DRAFT – ConfidentialCONFIDENTIAL               FOR EVERY WOMAN EVERY CHILD INNOVATION WORKING GROUP MEMBERS ONLY          ...
DRAFT – ConfidentialACKNOWLEDGEMENTSThe author would like to acknowledge the support received from the PMNCH secretariatin...
DRAFT – ConfidentialEXECUTIVE SUMMARYOne of the main motivations for creating EWEC and the Innovation Working Group(IWG) i...
DRAFT – ConfidentialOpportunity for MNCH –Overall, the brief assessment of the SRI investment industry reveals no specific...
DRAFT – Confidentialdiscussion will clarify whether the conceptualization and refining of interesting models issomething t...
DRAFT – ConfidentialOVERVIEWDespite the overall increase in development assistance for Reproductive Maternal,Newborn and C...
DRAFT – ConfidentialMarch 2008, the Secretary-General noted that the “post-Monterrey period has seen aflourishing phase in...
DRAFT – ConfidentialEmergence of Sustainable InvestmentAs Al Gore’s recent thought piece argues, the business of asset man...
DRAFT – Confidential                           Investments intended to create positive impact beyond financial return     ...
DRAFT – Confidential2. Impact First Investors: These investors primarily aim to optimize social or   environmental returns...
DRAFT – Confidentialand that growth is expected to accelerate. The Monitor Institute estimates that impactinvesting could ...
DRAFT – ConfidentialNew investment structures may want to exploit the MNCH theme. Investable themeshave characteristics of...
DRAFT – Confidentialgrowing and could be as large as USD18bn – USD123bn. Regarding the opportunity tocreate investment str...
DRAFT – Confidentialof financial structures considered for this research is included in the tables found inAnnex 1.Overvie...
DRAFT – ConfidentialInnovative structures in this category aim to provide additional funding through thecreation of an add...
DRAFT – Confidential International Finance Facility for Immunization accelerates the availability and predictability of fu...
DRAFT – ConfidentialAGRA Fund:  African Agriculture Fund is supported by donors first loss guarantee and  technical assist...
DRAFT – Confidentialautomatically donated to UNHCR’s earthquake relief operations. However, the offeringwas not deemed a f...
DRAFT – Confidential     spending creating more sustainable local markets.Examples of these include -Vitamin and Mineral P...
DRAFT – ConfidentialThe associated cost savings generated from eliminating inefficient procurementpractices (e.g., emergen...
DRAFT – Confidentialdifferent types of investors have different risk/return profiles and some place a greateremphasis on s...
DRAFT – ConfidentialInnovative Finance Structures                                                        Product          ...
DRAFT – Confidentialspace. The five models are not all actual investment structures, but instead touch onaspects of the in...
DRAFT – Confidential  Model 1: MATERNAL/CHILD HEALTH SHARED VALUE INVESTMENT FUND                                         ...
DRAFT – ConfidentialEWEC IWG would play a primary role in convening partners and filtering ideas. EWECIWG and its members ...
DRAFT – Confidentialdeveloping country governments to stimulate research and development. Traditionallytheir funding has c...
DRAFT – ConfidentialModel 3: HIGH LEVEL WORKING CAPITAL CREDIT FACILITY MODELThere exist many products and commodities tha...
DRAFT – Confidential      Credit Facility Roles & Responsibilities      Roles and responsibilities need to be confirmed af...
DRAFT – Confidential             This fund would seek to attract some of the one-in-ten investors with an             inte...
Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Chil...
Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Chil...
Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Chil...
Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Chil...
Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Chil...
Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Chil...
Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Chil...
Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Chil...
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Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Child’s Mandate

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Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Child’s Mandate

  1. 1. DRAFT – ConfidentialCONFIDENTIAL FOR EVERY WOMAN EVERY CHILD INNOVATION WORKING GROUP MEMBERS ONLY NOT FOR DISTRIBUTION Financial Innovation Landscape Research: Testing the Feasibility of Financial Innovation to Support Every Woman Every Child’s Mandate EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 1
  2. 2. DRAFT – ConfidentialACKNOWLEDGEMENTSThe author would like to acknowledge the support received from the PMNCH secretariatin particular Shyama Kuruvilla, Bjorn Henrik Axelson. In addition, he would like to thankAndrew Farnum of the Bill and Melinda Gates Foundation, Tone Rosingholm of JPMorgan, Andrew Taylor of Grand Challenges Canada, Ankur Vora of The Children’sInvestment Fund Foundation, Christopher Edgerton-Warburton of Lion’s Head Capital,Oliver Sabot of UN Commission on Lifesaving Commodities for Women and Childrenand Barbara Bulc, Global Development Impact.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 2
  3. 3. DRAFT – ConfidentialEXECUTIVE SUMMARYOne of the main motivations for creating EWEC and the Innovation Working Group(IWG) is a desire to drive increased private and public sector commitments to improvematernal newborn and child health globally. This is important not only for reducing coststo the public sector for interventions that will improve Maternal, Newborn and ChildHealth (MNCH) but also to increase MNCH sector sustainability by introducing market-driven mechanisms. A critical element in the delivery of increased contributions is thedesign and development of new financial mechanisms/investment vehicles/structures(hereinafter ‘structures’), through which increases in capital can flow into MNCHalongside core grant funding. An opportunity exists to attract funds to sustainableprojects that reach vulnerable groups by the creation of structures that make use of theglobal financial markets to attract and generate both public and private investmenttowards MNCH.Official sector flows -‘Innovative’ financial structures have generated an estimated USD57.1 bn in officialsector flows between 2000 and 2008, indicating its potential for raising significant newresources that could be provided in a more sustainable fashion. Innovative sources tofund development today include a wide range of different types of structures throughwhich public and private sector capital can flow towards improving developmentoutcomes. They are not limited to taxes, but include voluntary contributions, market-based mechanisms as well as a broad range of financial instruments including thematicglobal trust funds, public guarantees and insurance mechanisms, cooperativeinternational fiscal mechanisms, equity investments, growth-indexed bonds, distributionsystems for global environmental services, microfinance and mesofinance.Private sector flows -In tandem with the official sector flows, investment capital represents an even larger poolof potential financing for the global development community. Global financial stockstands at USD212 trn and is growing. More investment decision-makers are expected incoming years to consider environmental, social, and governance factors in theirinvestment policies, leading to more investment flows into structures that explicitly coverthe social/environmental/governance/ethical (ESG) profile of companies; these aretypically called socially responsible investments (SRI). An increasing amount of moneytoday seeks investments with positive ESG characteristics with the market globallyestimated at USD12 trn in 2012 ballooning to USD25 trn by 2015. Today 850 institutionalinvestors representing over USD30 trn have signed to the Principles for ResponsibleInvestment (PRI), an investor initiative in partnership with the UN Global Compact andthe UN Environment Programme Finance Initiative, using six principles in a voluntarysetting to encourage all types of investors to integrate ESG factors into their investmentpractice.Within this market for private capital, impact investments are emerging as an alternativeasset class and are intended to create positive impact beyond financial return. Suchinvestment structures need to support projects with compelling investments themes.There is no doubt that impact investing has been growing dramatically over the last fewyears and that growth is expected to accelerate with some forecasting the potential overthe next 10 years for invested capital of USD400 bn - USD1 trn.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 3
