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Social Investment Matters
Asad MahmoodManaging Director, Global Social Investment Funds
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Agenda
Social Investment DefinedOur Belief– Potential– Challenges– Solutions
The Market for Social Investment Our Vision, Mission and StrategyThree 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
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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
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Our Belief: Potential
Microfinance
Healthcare
Any social venture with a cash flow can be financed by bringing differently motivated money to a common platform
AffordableHousing
Education
Agriculture
AlternateEnergy
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Our Belief: Challenges of Social Venture
Low volume of transactions and lack of robust cash flows
Lack of liquidity
No track record on investment risk
Perceptions out of line with real issues
The social venture industry is no different than any other nascent industries marked by
The social ventures also have to contend with
unique perceptual issues
Doing good can only be achieved through charity:
“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”
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Our Belief: Challenges with Socially Responsible Institutional Investors
Do not want to sacrifice return
Do not want additional risks
Evaluate social investments by the same measures they use to judge highly commercial developed markets
- Rating
- Daily Quotes
- Liquidity
Common attitude of socially responsible
institutional investors
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Our Belief: The Solutions
Credit enhancement can mitigate the issue of
track record and risk perception
Subsidy can enhance weak cash flows to meet
minimum investors requirement
Increase volume will create the required
liquidity and help mitigate other elements of
risks like price quotes, etc
Social Ventures have limited resources
Growth will come with increased capacity
Capacity can only be increased through capital investments
Develop structures that meet social and investors’ needs
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Socially Motivated
Commercial Investors
Foundations and
International Financial
Institutions
Senior Debt
Subordinated Debt
Equity and
Grant Capital
Stratified-Risk Capital StructureBefore Financing
Social Venture
Service Delivery to
the Poor
Paying Patients/
Customers
Investment Capital
Social Venture
Paying Patients/
Customers
Cash Flows Service Delivery
Improved Service Delivery to
the Poor
After Financing
Deutsche Bank, by increasing the availability of investment capital, helps increase the level of outreach of social ventures to the poor
Scale-Up of Social Finance
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The Market for Social Investment
Source: ‘Blended Value Map’ Jed Emerson, 2004
$2.16
$17
$0.225 $0.0160
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Traditional InvestmentFunds
"Screened" Funds Charitable Donations Private SocialInvestments
in U
S$ T
rillio
ns
Where:$14 billion in Community Development Financial
Institutions, $2 billion in “double bottom
line” funds and $200 million in Program
Related 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.
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To be a catalytic leader in providing socially responsible lending, investing and philanthropic resources, acting as an agent of development and growth in distressed communities globally.
“To be the investment banker for social capital”Deutsche Bank embraces social investing as a specialized investment banking business with the dual objective of profitability and social return.
Use the Bank’s social financing expertise, investment banking skills, structuring capabilities, business 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.
Mission
Strategy
Vision
Deutsche Bank & Social Investment
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Funds under DB Sponsorship or Management
DB-Microcredit Development Fund
Launched in partnership with DB Private Wealth Management in US and UKPioneered structures for investing in local currencyFacilitates linkages between MFIs and local financial institutionsSeeks to increase scale of MFIs so they can become commercially sustainableHas lent more than $ 5MM to nearly 50 MFIs in 27 countries
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Established 9 years ago, it was the first
commercially oriented microfinance fund launched by a global bank
Products Deposits or financial guarantees
Term Up to 5 years
Interest Rates Commercial rate on local bank loan; discount on the guarantee
Size $25,000 - $250,000
Currency Guarantee in US Dollars
Amortization Varies with local loan
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DB Start-up Fund
Funds early stage, commercially viable MFIsActs as catalyst to unlock local equity/stakeholder supportFavors locations under-served by microfinanceCapitalized with funds from Deutsche Bank, Cordaidand other social investorsA $1MM fund launched in 2005. Commitments to more than 5 MFIs.
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Funds under DB Sponsorship or Management
First start-up fund for microfinance institutions
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)
Amortization Bullet maturity
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First commercial fund to provide financing in the locally demanded currency.
Largest microfinance fund of its kind at launch date
Facilitates capital access for commercially focused MFIs in locally demanded currencyOffers flexible, sophisticated financial instrumentsPresents microfinance as an emerging asset class to investorsBrings 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
Global Commercial Microfinance Consortium
Financial Times “2006 Sustainable
Deal” finalist
Funds under DB Sponsorship or Management
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
Size Single and multiple draws up to $4.5 MM
Currency Locally demanded currency
Amortization Bullet maturity
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Senior Debt$63.35 MM
Sub Debt, Equity & Grant Capital
$17.25 MM
Class A $5.5 MM
DFID $1.5 MM
USAID Guarantee
$15 MM
Class B $6.25 MM
Global Commercial Microfinance Consortium
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Capital Structure Investment Partners
SubDebt $4MM
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Sample StructureStandby Letter of Credit with Leverage
HNL equivalent
Commission in USD / L/C Guarantee Fee
Custodian
$US Collateral Deposit
Inte
rest
in H
NL
HonduranBank
Interest on Collateral
Deutsche Bank Microfinance Fund
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Issues Letter of Credit
Honduran MFI
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Sample StructureLocal Currency Source: DB Branch
Loan in Pakistani Rupee
Interest Rate on Pakistani Rupee Loan
US$ Guarantee
DepositInter-
company Guarantee
Guarantee fee in US$
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Deutsche Bank
Microfinance Fund Interest on
US$ Deposit
DB London DB Karachi
Pakistani MFI
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Sample StructureLocal Currency Source: Local Bank
Loan in US$
US$ / Colombian Peso Cross Currency SWAP
US$ Purchase of credit risk
Interest in Pesos
Colombian Peso Loan
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Deutsche Bank
Microfinance Fund Interest in
US$ (minus margin)
Colombian MFI
ColombianBank (Panama
Branch
ColombianBank
Interest in US$
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Deutsche Bank’s Microfinance Footprint
Latin America &the CaribbeanHonduras
HaitiNicaragua
BoliviaColombiaMexicoChile
ArgentinaUruguayEcuador
PeruDominican Republic
El SalvadorBrazil
Africa -SubSahara
BeninKenya
UgandaMozambiqueSouth Africa
TanzaniaRwanda
EuropeBosnia & Herzegovina
Serbia AlbaniaGeorgiaKosovo MoldovaAlbania
RomaniaRussian Federation
East Asia and the Pacific
CambodiaPhilippines
Samoa
South AsiaIndia
Pakistan
Middle East & North AfricaMoroccoJordan
Central Asia
AzerbaijanMongolia
Kazakhstan
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The Fund
First–ever microfinance fund for German Investors
Collaborative approach: German private investors and development agencies
Target Rating: BBB- or higher
Target capitalization: € 60 MM
Further establishes microfinance as an investibleasset class
First German Fund for Microfinance
The Offering
Up to € 5 MM (or locally demanded equivalent)
7 year maturity
100% subordinationTier II Capital compliant (Basel guidelines)
Launch date: September 2007
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First fund with German investors. The first rated Sub Debt Fund in the
microfinance space
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First German Fund for MicrofinanceFirst Rated Sub-debt Fund in the World
EUR Equivalent
in local demanded currency,
USD
MFI 1
MFI 2
MFI 3
MFI ..
