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Social Investment Matters




Asad Mahmood
Managing Director, Global Social Investment Funds
1
Agenda
     Social Investment Defined
     Our Belief
     – Potential
     – Challenges
     – Solutions
     The Market ...
Social Investments Defined

     Most investments have indirect social value in terms of
     expansion of the economy or ...
Our Belief: Potential
    Any social venture with a cash flow can be financed by bringing differently
    motivated money ...
Our Belief: Challenges of Social Venture

                                Low volume of transactions and lack of robust
  ...
Our Belief: Challenges with Socially Responsible
    Institutional Investors


                               Do not want ...
Our Belief: The Solutions


        Social Ventures have limited
                 resources               Credit enhanceme...
Scale-Up of Social Finance
                                               Stratified-Risk
    Before Financing            ...
The Market for Social Investment
                           18           $17

                           16


            ...
Deutsche Bank & Social Investment

                   “To be the investment banker for social capital”
         Vision    ...
Funds under DB Sponsorship or Management
                                                                              Lau...
Funds under DB Sponsorship or Management
                                                                              Fun...
Funds under DB Sponsorship or Management
Global Commercial                                                                ...
Global Commercial
           Microfinance Consortium
                     Capital Structure    Investment Partners




   ...
Sample Structure
       Standby Letter of Credit with Leverage

        Honduran                                          ...
Sample Structure
       Local Currency Source: DB Branch
                                      DB London                  ...
Sample Structure
       Local Currency Source: Local Bank
                            US$
                        Purchase...
Deutsche Bank’s Microfinance Footprint

                                           Europe
                                ...
First German Fund for Microfinance
                       First–ever microfinance fund for German Investors

             ...
First German Fund for Microfinance
        First Rated Sub-debt Fund in the World
                                        ...
Business Engagement in Microfinance

                        Several issuances in Europe for one of the largest
        Un...
Business Engagement in Microfinance
                         Assistance from DB product and industry experts in
       DB ...
Coming Soon …


        Multi-facility   Developing multi-facility (grant, debt, equity)
          Vehicle        investme...
Eye Fund I
         Using debt to reach scale,
     and tapping new sources of capital




24
Eye Fund I - Three Driving Forces
                            Approximately 37 million people are blind worldwide and anot...
Eye Fund I: The Objective
     To address the major constraints to a sustainable eye care sector in the developing
     wo...
Eye Fund I: Structural Overview

         $20 MM                      Oversight Structure




          Senior       Socia...
BEFORE                                    AFTER



              Enterprise Social Fund
     An opportunity to help create...
Enterprise Social Fund Context

       In the past 30 years, the social housing sector has principally
       relied on th...
Enterprise Social Fund Objectives

       Engage the corporate sector as investors in social ventures



       Develop an...
Enterprise Social Fund Structure
     Enterprise Social Fund LLC:

