of Impact!

🔌 Plugged In: Inside Wisconsin’s game plan to tap federal financing for the green transition. Get Plugged In with ImpactAlpha’s Sherrell Dorsey and Forward Together Wisconsin’s Mandela Barnes, tomorrow, Sept. 18, at 11:30am PT / 2:30pm ET / 7:30pm London. RSVP today.

In today’s Brief:

  • Lessons in catalyzing capital for climate and development
  • Electrifying public transport in India
  • Upskilling the green workforce in Europe
  • Traction in the UK impact market

Blending billions: Lessons in catalyzing capital at scale for climate and development. As host of last year’s COP28 climate gathering, the United Arab Emirates made a splash with its $30 billion AltĂ©rra climate fund. Tucked within: A carveout for catalytic investments to mitigate risk and crowd in  commercial capital for climate solutions for the Global South. The $5 billion Alterra Transformation Fund is among the largest deployments of catalytic capital to date. The fund has seeded TPG Rise Climate’s Global South Initiative with $500 million, and Brookfield’s Catalytic Transition Fund with $1 billion. AltĂ©rra “wants to challenge the status quo of how we invest in climate solutions,” AltĂ©rra’s Majid Al-Suwaid said earlier this year. This week’s Agents of Impact Call (RSVP) will dissect how large blended finance funds can leverage guarantees, first-loss reserves and other forms of catalytic capital to create investment-grade pathways for renewable energy, sustainable agriculture and small business lending in emerging markets. “Standardization and scale of financial products are key to mobilizing commercial capital toward Africa’s development priorities,” says Aakif Merchant of the blended finance platform Convergence.

  • First-loss climate capital. The blended approach allows Climate Fund Managers to “mobilize private sector financing at scale for the climate crisis,” CFM’s Rajashree Padmanabhi tells ImpactAlpha. Launched out of the Global Innovation Lab for Climate Finance, the fund Climate Investor One leveraged a tranche of first-loss capital to raise and deploy more than $800 million to finance climate mitigation strategies in emerging markets. The Hague-based CFM has already raised more than $850 million for Climate Investor Two, with an expanded mandate that includes adaptation strategies for oceans, water and sanitation infrastructure initiatives. Private institutional investors include KLP, BNG Bank, SwedFund and the Green Climate Fund.
  • Climate + gender. Adapting to climate changes requires a long-term strategy. The $1.5 billion Project GAIA has an investment timeline of 30 years. The blended finance vehicle from Canadian development finance institution FinDev Canada and Mitsubishi UFJ Financial Group is a long-term debt facility for large projects needing $250 million or more for climate resilience and the green transition in low-income countries. The fund includes a first-loss junior equity tranche, a second-loss guarantee tranche of up to $300 million, and foreign-exchange hedging to buffer losses on local currency loans. The Green Climate Fund has approved up to $150 million in junior equity, or 10% of the fund. Axa XL will provide up to $50 million for the guarantee tranche. The partners have pledged to align with the 2X Criteria for gender inclusion.
  • Guaranteeing impact. The $1 billion SDG Loan Fund took more than three years to put together. In allocating capital toward the Sustainable Development Goals, Munich-based Allianz, which manages more than $2 trillion, faced obstacles common to institutional investors, including the need to write large checks. The insurer sought out FMO, the Dutch development finance institution, which agreed to put up a first-loss reserve of 10%. To satisfy FMO’s own risk considerations, MacArthur Foundation provided an unfunded guarantee of $25 million (for background, see, “A $25 million guarantee to catalyze $1.1 billion”). The fund has deployed approximately $100 million in loans for clean energy, financial inclusion and sustainable agriculture. “The ratio between the dollars committed to the guarantee and the dollars ultimately unlocked from the private investors is 40:1,” MacArthur’s Debra Schwartz told ImpactAlpha. “We think that’s a pretty efficient use of our impact investment.”
  • Keep reading, “Blending billions: Lessons in catalyzing capital at scale for climate and development,” by Dennis Price, David Bank, Jessica Pothering and Amy Cortese on ImpactAlpha.
  • This week’s Call. On this Thursday’s Agents of Impact Call, Climate Fund Managers’ Rajashree Padmanabhi will join Mitsubishi UFJ’s Ariane Pevide, MacArthur Foundation’s Debra Schwartz, and Convergence’s Nnamdi Igbokwe, to share practical lessons in “blending billions,” Thursday, Sept. 19, at 10am PT / 1pm ET / 6pm London. RSVP today.