  4. 4. DRAFT – ConfidentialOpportunity for MNCH –Overall, the brief assessment of the SRI investment industry reveals no specific MNCH-themed investment products currently being marketed but that this sub-sector of thehealth sector has to date been included as part of wider health sector based investmentstructures in funds that seek to increasingly invest in healthcare, hospitals or childcarethemes, and/or that have a focus on primary health or services. Of funds that explicitlyseek to fund health-related themes, the Henderson Horizons Industries of the FutureFund is the one example of a mainstream institutional investment fund with an advancedapproach to seeking different healthcare models for investment globally – for example inprimary health and clinics in developing countries. The Allianz RCM WellnessFund “provides an opportunity for investments in companies driving positive change inthe global healthcare system”. But like other generic healthcare, wellness and lifestyletheme funds, it does not have a specific MNCH sub-sector focus so the opportunityremains open.In the impact investing industry, there exist a few investment funds for the health sectorbut these are in early days of development and investing (e.g. Africa Health Fund).According to JP Morgan research of 2,200 impact investments made over recent yearstotaling over USD4 bn, only 59 investments totaling just under USD90 million have beencompleted in the health sector - none of which solely focus on MNCH. Nevertheless,their research indicates a growing market for health sector investments and based ontheir review of existing and forecast market demand they also estimate that the totalhealth market for impact investment could be as large as USD18bn – USD123bn.Tried and tested models -Innovative financing approaches can address several key areas impeding efforts todeliver EWEC’s mandate. The research has considered existing and in-developmentstructures to channel more public funds, private capital (philanthropic and investment)for scaling up innovations, encourage cost reduction in new product and service deliverysystems, and address constraints in the value chain of delivering new services. Over 60innovative finance precedents of what other organizations similar to EWEC have done toexpand funding and consequently their impact horizons have been reviewed, many ofwhich appear to show promise for application to the MNCH sector. Accordingly, EWEC’smandate to improve MNCH could become a theme within such innovative financialstructures and thereby attract more capital, both philanthropic and investment, to closethe current gap in funding.Open thinking on investment models -Five very different models have been proposed for consideration to explore. All fivemodels will directly or indirectly, draw more attention to MNCH issues from investors, aswell as increase public and private sector capital flows to the sector and the EWEC IWGand its partners. The five presented to generate creative discussion are: The VentureCapital Value Chain Approach, The Product Development Partnership Facility, TheWorking Capital Credit Facility, The Major Company Equity Portfolio and The MajorIndex. Many more variants exist; the five described in the paper are for the purpose ofcreative discussion only and are not intended to be an exhaustive list of prescriptiveavenues of investigation. This research together with the accompanying EWEC IWGEWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 4
  5. 5. DRAFT – Confidentialdiscussion will clarify whether the conceptualization and refining of interesting models issomething that EWEC IWG will continue to explore and refine in the coming financialyear.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 5
  6. 6. DRAFT – ConfidentialOVERVIEWDespite the overall increase in development assistance for Reproductive Maternal,Newborn and Child Health (RMNCH), there remains a massive funding gap, which theGlobal Strategy estimates at USD88 bn for the 2011–15 period just for the 49 lowest-income countries. This funding gap includes not only what is needed for care duringchildbirth, postnatal care, prevention and treatment of childhood pneumonia anddiarrhea, and family planning, but also the large financing gap for underlying healthsystems.There has been however some positive news over recent years. A 2010 IHME reportfound that overall development assistance for health has risen dramatically, with donordisbursements increasing from USD5.3 bn in 1990 to USD23.8 bn in 2008 (and,according to preliminary data, to USD26.9 bn in 2010). Much of this increase is relatedto funding for MDG 6. Funding for HIV/AIDS, TB, and malaria grew from 4.4% to 34.0%of all development health aid between 1990 and 2008, and funding for HIV/AIDS alonerose from 3% to 26% of total health aid in this period (from USD0.2 to USD6.2 bn).Funding to RMNCH also increased, from USD0.95 bn in 1990 to USD3.1 bn in 2008.However, the share of RMNCH funding out of total development aid for health fell from17% in 1990 to 13% in 2008 (this is partly explained by the very large rise in funding forHIV/AIDS; if this HIV/AIDS funding was removed from the analysis, the share of RMNCHfunding out of total health aid would have been flat between 1990 to 2008).Consequently, one of the main motivations for creating EWEC was a desire to driveincreased private and public sector commitments to improve maternal newborn and childhealth globally. This is important not only for reducing costs to the public sector forinterventions that will improve maternal/child health but also to increase maternal/childhealth sector sustainability by introducing market-driven mechanisms. A critical elementin the delivery of increased contributions is the design and development of existing andnew financial structures that grow the capital flow into maternal newborn and child health,alongside existing and new core grant funding.Access to capital, cost reductions and sustainable local markets are essential for theability to scale up promising innovations. The global financial environment may well limitthe access to public capital for global health in the near-term future. Financing, not onlyfrom overseas development assistance and philanthropic capital, from investors andcompanies can therefore become more important.INVESTMENT LANDSCAPEMarket Size and Opportunity for Innovative FinanceInnovative fundraising for development generated an estimated USD57.1 bn in officialsector flows between 2000 and 2008, indicating its potential for raising significant newresources that could be provided in a more sustainable fashion.In March 2002, the Monterrey Consensus recognized “the value of exploring innovativesources of finance” and sparked what has become a far-ranging effort to pilot andimplement a variety of new mechanisms, mobilizing countries of different levels ofdevelopment to meet internationally agreed UN Millennium Development Goals. InEWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 6
  7. 7. DRAFT – ConfidentialMarch 2008, the Secretary-General noted that the “post-Monterrey period has seen aflourishing phase in the number and variety of new initiatives for financing development.In the context of a new spirit of partnership between developed and developing countries,various groupings have explored together innovative ways to increase financing fordevelopment. This partnership “modality” could increasingly become the distinguishingfeature of the exploring and implementing of new initiatives for financing development”.In the midst of a global financial and economic crisis, it is important to continue tosupport efforts in this new modality of international development cooperation in light ofthe creativity that has been unleashed building on consensus for enhanced cooperationin the revenue-raising side and the potential for large scale funding that could begenerated.The first concrete outcome in the innovative financing framework came with thepublication of the Landau report in 2004. It identified the feasibility of new financialsources such as solidarity levies and market-based mechanisms that could becoordinated internationally but implemented at a national level. In 2005, the Declarationon Innovative Sources of Financing for Development was endorsed by 79 Heads ofState at the United Nations. This high-level declaration has been regularly readdressed,at the call of the Leading Group on Solidarity Levies to Fund Development, which wasrenamed in May 2009 as the Leading Group on Innovative Financing for Development.Now, the pilot phase is completed. Several structures are in place and new ones arebeing planned beyond the initial activities in the health sector. Innovative sources to funddevelopment today include a wide range of different types of structures. They are notlimited to taxes, but include voluntary contributions, market-based mechanisms, andloans guarantees as well as levies. They are characterized by being stable, long-termand complementary to official public aid and oriented toward widening the sharing of thebenefits of globalisation. New actors have also emerged. The topic of innovativefinancing has received considerable international attention, in particular through the workconducted by the High-Level Task Force on Innovative International Financing for HealthSystems, as well as the Leading Group. The concept of innovations now extends tosuch diverse forms as thematic global trust funds, public guarantees and insurancemechanisms, cooperative international fiscal structures, equity investments, growth-indexed bonds, countercyclical loans, distribution systems for global environmentalservices, microfinance and mesofinance, and so on. Tailoring these instruments to thespecific needs and vulnerabilities of the international community and well-identifiedmarket inefficiencies remains one of the ongoing challenges of development finance.Much progress has been made in terms of both practical accomplishments andinternational mobilization since then and innovative sources of financing for developmenthave been recognized at the highest level in a number of multiparty declarations.In tandem, investment capital represents an even larger pool of potential financing forthe global development community. Global financial stock stands at USD212 trn and isgrowing. In the developing world, meanwhile, rapid economic growth is creating animmense amount of new wealth. Savings in Asia, apart from Japan and Australia, areexpected to increase by 100% to USD6trn in the next three years, according to CerulliAssociates, the research house. A host of different models is emerging, from tinyspecialists with a few hundred million dollars of assets to retail giants such as Fidelity orhybrids such as the Bank of New York Mellon, which has more than USD1 trn of assetsspread among a collection of boutique managers.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 7