         $15MM 5-year notes with 20% first loss DB guar...
Deutsche Bank’s Microfinance Portfolio
     Management Capabilities
                     Extensive Microfinance Relationsh...
Portfolio Management Capabilities
                        Multidisciplinary Team …
         Socially       – Skillset in M...
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  1. 1. Social Investment Matters Asad Mahmood Managing Director, Global Social Investment Funds 1
  2. 2. Agenda Social Investment Defined Our Belief – Potential – Challenges – Solutions The Market for Social Investment Our Vision, Mission and Strategy Three Main Components of Our Work – Domestic Social Finance – International Social Finance – New Initiatives Fund New Initiatives in Social Investment – Eye Fund I – Enterprise Social Fund Our Team / Our Strength 2
  3. 3. Social Investments Defined Most investments have indirect social value in terms of expansion of the economy or creation of jobs, etc. Social investments by their very intent are designed to achieve social goals directly through commercial approaches Social investments are about BOTH a maximization of value to society and a maximization of profits 3
  4. 4. Our Belief: Potential Any social venture with a cash flow can be financed by bringing differently motivated money to a common platform Microfinance Education Alternate Energy Healthcare Agriculture Affordable Housing 4
  5. 5. Our Belief: Challenges of Social Venture Low volume of transactions and lack of robust The social venture cash flows industry is no different than any other nascent Lack of liquidity industries marked by No track record on investment risk Perceptions out of line with real issues Doing good can only be achieved through The social ventures also charity: have to contend with unique perceptual issues “You can’t charge interest to the poor” Lack of recognition of the full potential of the poor: “They are worthy of charity but aren’t capable of running a business” 5
  6. 6. Our Belief: Challenges with Socially Responsible Institutional Investors Do not want to sacrifice return Common attitude of socially responsible institutional investors Do not want additional risks Evaluate social investments by the same measures they use to judge highly commercial developed markets - Rating - Daily Quotes - Liquidity 6
  7. 7. Our Belief: The Solutions Social Ventures have limited resources Credit enhancement can mitigate the issue of track record and risk perception Growth will come with increased capacity Subsidy can enhance weak cash flows to meet minimum investors requirement Capacity can only be increased through capital investments Increase volume will create the required liquidity and help mitigate other elements of Develop structures that meet social and investors’ needs risks like price quotes, etc 7
  8. 8. Scale-Up of Social Finance Stratified-Risk Before Financing After Financing Capital Structure Paying Paying Investment Capital Patients/ Patients/ Customers Customers Socially Senior Motivated Debt Commercial Investors Social Social Venture Venture Service Improved Service Delivery to Delivery to the Poor Subordinated the Poor Debt Foundations and International Equity Financial and Institutions Grant Capital Deutsche Bank, by increasing the availability of investment capital, helps increase the level of outreach of social ventures to the poor Cash Flows Service Delivery 8
  9. 9. The Market for Social Investment 18 $17 16 14 Where: $14 billion in Community 12 Development Financial Institutions, in US$ Trillions 10 $2 billion in “double bottom line” funds and $200 million in Program 8 Related Investments 6 4 $2.16 2 $0.225 $0.016 0 Traditional Investment "Screened" Funds Charitable Donations Private Social Funds Investments In the US, $2.4 trillion is earmarked for social purposes, yet 90% of this is in passive “Screened” funds and only 0.1% is invested in funds actively targeting a social and financial return. 9 Source: ‘Blended Value Map’ Jed Emerson, 2004
  10. 10. Deutsche Bank & Social Investment “To be the investment banker for social capital” Vision Deutsche Bank embraces social investing as a specialized investment banking business with the dual objective of profitability and social return. To be a catalytic leader in providing socially responsible lending, investing and philanthropic resources, acting as Mission an agent of development and growth in distressed communities globally. Use the Bank’s social financing expertise, investment banking skills, structuring capabilities, business Strategy resources and worldwide relationships to create financial instruments that benefit social enterprises, and in the process transfer financial know-how among both clients and investors. 10
  11. 11. Funds under DB Sponsorship or Management Launched in partnership with DB Private Wealth Management in US and UK Pioneered structures for investing in local currency DB-Microcredit Facilitates linkages between MFIs and local financial Development Fund institutions Seeks to increase scale of MFIs so they can become commercially sustainable Has lent more than $ 5MM to nearly 50 MFIs in 27 countries Products Deposits or financial guarantees Term Up to 5 years Interest Rates Commercial rate on local bank loan; discount on the Established 9 years ago, it was the first guarantee Size $25,000 - $250,000 commercially oriented microfinance fund Currency Guarantee in US Dollars launched by a global bank Amortization Varies with local loan 1 11 1