Sponsored by Heading for Change 

Climate Week NYC exclusive: Scaling climate impact and returns with a gender lens. ImpactAlpha is pleased to co-host this in-person event with Heading for Change and UBS. The event will explore how investors are deploying gender-smart climate finance to create resilient, inclusive economies. Hear from investors who are spotting new market opportunities, accelerating impact and facilitating a just transition, including Heading for Change’s Sana Kapadia and Jackie Vanderbrug, UBS’s Andrew Lee and Amantia Muhedini, Courageous Capital Advisors’ Laurie Spengler, MCE Social Capital’s Camilla Nestor, and The 22 Fund’s Tracy Gray, in conversation with ImpactAlpha’s David Bank.

  • Space is limited. Register your interest in joining the discussion in New York, Tuesday, Sept. 24 at 4pm ET.

Dealflow: Energy Transition 

ADB mobilizes more than $86 million for electrifying public transport in India. The Asian Development Bank has issued a loan of 3.6 billion rupees ($43 million) to Indian electric vehicle and renewables conglomerate JBM Group to promote green public transportation. The deal is part of a debt package of 7.2 billion rupees ($86 million) arranged by ADB. The other half is being committed by the Asian Infrastructure and Investment Bank. The loan will support JBM’s acquisition of 650 e-buses, as well as the construction of depots and charging infrastructure in the states of Haryana and Odisha.

  • Electric buses. The investment will “build eco-friendly urban infrastructure,” said ADB’s Suzanne Gaboury, and support “public health through cleaner air and climate action through lower emissions.” India’s transport sector accounts for 12% of the country’s energy-related emissions. Its energy demand and carbon emissions are expected to double by 2050. The government has adopted policies to curb transportation emissions, including offering subsidies for EV purchases and charging infrastructure.
  • Gender smart. Women in India’s auto transport sector make up just 15% of the workforce and are usually in business operations roles. To increase women’s involvement in the sector, ADB and JBM have created a “gender action plan” to train more female drivers and implement measures to ensure their safety.
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Germany’s Smalt scores €8 million for green workforce training. Workforce development is key to accelerating the green transition. In Europe, more than three million workers are needed for solar and heat-pump installations and other clean technology services. Smalt was launched a year ago by a pair of Harvard and Stanford alums to help meet that demand. The Berlin-based company runs an academy to train workers, with a focus on migrants, and offers installation services to customers. It has hired and upskilled 40 workers that have installed more than 200 solar PV systems in large commercial and multifamily buildings. Its customers include more than a dozen clean energy and clean tech equipment manufacturers, such as HVAC services provider Thermondo and ENVIRIA Energy, a commercial and industrial solar services company backed by BlackRock. Smalt also provides subcontracting services, as well as consultation and financing for green projects. 

  • Holistic approach. With the €8 million ($9 million) seed round, Smalt is looking to extend its footprint in Germany’s solar PV market, including large commercial solar projects. Noa, formerly called A/O PropTech, led the round. “Smalt offers a holistic approach to the shortage of skilled workers in Europe’s energy transition by attracting fresh talent to the industry and expediting their entry into the jobsite by blending digital and onsite training,” said Noa’s Arjun Jairaj. Smalt is looking to build a franchise network of installers and maintenance services stores in Germany with its trained workers. Other backers in the round include General Catalyst, Owl Ventures and Heartfelt (formerly APX). 