  8. 8. DRAFT – ConfidentialEmergence of Sustainable InvestmentAs Al Gore’s recent thought piece argues, the business of asset management in the 21stcentury happens in a changing socio-economic environment, suggesting investment inthe context of “Sustainable Capitalism”.“To address these sustainability challenges, we advocate for a paradigm shift toSustainable Capitalism; a framework that seeks to maximise long-term economic valuecreation by reforming markets to address real needs while considering all costs andstakeholders… governments can contribute significantly by, among other things,developing key infrastructure and policy frameworks. Programmes related to humanrights, public health and education are just some of the essential pillars necessary tohelp support the private sector’s transition to a more sustainable model.”More investment decision-makers are expected in coming years to considerenvironmental, social, and governance factors in their investment policies, leading tomore investment flows into structures that explicitly cover thesocial/environmental/governance/ethical (ESG) profile of companies; these are typicallycalled socially responsible investments (SRI). Trillions of dollars today seek investmentswith positive ESG characteristics. Sustainable investment is an investment theme whereESG factors are explicitly integrated into investment practice. Investment structures withspecific ESG objectives have increased. There are an increasing number of sustainableinvestment products from both mainstream and boutique investors. The most recent bi-annual survey of ESG investment structures in the US published in 2010, identifiedUSD3.1 trn in assets under management (AUM), while in Europe over USD5 trn hasbeen reported. In 2012 a global study is underway, and expectations are that the globalAUM will have risen to over USD12 trn when the results are released in December 2012,with at least USD450 bn is in emerging markets. Some analysts predict that this couldtop USD25 trn by 2015. Today 850 institutional investors representing over USD30 trnhave signed to the Principles for Responsible Investment (PRI), an investor initiative inpartnership with the UN Global Compact and the UN Environment Programme FinanceInitiative. This uses six principles in a voluntary setting to encourage all types ofinvestors to integrate ESG factors into their investment practice. The Carbon DisclosureProject’s CDP 9 in 2011 counted over USD78 trn AUM from about 655 institutionalinvestors focused on climate change impacts, counting carbon footprints revealing therisk in their investment portfolios. But not all Millennium Development Goals, and theissues they represent, receive investment interest.Impact investment MarketWithin the market for private capital, impact investments are emerging as an alternativeasset class and are intended to create positive impact beyond financial return. Suchinvestment structures need to support projects with compelling investments themes.In summary, impact investments are investments designed to create positivedevelopmental impact beyond financial return. Although the term spans a wide variety ofinvestment structures and sectors, they can be defined through the followingcharacteristics:EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 8
  9. 9. DRAFT – Confidential Investments intended to create positive impact beyond financial return Provide Capital Expect Financial Returns •  Transactions currently tend to be private •  The investment should be expected to debt or equity transactions return at least nominal principal •  More publicly traded investment •  Donations are excluded opportunities will emerge as the market •  Market rate of marketing beating returns matures are within scope …to generate positive social and/or Business designed with intent… environmental impact •  The business into which the investment •  Positive social and/or environmental is made should be designed with intent impact should be part of the stated to make a positive impact business strategy and should be •  This differentiates impact investments measured as part of the success of the from investments that have unintentional investment positive social or environmental consequences Source: JP Morgan research December 2011, interviews, analysis 1Impact investments span a wide range of activity both in terms of financing structures, aswell as the sectors that they seek to support. Sectors that figure most prominently in thespace include agriculture, health, housing, education and mobile technology. While therehave been innovative concepts such as the International Finance Facility forImmunization (IFFIm) bonds which have raised more than USD3 bn for the GAVIAlliance’s immunization programs, the majority of investments are private debt andequity instruments which run the gamut from low interest loans to agriculturalcooperatives to high risk/high return investments in new technologies which mirrortraditional venture capital.Types of Investors -Although all investors in the impact investing space share the vision of combiningfinancial returns with positive social/investor returns, their motivations and emphasis oneither of those metrics tends to place them into two broad groups:1. Financial First Investors: These are investors who seek to optimize financial returns with a floor for social/environmental impact. This group tends to consist of commercial investors who search for investment structures that offer market rate returns and simultaneously yield some social/environmental benefit. They can accomplish this by integrating social and environmental value drivers into investment decisions (e.g. Development Finance Institutions such as the IFC and OPIC), by looking for high returns in a way that leads them to create some social value (e.g. clean technology funds), or in response to regulations or tax policy (e.g. the Green Funds Scheme in the Netherlands or affordable housing in the U.S.).EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 9
  10. 10. DRAFT – Confidential2. Impact First Investors: These investors primarily aim to optimize social or environmental returns with a financial floor. This group considers social/environmental benefit as their primary objective and are willing to accept a wide range of returns, from return of principal (e.g. Acumen Fund) to market rate (e.g. Ignia). This group is also willing to accept a lower than market rate of return in investments that may be perceived as higher risk in order to help reach social/environmental goals that cannot be achieved in combination with market rates of financial returns. !"#$"%&()*(+$,-.&(+%/"&)0 1+21 78%-%.8-9(780&( +%/"&)0(EE !)9"9<(:"&;0% 4,&8$8?"(*8%-%.8-9( =->8$8?8%#( 0"&;0%(F8&G(-%( 8$,-.&(*9))0 +%/"&8%# +$,-.&(780&( +%/"&)0(EE +$,-.& 6-0#"&(78%-%.8-9(:"&;0% 4,&8$8?"().8-9( +%/"&$"%& 8$,-.&(F8&G(-( *8%-%.8-9((*9))0 7+3@3A+@B(7B44: B-<"0"H(!&0;.&;0" C%)$8%-9(,08%.8,-9D +$,-.&(79))0 IG89-%&G0),< 3435 3435 6-0#"&(!).8-9(+$,-.& 1+21There is also the possibility of “Layered Structures” where both types of investors worktogether, blending different types of capital with different requirements and motivations.In this structure, Impact First investors accept a sub-market risk-adjusted rate of returnenabling other tranches of the investment to become attractive to Financial Firstinvestors. This symbiotic relationship allows Financial First investors to achieve marketrate returns and Impact First investors to leverage their investment capital thus achievingsignificantly more social impact than they would if investing on their own. One shouldalso note that these structures can also include purely philanthropic organizationscombining their grant money with Financial and/or Impact First investors to generatehigher levels of impact than any of those institutions could achieve on their own.Size of Market –The current and potential size of the Impact Investing market is probably the mostcontroversial aspect of the sector. Although exact numbers are hard to ascertain, thereis no doubt that impact investing has been growing dramatically over the last few yearsEWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 10
