Impact investment and blended capital have grown steadily and substantially in volume over the past few years. Yet, frontier markets and social sectors – such as education – remain largely left out or underserved. A major barrier that remains is the risk involved, as there is a lack of evidence that investments in social services in fragile states can generate a risk-adjusted rate of return.
But there are pilots and models that show promise – such as a microfinance bank that provides student loans in Sub-Saharan Africa, and a for-profit private education model in India. Private capital can help develop and scale such models.
To bridge this gap, Palladium will facilitate the mobilization of USD 2 billion in blended finance for developing countries over the next eight years. The United States Agency for International Development (USAID), through its Office of Private Capital and Microenterprise (PCM), has awarded Palladium this mandate with a USD 250 million contract known as CATALYZE.
A "Serious Chance" for Scale
"CATALYZE offers Palladium and the broader impact investment and blended finance community a serious chance for sustainable impact at scale," says Roland Pearson, Director of Innovative Finance at Palladium. "We believe that the introduction of private and returnable capital will substantially help to establish and scale sustainable businesses and business models serving social sectors, women, and other key markets."
The project will help investors to explore and find commercially viable opportunities and approaches to creating jobs, developing sustainable social services, tightening and rationalizing supply chains, and advancing inclusive growth. CATALYZE will also seek to optimize the efficiency of blended finance deployment by broadly sharing lessons and insights, introducing common tools and approaches, and connecting advisors with potential investors and investees.
"Some projects only focus on transactions – they have to just get deals done," explains Pearson. "CATALYZE is different: we'll be getting USD 2 billion into these markets, but we'll also aim to influence the way in which blended finance is done at a larger, industry level."
The project will:
CATALYZE's initial activities will focus on expanding sustainable models for education in Sub-Saharan Africa at the primary, secondary, and tertiary levels. "We've also begun to conceptualize how to incorporate a gender-smart investing lens throughout CATALYZE's work to promote women's economic empowerment globally," says Pearson.
Building Off Tools and Best Practices
According to Erin Endean, Vice President of Economic Growth at Palladium, the company's "current work mobilizing private capital in Ghana and Kenya serve as models for the types of blended finance initiatives that could be implemented under CATALYZE."
Palladium's 2018 acquisition of Enclude "expanded our capabilities to develop unique insights and tailor tools, such as pay-for-results methodologies, to attract commercial capital," Endean says.
CATALYZE will link USAID with the full diversity of players in the blended finance and impact investing space — and add the tools and best practices Palladium has developed and refined in projects in innovative financing work around the world. This will accelerate the attraction of sustainable sources of capital to initiatives and investments with promising ideas for improving the lives of poor and disadvantaged communities around the world.
"We'll help solve complex challenges that have stymied commercial and impact investors from committing adequate amounts and types of funding, especially to frontier markets and social sectors," says Pearson.