Dealflow overflow. Investment news crossing our desks:

  • Salesforce Ventures is launching a second $500 million fund to invest in startups helping to balance “trust, growth, and innovation” in generative AI. “Values drive value, and we know trust and responsibility are good for the world – and good for business,” said Salesforce Ventures’ Paul Drews (see related, “With stakes in Anthropic, impact investors seek a seat at the AI table”). (Salesforce Ventures)
  • Blume Equity, a women-led growth equity fund for climate tech startups in Europe, notched a €25 million ($27.9 million) commitment from British Patient Capital. Australian asset manager Queensland Investment Corporation is also backing the firm’s first fund. (Blume Equity)
  • The US Department of Energy’s Loan Programs Office conditionally approved a $1.6 billion loan guarantee for Wabash Valley Resources to develop a carbon-negative ammonia production facility in West Terre Haute, Ind. The $2.4 billion project would repurpose an industrial gasifier site and store the captured carbon. (DOE)

Signals: Institutional Impact

British impact investing market gains traction. It’s been a busy few years for impact investing in the UK. The value of impact assets in the country surged by more than a third to almost ÂŁ77 billion ($102 billion) from 2021 to 2023, according to the London-based Impact Investing Institute. The growth was driven in part by new funds, including Generation Investment Management’s $1.5 billion Just Climate fund and Morgan Stanley’s 1GT Fund. Smaller impact investors, such as Resonance and Big Issue Invest, grew in size and sophistication. Another driver: UK regulations such as the Financial Conduct Authority’s Sustainability Disclosure Requirements. The UK impact investing market “is not just growing; it is evolving, innovating and embedding itself into the core of our financial system,” write the institute’s Sarah Teacher and Bella Landymore. 

  • Impact tops traditional markets. The UK accounts for roughly 8% of the nearly $1.2 trillion global impact investing market. Direct investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return – as the Global Impact Investing Network, or GIIN, defines impact investments – accounted for less than 1% of UK investments. Still, the UK impact field saw 10% compound annual growth over the three-year period, compared to zero to -2% growth for the broader UK asset management sector. The institute’s report used GIIN data for the first time.
  • Impact expectations. The institute surveyed more than 100 “market actors, thought leaders and policy makers,” including BlackRock, Better Society Capital, Bridges Fund Management, Circularity Capital, ThirdWay Partners, Impact Earth and Octopus Investments. Private equity drew the most capital (45%), followed by real assets (28%) and private debt (11%). Most respondents said their performance was in line with or beat their expectations. Two-thirds said they planned to boost impact investing in the UK over the next five years. The top sectors were financial services (including microfinance), healthcare, housing and energy. In April, Savills Investment Management landed ÂŁ123 million for affordable housing in the UK. Last month, London-based Just Climate invested $150 million in Continuum Green Energy to reduce India’s industrial carbon emissions.
  • Blended finance. Some 40% of respondents participated in blended finance deals in the past five years. The top approach: flexible-term debt. Others leveraged government-backed first loss capital. The UK Nature Impact Fund, which invests in nature restoration projects and is managed by Federated Hermes, includes a ÂŁ30 million first-loss layer from the UK’s Department for Environment, Food and Rural Affairs.

Agents of Impact: Follow the Talent

Laurie Felker Jones joins Antler as a visiting partner… Blue Earth Capital adds George Wheeler, previously with Legal & General Investment Management and BlackRock, as vice president of fundraising and investor relations… Marquette Associates’ Ibrahim Rashing joins Harris for President as engagement and phone banking co-chair.

Dominik Mjartan is stepping down as CEO of Optus Bank and will become vice chairman of the board… The National Coalition for Community Capital appoints Jackie Koney of Paper City Development to its board of directors… Galway Sustainable Capital welcomes Harry Hegeman, previously with AES Clean Energy, as an investment associate… Morgan Stanley Wealth Management is hiring an investment due diligence associate in New York.

LISC has several new openings, including lending and investments director, operational risk director and program officer… CrossBoundary Group seeks a head of investor relations and an investment advisor… The Principles for Responsible Investment is looking for a senior responsible investment ecosystem manager for the UK and Ireland.

👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.

Thank you for your impact!

– Sept. 17, 2024