  11. 11. DRAFT – Confidentialand that growth is expected to accelerate. The Monitor Institute estimates that impactinvesting could be a USD500 bn industry over the next decade. A November 2010research report from J.P Morgan looking at selected businesses within only 5 sectors –housing, rural water delivery, maternal health, primary education and financial services –is even more bullish, forecasting the potential over the next 10 years for invested capitalof USD400 bn - USD1 trn and profit of USD183 - USD667 bn.Microfinance is the most mature of the impact investing sectors and has beeninstrumental in driving interest in impact investment in general. On the positive side, wehave seen how, despite the financial recession, foreign investment in microfinance hasgrown explosively over the last five years, increasing from roughly USD2 bn in 2005 toUSD13 bn in 2010.A number of foundations have entered the space with significant funding behind them. In2009 the Gates Foundation announced that it would seek to leverage its grant givingwith social investments from its endowment, and that their initial commitment to impactinvesting will be USD400 million. The same year, the Kellogg Foundation alsoannounced that it would dedicate USD100 million to “mission-driven investing”, USD25million of which would be for international investing. A number of other foundations, bothnew and old have also got into the act with Rockefeller Foundation, Soros EconomicDevelopment Network, Omidyar Network, Skoll Foundation and the Children’sInvestment Fund Foundation (CIFF) among the prominent players. The impact investingworld has also attracted a number of DFIs, with the IFC being most prominent amongstthem. Although they have for the most part shied away from direct investing, they haveplayed a catalytic role, both as funder and as chief promoter, in some of the newerimpact investment funds such as the Africa Health Fund and Leapfrog.One important sub-note to the impact investing market one must remember is that overrecent years several social investment structures have been created where theunderlying project and/or security to which the facility invested had little or no link to thedesired development outcome. In these cases limited funding has been raised andconsequently the respective structures’ sustainability is limited. Moreover, it is evidentfrom interactions with the investment community that a programmatic track record ofachieving impact, may it be for health or some other development outcome, is of greatimportance to investors.Making the Investment Case for Maternal Newborn and Child HealthIf MNCH fits into this segment of the investment marketplace where ESG is integratedinto investment themes (and increasingly ESG is being integrated across all portfolios),then one may make a case for the need for more investors to be thinking of the MNCHtheme as an investable theme – one that generates investment returns, especially whereinvestments seek opportunities in developing countries and emerging markets. Forexample, the UN Secretary Generals describes “[t]he private sector, for its part, isbeginning to find that sponsoring innovation in the health systems of developingcountries serves its long-term interests by spawning new industries or yielding newgenerations of healthy consumers.” The investable value proposition must make thecase how paying customers will benefit from the MNCH intervention or product.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 11
  12. 12. DRAFT – ConfidentialNew investment structures may want to exploit the MNCH theme. Investable themeshave characteristics of simplicity, accessibility and market-entry timing, where a valueproposition is created that offers a compelling case for why investment should be placedwithin the theme. The investment managers offering the investment structure must havethe competency to exploit the investment theme and its opportunity, and sufficient capitalmust be raised to fund the strategy – investment management is an expensive businessand requires scale. Current examples of new or emerging themes as investment ideasinclude: commodity type (e.g. carbon dioxide emissions); company characteristics (e.g.corporate governance); natural capital themes (e.g. water, biodiversity); market niche(e.g. clean technology, wellness, agriculture/food security); and geography (e.g.Vietnam).The healthcare sector is vast, and “there are many large and small companies to choosefrom in various industries.” Investment strategies marketed to investors today focus oninvestment that generates cash-flow, for example, in companies that operate across thehealthcare continuum, including the pharmaceuticals, medical devices, healthcareservices and healthcare IT sectors. Investment firms offering these opportunities includeprivate equity funds Altaris, Apposite Capital and NewSpring Capital, hedge fund PerellaWeinberg Partners, GE healthymagination fund, and mutual funds Invesco Global HealthCare Fund, Delaware Healthcare Fund and Putnam Global Sector Healthcare Fund.MNCH may be covered in funds that seek to invest in healthcare, hospitals or childcarethemes, and/or that have a focus on primary health or services. Of funds that explicitlyseek to fund sustainability themes, the Henderson Horizons Industries of the FutureFund is the one example of a mainstream institutional investment fund with an advancedapproach to seeking different healthcare models for investment globally – for example inprimary health and clinics in developing countries. The Allianz RCM WellnessFund “provides an opportunity for investments in companies driving positive change inthe global healthcare system”. But like other generic healthcare, wellness and lifestyletheme funds, it does not have a specific MNCH sub-theme. Overall, the briefassessment of the investment industry reveals no specific MNCH-themed investmentproducts currently being marketed but that this sub-sector has to date been incorporatedas part of wider sector based investment structures.Research and analysis providers that sell their analysis to investment managers to usein building their portfolios include ESG-specialists like MSCI ESG, Sustainalytics, EIRIS,Oekom, Responsible Research and GES as well as the research teams within majorsell-side broker houses like Deutsche Securities, Goldman Sachs, JP Morgan Chase,Societe Generale, and Credit Suisse all have healthcare analysts. The extent ofcoverage in 2012 of MNCH as a specific sub-sector within overall health sector does notappear to exist.In the impact investing industry, examples of structures funding MNCH or healthcare-related work may be extrapolated from some efforts to fund poverty, socialentrepreneurs, and other bottom-of-the-pyramid (BOP) directed funding, and impactinvesting funds with generic healthcare themes. More specifically, there exist a fewinvestment funds for the health sector as seen in Annex 1 but these are in early days ofdevelopment and investing. According to JP Morgan estimates of 2,200 impactinvestments totaling over USD4 bn only 59 investments totaling just under USD90million have been completed in the health sector over recent years. Nevertheless, theseestimates indicate a growing market and based on their review of existing and forecastmarket demand they also estimate that the total health market for impact investment isEWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 12
  13. 13. DRAFT – Confidentialgrowing and could be as large as USD18bn – USD123bn. Regarding the opportunity tocreate investment structures surrounding the MNCH theme, interviews with the financialcommunity suggest there is a growing appetite for investments in the health sector. It isimportant to note however the appetite lies in investing along the health sector valuechain given the attractive returns both socially and financially. Therefore, whenconsidering potential investment structures one cannot be too restrictive as to whatmarkets investee companies can produce products/services for (i.e. solely for womenand/or children) but to be accommodating so as to ensure the entire market opportunitycan be realized by the investee company.A key determinant of the mix of mainstream investors wanting an investment return andphilanthropic investors wanting some level of return together with material social impact,depends upon the underlying components of the investment, the investment returnexpectations of the investors/philanthropists, and the degree to which MNCH is seen asa new megatrend impacting all elements of the health care chain, from medicalequipment makers, to biotech, to distribution, to hospitals. Any future investigation byEWEC and its partners will need to analyse the market potential more completely in linewith the various financial structures explored within this paper.EWEC’s mandate to improve MNCH could become a theme for such innovative financialstructures and thereby attract more capital, both philanthropic and investment, to closethe current gap in funding.UNDERSTANDING THE INVESTMENT STRUCTURES IN PRACTICEMethodology!To identify innovative financing structures for this analysis, a literature review and selectexpert interviews have been undertaken. The review encompassed both structures thatare currently operational and those that remain proposals yet to be implemented. Not allstructures identified were included in the final list, only a selection. As such, the list ofstructures is meant to be representative, and not entirely exhaustive of all innovativefinancing options available.In order to determine which financing initiatives the EWEC IWG should focus on, a set ofgoals and guiding principles that support a high-level decision making framework shouldbe defined. The criteria for this could include i) potential impact on public health, ii)amount of capital generated/leveraged, iii) ability to develop and implement and iv)financial sustainability, amongst others.In addition to these criteria, a key aspect of creating any new structure is determining thebest metric for measuring the social return on investment that would be generated.While such metrics are relatively well developed for investment themes such as theenvironment or governance, additional work is needed on health metrics (e.g., DALYs).After determining the list, each structure was placed into one of the 3 structurecategories, namely Voluntary Contributions, Taxes/Levies and Financial Instruments.When a given structure spanned more than one category, it was assigned it to thecategory considered most directly captured its primary approach and purpose. The listEWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 13