  12. 12. Funds under DB Sponsorship or Management Funds early stage, commercially viable MFIs Acts as catalyst to unlock local equity/stakeholder support DB Start-up Fund Favors locations under-served by microfinance Capitalized with funds from Deutsche Bank, Cordaid and other social investors A $1MM fund launched in 2005. Commitments to more than 5 MFIs. Products Debt and equity-like structures Term Up to 5 years Interest Rates Flexible rate structures Size $25,000 - $100,000 Currency US Dollars or local currency (with FX risk-sharing) First start-up fund for microfinance institutions Amortization Bullet maturity 1 12 2
  13. 13. Funds under DB Sponsorship or Management Global Commercial Facilitates capital access for commercially focused MFIs in locally demanded currency Microfinance Consortium Offers flexible, sophisticated financial Financial Times instruments “2006 Sustainable Deal” finalist Presents microfinance as an emerging asset class to investors Brings together social investors, development agencies and first-time institutional investors $80.6 MM nearly fully committed with more than 40 deals approved in about 21 countries Products Fixed and floating rate financial products; interest, currency and credit swaps; loan guarantees; direct loans Term Up to 5 years Interest Rates Commercial microfinance rates First commercial fund to provide Size Single and multiple draws up to $4.5 MM financing in the locally demanded currency. Currency Locally demanded currency Largest microfinance fund of its kind Amortization Bullet maturity at launch date 1 13 3
  14. 14. Global Commercial Microfinance Consortium Capital Structure Investment Partners Senior Debt $63.35 MM USAID Guarantee $15 MM SubDebt $4MM Sub Debt, Equity Class A $5.5 MM & Grant Capital $17.25 MM Class B $6.25 MM DFID $1.5 MM 1 14 4
  15. 15. Sample Structure Standby Letter of Credit with Leverage Honduran Deutsche Bank Bank Microfinance Fund Issues Letter of Credit HNL Interest in HNL equivalent $US Collateral Deposit Custodian Interest on Collateral Honduran Commission in USD / L/C Guarantee Fee MFI 1 15 5
  16. 16. Sample Structure Local Currency Source: DB Branch DB London DB Karachi US$ Guarantee Inter- Deutsche Deposit company Bank Guarantee Microfinance Fund Interest on US$ Deposit Interest Loan in Rate on Pakistani Pakistani Rupee Rupee Loan Pakistani MFI Guarantee fee in US$ 1 16 6
  17. 17. Sample Structure Local Currency Source: Local Bank US$ Purchase of Deutsche credit risk Colombian Bank Bank (Panama Microfinance Branch Fund Interest in US$ (minus Interest margin) in US$ Loan in US$ US$ / Colombian Peso Cross Currency SWAP Colombian Colombian Interest in MFI Pesos Bank Colombian Peso Loan 1 17 7
  18. 18. Deutsche Bank’s Microfinance Footprint Europe Bosnia & Herzegovina Serbia Albania Georgia Central Kosovo Asia Moldova Azerbaijan Albania Mongolia Romania Kazakhstan Russian Federation Latin America & Middle East & North Africa East Asia and the Caribbean Morocco the Pacific Honduras Jordan Cambodia Haiti South Asia Philippines Nicaragua Africa - India Samoa Bolivia SubSahara Pakistan Colombia Benin Mexico Kenya Chile Uganda Argentina Mozambique Uruguay South Africa Ecuador Tanzania Peru Rwanda Dominican Republic El Salvador 18 Brazil
  19. 19. First German Fund for Microfinance First–ever microfinance fund for German Investors Collaborative approach: German private investors The Fund and development agencies Target Rating: BBB- or higher Target capitalization: € 60 MM Further establishes microfinance as an investible asset class Up to € 5 MM (or locally demanded equivalent) 7 year maturity The Offering 100% subordination Tier II Capital compliant (Basel guidelines) Launch date: First fund with German investors. September 2007 The first rated Sub Debt Fund in the microfinance space 19 19
  20. 20. First German Fund for Microfinance First Rated Sub-debt Fund in the World Investment Vehicle MFI 1 MFI 2 MFI 3 Investment Senior MFI .. Pass tranche MFI .. EUR Manager Through Equivalent MFI .. in local Entity demanded MFI .. currency, MFI 23 USD Junior MFI 24 tranche MFI 25 Senior Tranche Rated BBB- by Fitch 20 20
  21. 21. Business Engagement in Microfinance Several issuances in Europe for one of the largest Underwriting microfinance institutions in the world Asset First asset securitization in Bulgarian market Securitization Selected to bid for mandate on EUR400 MM Eastern Asset European microfinance portfolio owned by leading Management development agencies in the region Knowledge Partner MFI senior management (from Treasury, Accounting and Risk Management) will intern with DB Transfer 21 21
  22. 22. Business Engagement in Microfinance Assistance from DB product and industry experts in DB In-country structuring transactions Engagement Active volunteer program Private Spanish Managing €4 million microfinance loan portfolio targeted at low income and lower-middle income countries Foundation €34 million investment on the European Fund for Other Southeast Europe (EFSE) Transactions Equinoccio Fund in Mexico 22 22
  23. 23. Coming Soon … Multi-facility Developing multi-facility (grant, debt, equity) Vehicle investment vehicle for microfinance to be marketed to single-country investors/donors Advisory Role Advising in the creation and management of other funds CDO- + $200 MM Multi-Issuer Rated Deal “Consortium II" 23 23