MFI ..
MFI ..
MFI ..
MFI 23
MFI 24
MFI 25
Senior Tranche Rated BBB- by Fitch
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Seniortranche
Juniortranche
Investment Vehicle
Investment Manager
Pass Through
Entity
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Business Engagement in Microfinance
Underwriting
Asset Securitization
Knowledge Transfer
Several issuances in Europe for one of the largest microfinance institutions in the world
Partner MFI senior management (from Treasury, Accounting and Risk Management) will intern with DB
Asset Management
First asset securitization in Bulgarian market
Selected to bid for mandate on EUR400 MM Eastern European microfinance portfolio owned by leading development agencies in the region
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Business Engagement in Microfinance
DB In-country Engagement
Assistance from DB product and industry experts in structuring transactionsActive volunteer program
Managing €4 million microfinance loan portfolio targeted at low income and lower-middle income countries
Private Spanish Foundation
€34 million investment on the European Fund for Southeast Europe (EFSE) Equinoccio Fund in Mexico
Other Transactions
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Coming Soon …
CDO-“Consortium II"
+ $200 MM Multi-Issuer Rated Deal
Multi-facility Vehicle
Developing multi-facility (grant, debt, equity)investment vehicle for microfinance to be marketed to single-country investors/donors
Advising in the creation and management of other funds
Advisory Role
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Eye Fund IUsing debt to reach scale,
and tapping new sources of capital
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Eye Fund I - Three Driving Forces
Approximately 37 million people are blind worldwide and another 150 million have serious visual impairment, of which 75% are easily treatable/preventable (i.e. cataracts, glaucoma)
Grants are insufficient to meet Vision 2020 goals
Collective annual spending roughly $250 MM
There are approximately 250 eye care programs that are currentlyself-sustainable
These programs serve clients from all economic strata, with userfees from regular clients subsidizing the poor
Leveraging existing financial models and capital markets
Integrating financial institutions, socially motivated investors, and the social sector
Recent success in microfinance as a platform for the next-generation of social investments
Global Demand for Affordable, High-Quality Eye Care
Proven Sustainable and Profitable
Service Delivery Model
Creating Competitive Landscape for Social
Investing
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Eye Fund I: The Objective
Diversifying Financial Resources Available to Eye Care Programs
Providing low interest debt financing for investment
Leveraging existing networks to aggregate financing needs
Capacity Building and Human Resources Development
Improving operations through training and organizational development
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
cashflow from user fees; thus also increasing the resources available to
serve the poor
Developing a replicable methodology for social investing, eye care and
beyond
EYE FUND I
LARGER, LARGER, SUSTAINABLE EYE SUSTAINABLE EYE
CARE SECTORCARE SECTOR
Grant Component
To address the major constraints to a sustainable eye care sector in the developing world with increased outreach to the poor.
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Eye Fund I: Structural Overview
PRI/Social Investors (1% Return)
Socially Motivated Commercial Investors
SeniorDebt
$14 MM
$20 MM Oversight Structure
Development Agencies
Uses of FinancingCapital investments for equipment or
buildings
Program expansion
Bridge Financing
Replication of program in new region
Subordinated Debt
$4 MM
Grant $2 MM
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BEFORE AFTER
Enterprise Social FundAn opportunity to help create low cost housing
for America’s most needy familiesthrough the engagement of the corporate sector
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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
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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
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$0 $12.0MM $15.0MM
The Fund
Tranche A$12 MM Notes
Tranche B$3 MM Notes
Commercial Institutional
Investors
Socially Responsible
Investors
$3 MM DB Guaranty
$$Loans to CBOs
Loans Repaid by
CBOs
Advisory Board of Directors
Credit Committee Fund Manager
$$
$$$$
Enterprise Social Fund StructureEnterprise 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
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Structuring Excellence & Track Record
Extensive Microfinance Relationship Network– 77 relationships in 41 Countries
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
Deutsche Bank’s Microfinance Portfolio Management Capabilities
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Portfolio Management CapabilitiesMultidisciplinary Team …– Skillset in Microfinance Institutions, Investment Banking,
Asset Management, Project Finance, International Consulting, Law & Accounting
– 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
Socially Committed,
Experienced Deal Team