  14. 14. DRAFT – Confidentialof financial structures considered for this research is included in the tables found inAnnex 1.Overview of FindingsInnovative financing approaches can address several key areas impeding efforts todeliver EWEC’s mandate. To date, the research has considered new structures tochannel more public funds, private capital (philanthropic and investment) for scaling upinnovations, encourage cost reduction in new product and service delivery systems, andaddress constraints in the value chain of delivering new services. Specifically theresearch looked at modalities in the following categories:Voluntary Contributions -Typical modalities of Voluntary Contributions have included credit card rounding plans,lotteries and Cause-Related Marketing schemes. For these to be successful a strongbrand is critical to raise the contribution levels and the link between the contribution andthe cause to be funded needs to be clear. Without a clear link the contribution will not besustainable, and it will be eroded by competition.Examples of Voluntary Contribution funding structures include -Product RED: Funding secured through high-profile leveraging of major global brands Added value Funds direct to 100% for HIV Further (red) Direct private to purchase Global Fund programs support sector support decision Smart shopper When shopper The Global The The Result? notes that chooses to Fund uses contribution Shopper has (product)RED purchase the 100% of this helps people new items from top (product) RED money to affected by (product)RED brands cost the items the finance HIV HIV in Ghana, items from same as non- makers send health and Swaziland, favorite (product)RED a contribution community Rwanda, brands at the items. But of up to 50% support Lesotho and same time choosing the of profits programs in other helping to (red) items directly to the Africa, with a countries to eliminate means that up Global Fund – focus on be granted AIDS in Africa. to 50% of not to (red). women and (red) money in They can profits made children. the future. continue to from those help when sales will go to they choose help eliminate other (red) AIDS in Africa. products or donate directly to the Global Fund. Source: The Global Fund press release, analysisTaxes/Levies -EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 14
  15. 15. DRAFT – ConfidentialInnovative structures in this category aim to provide additional funding through thecreation of an additional tax or levy structure.Examples in this category include -UNITAID:The solidarity contribution or tax on airline tickets represents 70% of UNITAIDsfinancial base and is complemented by multi-year budgetary contributions from anumber of member countries.The tax is applied to all flights departing from countries that impose it and is paid bypassengers when purchasing their tickets, normally as an addition to existing airporttaxes. Airlines then are responsible for declaring and collecting the levy. Passengers intransit are exempt, thus avoiding any further administrative burden for airports inparticipating countries. The solidarity levy fully respects countries tax sovereignty. Forpassengers, the cost of the air tax is very low compared to the total cost of a ticket; it canrange from USD 1 for economy-class tickets to USD 10 and USD 40 for business andfirst-class travel. Different rates can be set according to a countrys level of developmentand there is an extra option to vary the charge according to the distance traveled. Forexample, some countries in Africa have chosen to impose the levy only on internationalflights or on business and first-class tickets. As of September 2011, nine of UNITAIDs29 member countries were implementing the airline tax: Cameroon, Chile, Congo,France, Madagascar, Mali, Mauritius, Niger, and the Republic of Korea. Norwayallocates part of its tax on CO2 emissions from aviation fuel to UNITAID.Financial instruments -Financing from investors and increased investment by companies could be moresignificant and sustainable sources of funding than donor money.a) Generating new resources – Structures to mobilize financing from investors and companies, leading to more investment flows into structures that explicitly cover the ESG profile of companies and impact investments. Asset classes of this nature include active/passive publicly traded equity/debt funds, private equity funds, social impact bonds, revolving funds, index-linked products, receivable financing structures and procurement structures.Examples of these include -International Finance Facility for Immunization:EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 15
  16. 16. DRAFT – Confidential International Finance Facility for Immunization accelerates the availability and predictability of funds for immunization International Finance Facility for Immunization (IFFIm) !  Created 2006 at initiative of U.K. government as a multilateral development institution !  Created to accelerate availability of predictable, long-term funds for health and immunization programs through GAVI !  Sells bond on the international capital markets thereby increasing immediately available development funds, in exchange for expected long-term grant payments of its sovereign sponsors !  Exposures to IFFIm are assigned a 0% risk Structure Impact Donors World Bank !  Front-loaded support for strategic Treasury immunization programs: UK $3bn (23 yrs) –  Measles Initiative France $1.7bn (20 yrs) Management –  Yellow Fever Initiative Services –  Global Poliomyelitis Eradication Italy $600M (20 yrs) Manages bond proceeds as liquid Campaign Norway $264M (15 yrs) –  Maternal and Neonatal Tetanus Funding investments until Spain $240M (20 yrs) they are needed Elimination Campaign Netherlands $114M (8 yrs) for programs in –  Supporting pentavalent vaccine introduction and other new recipient countries Sweden $38M (15 yrs) vaccines South Africa $20M (20 yrs) –  GAVI health systems, Notes immunization services, and pro- IFFIm issues AAA/ injection safety support Notes ceeds Aaa/ AAA-rated issues Disburse- bonds in the !  Raised more than $ 3 billion for ments international capital the GAVI Alliance s immunization markets programs as of Feb 2011 Noteholders SOURCE: IFFIm website; DfID; expert interviews; analysisCommons Global Health Fund: Commons Global Health Fund is supported by a Technical Assistance facility to de-risk investment portfolio Commons Global Health Fund (CGHF) •  Commons Global Health Fund is a $100M healthcare venture capital fund being launched by Commons Capital Oxford Bioscience Partners, with support from the Bill and Melinda Gates Foundation. •  Pioneering fund will invest in entrepreneurial companies developing cutting-edge healthcare technololgies for « dual market » use. •  Technical Assistance facility supported by foundations to de-risk the underlying portfolio companies. !"#$%"&(%")*&+,-./#01&2#%0,3&7%%,#)(,1&E6-.&,F:,3-%&G3"#& Team: Joint venture between a leader in !"##"$%&(")*(&+,*(-.&/0$1& double-bottom –line venture capital, -.,&H6((I?,(6$1*&*-,%&/"0$1*J"$K&D+LK&!(6$-"$& /"0$1*J"$K&MNON&*6-"$1,&!,$-3,&G"3&7PB<&O,%,*35.&*$1& Commons Capital and Oxford Bioscience >105*J"$&QP$16*RK&!.,#)6"&B6*A$"%J5%S&;$6C,3%6-T&"G& Partners. U6#)*)E,N& 4,5.$65*(& Technical Assistance group: The mission of the Technical Assistance Group is to provide highly 2,$-03,&/0$1& 7%%6%-*$5,& targeted expertise enabling the Fund’s portfolio companies to develop health innovation that will reach global helath markets and achieve widespread public health imnpact through sustainable business models. 8"39"(6"&!"#:*$6,%& Partners for Technical Assistance: Commons Capital is already working with RTI International, JSI Logistics, The Clinton Foundation (CHAI), EngenderHealth, Concord Health Strategies and the WHO. ;<=>;& >#,3A6$A=B,C,(":6$A& Investment stategy: ?*3@,-& D"3(1&!"0$-36,%& Size: $100M Number of Investment: 10-12 ($5-10M per company) Return expectation: Competitive venture rate returns (15-25%) Representative Investments: SOURCE: Commons Capital website, press release, interviews; analysisEWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 16
  17. 17. DRAFT – ConfidentialAGRA Fund: African Agriculture Fund is supported by donors first loss guarantee and technical assistance to catalyze private sector investment African Agriculture Fund (AAF) !  Private Equity fund created in 2009 in response to the 2008 food crisis by a group of European and African DFIs !  Objective is to support private sector companies that implement strategies to enhance and diversify food production and distribution in Africa by providing equity funding and technical assistance !  Three key features: (i) DFIs to take first loss to provide accelerated return to private investors; (ii) curve-out portion of fund specifically for SMEs as a sub-fund; (iii) Technical Assistance Facility to complement capability building Investors Investees Development financial institutions AAF Up to $20 million per portfolio ($300-500M target) company in: First loss guarantee !  Food production, processing and distribution in cereals, livestock farming, dairy, Initial !  Regular fund fruit and vegetables funding !  Crop protection !  SME sub-fund !  Logistics ($60M target) !  Fertilizers !  Seeds !  Edible oils Focusing on smallholders and Invest- cooperatives ment Private investors Technical Assistance Facility ($14M) Accelerated return Initial close on $135 M in Nov 2010 SOURCE: AAF press release (Nov 29, 2010); websites; interviews; analysisThe Dow Jones Global Fund 50 Index:The Dow Jones Global Fund 50 Index measures the performance of the largestcompanies that support the mission of the Global Fund. A portion of revenues generatedthrough the licensing of the index will go to the Global Fund. The index universe ofeligible securities is created according to the methodology of the Dow Jones Total StockMarket Indexes. The top 50 companies that contribute to the mission of the Global Fundare selected for the index. The collaboration between Dow Jones Indexes and theGlobal Fund enables Dow Jones Indexes to create a new socially conscious measureand generate income for The Global Fund. A similar initiative has been created by theLondon Stock Exchange (FTSE4Good) whereby it contributes monies to UNICEF basedon index fee income.UNHCR Kashmir Relief Note:Over recent years several social investment structures have been created where theunderlying project and/or security to which the facility invested had little or no link to thedesired development outcome. In these cases limited funding has been raised andconsequently the respective structures’ sustainability is limited. For example, theKashmir Relief Fund a joint project launched by the UN High Commissioner forRefugees (UNHCR), Zurich-based Société Générale Corporate & Investment Banking,and derilab s.a., a derivatives company allocated portion of invested capital to supportdisaster relief. For the Kashmir Relief Note, at inception, a 2 per cent fee wasEWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 17