  24. 24. Eye Fund I Using debt to reach scale, and tapping new sources of capital 24
  25. 25. Eye Fund I - Three Driving Forces Approximately 37 million people are blind worldwide and another 150 Global Demand for million have serious visual impairment, of which 75% are easily Affordable, High- treatable/preventable (i.e. cataracts, glaucoma) Quality Eye Care Grants are insufficient to meet Vision 2020 goals Collective annual spending roughly $250 MM Proven Sustainable There are approximately 250 eye care programs that are currently and Profitable self-sustainable Service Delivery These programs serve clients from all economic strata, with user Model fees from regular clients subsidizing the poor Leveraging existing financial models and capital markets Creating Competitive Integrating financial institutions, socially motivated investors, and the Landscape for Social social sector Investing Recent success in microfinance as a platform for the next-generation of social investments 25
  26. 26. Eye Fund I: The Objective To address the major constraints to a sustainable eye care sector in the developing world with increased outreach to the poor. Diversifying Financial Resources Available to Eye Care Programs EYE FUND I Providing low interest debt financing for investment Leveraging existing networks to aggregate financing needs Capacity Building and Human Resources Development Grant Improving operations through training and organizational development Component Scaling programs to serve the poor, while maintaining self-sufficiency Laying the Foundation for Systemic Change Enhancing the operational capacity of eye care programs to boost LARGER, cashflow from user fees; thus also increasing the resources available to SUSTAINABLE EYE serve the poor CARE SECTOR Developing a replicable methodology for social investing, eye care and beyond 26
  27. 27. Eye Fund I: Structural Overview $20 MM Oversight Structure Senior Socially Debt Motivated $14 MM Commercial Investors Uses of Financing Capital investments for equipment or buildings Program expansion Subordinated PRI/Social Debt Investors Bridge Financing $4 MM (1% Return) Replication of program in new region Grant Development $2 MM Agencies 27
  28. 28. BEFORE AFTER Enterprise Social Fund An opportunity to help create low cost housing for America’s most needy families through the engagement of the corporate sector 28
  29. 29. Enterprise Social Fund Context In the past 30 years, the social housing sector has principally relied on the Community Reinvestment Act, which required banks to invest in underserved communities in the United States The Community Reinvestment Act is only directed to banks and is driven by the geographic location of the banks Concentration of financing in big cities 29
  30. 30. Enterprise Social Fund Objectives Engage the corporate sector as investors in social ventures Develop an innovative channel to fulfill corporate social responsibility and enhance shareholder value through a well-protected return-based investment rather than as an expense for the corporation Provide Enterprise, a top social developer, with non-traditional sources of flexible and readily available financing to assist in the creation of affordable housing for low income families nationwide 30
  31. 31. Enterprise Social Fund Structure Enterprise Social Fund LLC: $15MM 5-year notes with 20% first loss DB guaranty Tranche A: 5.5% / Tranche B: 2.5% Structured to maximize protection of noteholders’ capital Advisory Board of Directors Credit Fund Manager Committee Commercial Loans to $$ Institutional $$ CBOs Investors The Fund Tranche A Socially Loans Tranche B Repaid by $$ $12 MM Notes $3 MM Notes $$ Responsible CBOs Investors $0 $12.0MM $15.0MM $3 MM DB Guaranty 31
  32. 32. Deutsche Bank’s Microfinance Portfolio Management Capabilities Extensive Microfinance Relationship Network Structuring – 77 relationships in 41 Countries Excellence & Track Record Impressive Underwriting Record – <$65,000 written off since 1998 Experienced Structuring Abilities – DB-Microcredit Development Fund → First-ever fund for microfinance from a Global Bank → Launched in collaboration with Private Wealth Management – Global Commercial Microfinance Consortium → Presented microfinance as an Asset Class to first-time Institutional Investors in 2005 → 3 of the world’s top development agencies in the capital structure: France, UK and USA → 90% of loan capital placed within 12 months Growing External Demand for Management Skills – Manages microfinance investments for a prominent Spanish family foundation – Partnership with Cordaid of The Netherlands 32
  33. 33. Portfolio Management Capabilities Multidisciplinary Team … Socially – Skillset in Microfinance Institutions, Investment Banking, Committed, Asset Management, Project Finance, International Experienced Deal Consulting, Law & Accounting Team – Multilingual capability (Spanish, French, Urdu, Hindi, Romanian, Italian, Korean, English and German) …. with deep industry and banking experience – Experienced in origination, structuring and execution of financings – 3 funds under current management – 3 new microfinance funds being structured 33
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