  18. 18. DRAFT – Confidentialautomatically donated to UNHCR’s earthquake relief operations. However, the offeringwas not deemed a financial success (estimated USD 25,000 raised) given the fund’sunderlying investments were in no way related to the region or burden.b) Reduce costs - Innovative financing can reduce the costs of certain interventions (i.e. maternity-related treatments, insurance, diagnostic equipment). New financing instruments can contribute to lower the cost of such solutions by stimulating research and development by companies into new product/service delivery systems, encouraging innovations to make distribution networks more efficient, and/or spurring improvements in production technologyExamples of these include -Advance Market Commitment for Pneumococcal Vaccines: Advance Market Commitments (AMCs) try to overcome upfront investment challenge by future volume and price guarantees Advance Market Commitments (AMC) for Pneumococcal vaccines !  Effort launched in 2009 to stimulate the development and manufacture of new vaccines for developing countries !  Donors commit funds to guarantee the price of vaccines once they have been developed, to provide incentives to manufactures to invest in R&D, and to expand manufacturing capacity; in exchange, manufacturing companies sign a legally-binding commitment to provide the vaccines at a price affordable to developing countries in the long-term !  Country government can budget and plan for their immunization programs knowing that vaccines will be available in sufficient quantity and at a price they can afford over the long term, with some co-payments Impact Financing !  4 suppliers submitted the offer, and GSK Global partnership and Pfizer agreed to supply pneumococcal vaccines through the AMC in March 2010 !  GSK introduced its first vaccine $1.5 Billion $1.3 Billion (Synflorix™) to Kenya in Feb 2011 at 90% discounted price Operations An Independent !  The long-term price of pneumo vaccine WHO establishes for developing countries will be $3.50/ Assessment UNICEF procures the target product dose (vs. >$70/dose in industrialized Committee (IAC) new vaccines, and profile (TPP) – countries currently) will approve the countries have to minimum product pneumo vaccine submit request specification !  Anticipated to help 60 countries to once developed introduce pneumo vaccine by 2015 and prevent more 7 million childhood deaths by 2030 SOURCE: GAVI web site; AMC web site (http://www.vaccineamc.org/); press search; analysisc) Address constraints across the value chain of delivering new products and services to women and children at the base of the pyramid, such as high production and distribution costs, low or fluctuating demand, and small effective markets. The potential magnitude and scope of innovative finance structures to attract investment capital by reducing constraints across the value-chain, sharing risk, and building sustainable markets are significant. Re-defining the marketplace, which is often small and conducive to high-cost value-added services, may make it easier for low- cost/high-volume products. Potential structures to overcome market bottlenecks and help to make products and services more available, and thus also attract more localEWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 18
  19. 19. DRAFT – Confidential spending creating more sustainable local markets.Examples of these include -Vitamin and Mineral Premix Procurement Credit Facility: Global Premix Procurement Facility to ensure the quality of vitamin and mineral premix used by industry and governments in emerging markets Global Premix Procurement Facility (GPPF) !  Effort launched in 2009 by Global Alliance for Improved Nutrition (GAIN) to address many challenges in the premix procurement process, such as premix costs and quality assurance. !  To address these barriers, a more efficient system is needed to procure premix at the best price, through transparent and efficient processes. !  Global Premix Procurement Facility (hereafter referred to as GPPF) entails four distinct functions: 1) Certification Process which establishes industry-wide standards and guidelines for premix. 2) Procurement Facility that makes premix more easily accessible to countries and the private industry engaged in fortification. 3) Revolving Fund Mechanism helps projects finance their premix purchases (USD75m financed to date) 4) Grant Mechanism that provides premix for fortification of food products used to reach vulnerable groups, including public sector programs and emergencies. !  To date, the GPPF has procured and financed over USD100m worth of vitamin and mineral premix. SOURCE: GAIN website, interviews; analysis 6Pledge Guarantee for Health:The United Nations Foundation (“UNF”) constructed a proof of concept for a novelfinancing structure, the Pledge Guarantee for Health (“PGH”) that provided short-termworking capital to recipients of donor funds to smooth and increase the predictability offinancing for health commodities. The proposed PGH supported aid recipients inarranging pre-financing through local banks of health commodity purchases, initiallyfocused on reproductive health commodities. Transactions consisted of short-term (3-12month) loans provided by a bank or other financial institution against an existingcommitment of a donor to an aid recipient, such as a Ministry of Health or NGO. Theapproach represents a fairly simple financing structure, allowing for bridge loans to aidrecipients during the gap between commitment by donors and actual cash disbursement.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 19
  20. 20. DRAFT – ConfidentialThe associated cost savings generated from eliminating inefficient procurementpractices (e.g., emergency shipments, expedited production) were estimated to bebetween 12-21%. The PGH was not successful during its pilot phase due to a failure toexecute transactions in an effective and commercial manner.Greater attention is now being paid to innovative financing structures and the role theycould play in maintaining and expanding the impact of global health programs. Thisgrowing interest is in part due to worries about the availability and sustainability of globalhealth assistance made through traditional channels, especially given an environment offiscal constraint prevalent in the wake of the recent global economic crisis. While notexpected to serve as a replacement for traditional health financing, such structures mayhelp to supplement existing funding, increase its effectiveness, and incentivizeinnovation in targeted areas.It is important to note that the innovative finance structures outlined in this paper may notonly generate new resources for EWEC IWG and its partners to deploy throughprograms but also would increase the flow of investment capital to efforts undertaken byprivate companies, thereby helping to reduce the funding gap for addressing MNCH.Much of the current conversation around innovative financing to address public healthconcerns is focused on raising funds for public institutions’ programs as previouslymentioned (e.g. those recommendations from the Taskforce on Innovative Financing forHealth Systems that will support government health programs and the MassiveGoodcampaign to support UNITAID). While such efforts are needed and have the potentialfor generating new funds to support these institutions’ initiatives, there is also significantpotential in mobilizing investment capital that will be deployed by private actors toimprove MNCH as seen by some of the new investment structures already launched.This additional investment capital could come from a range of sources, includingstrategic investors, institutional investors such as pension funds, multilateral financialinstitutions, social/impact investors, foundations, and others. As previously mentioned,EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 20
  21. 21. DRAFT – Confidentialdifferent types of investors have different risk/return profiles and some place a greateremphasis on social returns, so each innovative finance structure will likely appeal to adistinct subset of investors.MARKET CONSTRAINTSIn addition to generating new resources, innovative finance initiatives can addressmarket constraints along the value chain that prevent the private sector from moreeffectively addressing MNCH. In fact, according to the World Bank, innovative financinghas played a more significant role to date in providing tools to solve developmentproblems than it has in generating additional resources. The potential magnitude andscope of innovative finance structures to attract investment capital by reducingconstraints in the health sector, sharing risk, and building sustainable markets aresignificant. When constraints are reduced or eliminated, health sector companies willinvest more of their own resources and investors will see more opportunities to deploytheir capital at lower risk.Structures that overcome market bottlenecks and help to make health sector productsand services more affordable would also attract more spending from low-incomeconsumers. The large size of the global health care market for low-income consumers—estimated at USD158 bn and growing—should be a significant selling point in effortsboth to attract more private capital and to encourage more innovation by health sectorcompanies, improving the prospects of having a sustainable impact.EWEC IWG and its partners already have considerable knowledge of differentproduct/service markets and the constraints that have prevented the private sector fromrealizing its potential to improve MNCH. These constraints affect both the supply ofspecific products and consumer demand for them. For some of these productcategories, additional research will be necessary to gain a more detailed understandingof the market and how financial structures could solve various problems. This is a keypart of designing any effective initiative. For instance, the creators of the AdvanceMarket Commitment (AMC) for a pneumococcal vaccine emphasize that a fullunderstanding of the potential market for such a vaccine, including the price that peoplewould be willing to pay, was essential in structuring the AMC so as to maximize itseffectiveness. Building on this experience, EWEC IWG has created a Task Forcelooking into sustainable business models that can better deliver health care to womenand children at the BOP. To date, the findings reveal many promising business modelsacross the value chain some of which face market constraints that possibly could beaddressed through some form of financing modality. Such structures could alleviateboth demand- and supply-side constraints along the health sector value chain. Aselection of ideas as well as other potential initiatives, are illustrated below some ofwhich are discussed in more detail in the following section:EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 21
  22. 22. DRAFT – ConfidentialInnovative Finance Structures Product Design and Manufacturing Research and Packaging Distribution Sales Development Supply Side: Access to Theme-Based Funds (e.g. Maternal and Child Health Fund) Capital Product Development Partnership Facility Constraints Lack of Advance Market Commitment innovation, high costs !"!##$ Innovation Fund (e.g. Scaling Grant Challenges Winners) Advisory Services Grant Facility (e.g. Catalysing Partnerships Along Value Chain) Risk Credit Guarantees (e.g. Working Capital Credit Facility ) Vouchers Demand Side Performance Based Mechanisms (e.g. Country-wide Insurance/Health Finance) Information/ Every Woman Every Child Index Incentives = Potential Structure Source: EWEC IWG Task Force on Sustainable Business Models, interviews, analysisOPENING THINKING ON IDEAS FOR INVESTM ENT INSTRUM ENTSTo date, the research has considered and collated some of the experience and expertisethat exists within EWEC IWG as well as that of some other key stakeholders. In so doing,innovative financing options and emerging initiatives have been studied to determinetheir relevance and applicability to challenges in the MNCH sector. These includestructures that have been designed and implemented to address a broader set ofdevelopment issues and other public health issues and which could be adapted to thissector. Such structures could alleviate both demand- and supply-side constraints alongthe MNCH care continuum.Few companies are currently involved offering products and services in the MNCHmarket for the Base of the Pyramid, making it difficult to find good investmentopportunities. Nevertheless, the EWEC IWG’s and the Saving Lives at Birth: A GrandChallenge for Development’s recent calls for proposals show that opportunities do exist.Some investment model ideas are presented below as a starting point for EWEC IWGconsideration. They would attract new investment flows or investors’ interest in MNCHand cover different types of investment opportunities, with different roles for EWEC IWGand its partners, and different levels of design and implementation complexity. There aremany models to explore, and this paper offers just five to test different parameters ofhow to build and what architecture to test which will best fit the demand from investors,the need for investment capital, industry players and EWEC IWG partners active in thisEWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 22
  23. 23. DRAFT – Confidentialspace. The five models are not all actual investment structures, but instead touch onaspects of the investment value chain, answering the question: what economic models,what business models, and what interested private and public sector players may beattracted to this theme? The five are not exhaustive, and many more models andvariations of the models may be explored. These five are to generate creative debate,namely: The Venture Capital Value Chain Approach, The Product DevelopmentPartnership Facility, The Working Capital Credit Facility, The Major Company EquityPortfolio and The Major Index.Model 1: THE VENTURE CAPITAL APPROACH : MATERNAL/CHILDHEALTH SHARED VALUE INVESTMENT FUNDFunding for the BOP: A fund – mostly private equity/debt, some credit by nature -making many smaller investments, many of which may fail, some will succeedspectacularly. A Technical Assistance Facility will be included along side the fund tosupport companies and thereby de-risk the portfolio of investments. The fund willnecessarily include a geographic mix of projects/investments, a mix of funding but thelargest portion from mission-based investors (institutional, sovereign and foundation).The goal is to channel funds to projects helping small-medium enterprise level, andleveraging the EWEC IWG members in each region to establish a footprint of projectsand criteria for selection into the portfolio.i • Example: EWEC+Rabo Bank Maternal/Child Health SME Fund • Holdings: to be decided. • Investors include mission-related investors like Gates Foundation, Rockefeller Philanthropy Advisors, ultra-high net worth clients of Geneva private banks and large ESG institutional investors (e.g. PGGM, APG). • EWEC IWG/partners role: verify maternal/child health component of investment decision (business positive impact). • Funds flow: This model offers a very direct injection into small-medium ventures with unproven or new business models, or models with little prospect of yielding returns to capital, but that do have a material measurable impact on the social need. The experience of some philanthropy funds is that insufficient deals or projects exist to invest into, and capacity constraints are more likely in the execution of project selection, reporting and management, than on capital raising. An established investment structure with 7-9 year horizon should offer a stable cash flow to promising ventures, enhancing EWEC mission and brand. • Similar models: IFC Global Health Fund, Calvert Community Investment Notes/Calvert Social Equity Funds, J.P. Morgan Bay Area Equity Fund, Commons Global Health Fund.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 23
  24. 24. DRAFT – Confidential Model 1: MATERNAL/CHILD HEALTH SHARED VALUE INVESTMENT FUND FO RD ISC US Potential structure for MNCH SVI SIO N Investors, Banks Governments, MNCH SVI Asset Management (MNCH Foundations, other SVI AM) is composed of 3 groups: partners –  Private Equity/Debt MNCH SVI Asset –  Credit Management –  Foundation !  The Capital Advisors Group ( CAG ), managed by bank, makes investments in MNCH value chain opportunities !  The Credit Group ( Credit ), managed by global banking partner, sources debt financing for MNCH SVI investment Capital Advisors Credit Group Foundation - Nonprofit opportunities Investment Group Commercial Bank Vehicle (Foundation, !  The Foundation, managed by EWEC members other Foundations/EWEC members/others, partners) provides grants, loan guarantees, and technical assistance for MNCH SVI investment opportunities Manages Private Providers of Debt Grants, Loan !  Objective is to support private sector Equity/Debt Pool of Capital/ Market Guarantees, Technical companies that as a core part of their Capital Interface Assistance operation is to implement strategies involving products/services that improve MNCH at the BOP globally by providing equity/debt funding and technical assistance MNCH SVI AM investment sources of capital (Equity, Debt, Foundation/Nonprofit) Low cost of capital = more attractive projects, better financial/social returnsThe table below illustrates some key opportunities for product and service innovationalong the “Continuum of Care” for RMNCH. The RMNCH Continuum of Care representsthe ideal delivery of integrated health services and interventions for mothers and childrenfrom pre-pregnancy through to delivery, infancy and childhood. A wide range of medicaltechnologies and other products are needed to put together comprehensive, integratedpackages of essential interventions and to provide integrated care for women andchildren. A Maternal/Child investment fund could focus on investments within the sectorsfound within this continuum. Investments will need to be in companies that bring tomarket products/services meeting the needs of MNCH sector as well as the needs of thebroader population.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 24
  25. 25. DRAFT – ConfidentialEWEC IWG would play a primary role in convening partners and filtering ideas. EWECIWG and its members attract new deals and pre-qualifies fund opportunities using theirexpertise in MNCH. Metrics for decision-making and impact evaluation may explicitlycover performance meeting health-specific needs e.g. what number of children may bereached by a new method of delivery of a medical device in sub-Saharan Africa?Model 2: MNCH PRODUCT DEVELOPMENT PARTNERSHIP FACILITYThe facility just discussed could play a significant role in steering additional capital intofirms so that they can better address MNCH. More funding is also needed specifically toencourage innovation and to reduce the risk to private companies that want to engage inresearch and development oriented towards low-income consumers. Several optionsare available for innovation facilities. One of the more promising approaches is basedon an initiative being developed by the International AIDS Vaccine Initiative (IAVI) tostimulate innovation and the introduction of new products on the market. It could havebroad applicability to companies’ work on products for maternal/child health market.Product development partnerships like IAVI have made significant contributions to thepipeline of products that address specific health issues in developing countries. Theypartner with governments, academia, pharmaceutical companies, biotech firms, andEWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 25
  26. 26. DRAFT – Confidentialdeveloping country governments to stimulate research and development. Traditionallytheir funding has come from government and foundation grants that have either beeninsufficient in size, short-term, restricted, or unpredictable.To address these shortcomings, IAVI has been developing a Product DevelopmentPartnership Financing Facility. Its premise is to capture a portion of the future value ofproducts in development and use that money now to finance research and development.It would do so by issuing bonds, the proceeds of which would finance current researchand development of new products. Future revenues generated by these products wouldat least partially pay off the bonds as they come due. This initiative relies on a portfolioapproach to new product development, in recognition that not all R&D efforts would leadto profitable products. This approach also avoids the need to “pick a winner” in advance.Official donors would help to guarantee the bonds, and they would pay a small premiumon their purchases of future products that would help to pay off the bonds. This premiumwould only be paid once a new product has been developed that meets a set ofestablished criteria. Model 2: MNCH INNOVATION PRODUCT DEVELOPMENT PARTNERSHIP FACILITY FO RD Provide ISC Loan US Guarantee guarantees loans SIO PDP Financing Bond N Donors Facility Markets Issue R&D bonds Funding Repayments Product Development PDP Premiums Royalties on their purchases Product Production Firm Official Sales Donors revenues Product Purchase Developing Developed Markets MarketsWithin MNCH, a structure modeled on this financing facility could be built to catalyzeproduct innovation focused on underserved markets, with the added dimension ofencouraging innovations in distribution systems to ensure that products are accessible totarget populations. These innovation efforts would potentially support the objectives ofseveral EWEC IWG partners. EWEC IWG could convene private and public sectorpartners to develop the facility and potentially provide either seed funding or arrange fora guarantee on the bonds issued to finance the facility.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 26
  27. 27. DRAFT – ConfidentialModel 3: HIGH LEVEL WORKING CAPITAL CREDIT FACILITY MODELThere exist many products and commodities that are very cost-effective interventions toaddress MNCH. At the same time, a number of barriers exist for countries in procuringthese products: access to suppliers; inflated prices; huge variance in quality; access toupfront capital for large purchases; governance challenges in the purchasing process;lack of quality assurance and monitoring of delivered products; and, often, the lack offunds to purchase the products. To address these barriers, there may be potential toestablish a new structure, a Working Capital Credit and Procurement Facility, tospecifically help partners in the developing world manage procurement of these productsand commodities that are essential in addressing the MNCH burden. FO Model 3: HIGH LEVEL WORKING CAPITAL CREDIT FACILITY RD ISC US SIO N Potential opportunity is to capitalise a central fund with one or two partners, which will serve as a guarantee to make country level loans at preferential interest rates. Central Process !C!*D E$-#,+-) !"#$%&"()*+,#-$&) B<?=#@) ./$-$,#++)0/,1)23456) *-+1#) F$-#,+-) B<?=#@) >1+,?8@)</"#9:+-") 5-$7)8-9:);/$-$,#++)8/,1) -+A/-,;)<-+1#) #9)<9=+-)&9$,)1+8$/&#)23456) */"#9:+-) B<?=#@) Country Level Process B""+"")<-+1#) !G+</#+)5+%#) 79-#(,+"") H+<9=+-@) */"#9:+-) 1+8$/&#")9,) &9$,)23456)EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 27
  28. 28. DRAFT – Confidential Credit Facility Roles & Responsibilities Roles and responsibilities need to be confirmed after initial discussions with partners EWEC IWG/Partners Credit Facility Partner Procurement/ Certification Agent •  Provide capital to guarantee •  Raise lending funds to •  Potential to add Procurement loans leverage EWEC IWG/Partners and/or Certification Agent to •  Participate in joint fundraising guarantee capital certify, procure and fulfill efforts •  Use local contacts to direct orders •  Market facility offering to win potential customers to facility •  Receive payment from potential customers •  Qualify and approve potential customers both prepaid and customers who ask for credit credit customers •  Determine whether customers want credit to pay for orders •  Make loans and monitor •  Pay suppliers •  Bear bulk of default risk, repayments commensurate with capital •  Manage debt recovery in provided event of default •  Manage FX risk •  Bear commensurate default risk to incentivise recovery •  Provide financial capacity building as needed to customers (depends on partner)Model 4: MAJOR COMPANY EQUITY PORTFOLIOLiquid asset classes: driving the majors to act, investment grade. Large-cap fundinvesting in large listed companies in the health sector (include large pharma, generics,medical devices, medical services) that are fairly well-known, being a mix of good andbad, across many countries. • Example: the EWEC+CREDIT SUISSE Large Cap Global Health Equity Fund • Holdings: to be decided. • Investors include CalPERS, Norwegian Government Pension Fund, Munich Re and packaging to retail investors through LODH, Pictet or Calvert. • EWEC IWG/partners role: input into filter for best practice MNCH-supporting programs and product marketing responsibility performance. Also driver for next generation MNCH products/services, although 3-5 years from the more immediate venture capital type. • Funds flow: This model offers a tool to direct major companies and an indirect injection into ventures that do have a material measurable impact on the social need. Potentially, this model may attract the most investor capital because it is similar to existing investment structures currently marketed in other ESG themes, such as the Generation IM/LODH joint venture on a sustainability theme in Switzerland. Being too similar may also be a major disadvantage for investors seeking new and innovative investment structures.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 28
  29. 29. DRAFT – Confidential This fund would seek to attract some of the one-in-ten investors with an interest in ESG factors, introducing MNCH as primary theme. • Similar models: WWF Living Fund, American Century Livestrong Portfolios, Deutsche Bank Global Fund Exchange Traded Fund.Model 5: THE MAJOR INDEXLeverage EWEC brand and/or media, own the opinions, create the conversation ofmissing investment, investment grade via potential index licensees. This idea model sitsalongside the actual investment flows, seeking to act as an arbiter of opinion regardingthose large or small, old or new, companies that play some part in the production anddistribution of products/services addressing MNCH. By creating an index of rankedcompanies based on criteria EWEC IWG approves, and delivered in conjunction withprofessional ratings agencies, the index is about attracting interest to the MNCH spacewith a mix of positive and negative assessments of players. The impact is less direct,ranking efforts by companies or existing investment structures to have a positive impacton the MNCH sector. Here the leverage of EWEC brand and/or media is the power: ownthe opinions, create the conversation of missing investment, bad investment, goodinvestment, no investment structure as such. • Example: EWEC+FORTUNE Healthy-50, EWEC+FAST COMPANY Healthy-90 • Holdings: No holdings, but a ranking of the best large and small companies respectively, using a mix of best EWEC IWG thinking on MNCH with an established ESG rating firm • Investors: None in the ranking, but license rank as index for index investment product sellers to sell to investment managers and investors. • EWEC IWG/partners role: expert opinion on better performance by large firms and emerging new MNCH solutions. • Funds flow: This model depends firstly on building the brand, then monetizing it over a 3-5 year window. At the systemic level, it is unclear how the market of opinion, and then investors, may choose to respond to the issue that the index highlights. Where the index idea proves attractive as an investment theme, the index may quickly and easily, with low involvement, license out the index for use by money managers as benchmark or buy-list. If the index gains credibility – perhaps over years (the Domini 400 is now 18 years old), the partnership that owns the brand would capture some fees or royalties, funding the organization or programs, or both. • Similar models: Fortune 100 Best Companies to Work For; CRO Magazine Business Ethics 100, Access to Medicines Index, Dow Jones Global Fund 50 Index, Forest Footprint Project, Carbon Disclosure Project, Access to Nutrition Index.EWEC IWG Financial Innovation Landscape Research Apr 20 2012.docx 29

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