I want to share here some tips for entrepreneurs, fund managers and various intermediaries who are looking at Development Finance Institutions (DFIs) as prospect funders, lenders and investors. DFIs are not the typical financiers, and I wonder sometimes whether they really form a homogenous category by themselves. As a general definition, I would qualify as DFI any finance company with government(s) as majority shareholders(s) and backers, with a mandate to invest in developing countries. Examples of DFIs include IFC (World Bank Group), PROPARCO (France), DEG (Germany), and EBRD (EU). However, each institution, from what I have seen, strives at having its own focus area, expertise and strategy. The capacity and outreach really differs as well. Some DFIs are subject to strong political influence while some tend to act as quasi-commercial investors with strict profitability targets. Some have a couple of offices, others have dozens spread across continents.
With the recent growth in emerging markets funds and the expansion of impact investing, there is large acknowledgment among DFIs that they should refine their role and better justify their existence, by moving to riskier markets (“frontier countries” such as the newly open Myanmar) and stimulate innovation, or what is more soberly called “market development”, by acting as guarantors or first movers. We also see a trend of fund management activities taking place within, started by IFC as far as I know . I will likely come back on this topic more extensively in another post, but I wanted for now to draw attention to some the follwoing while fundraising from DFIs:
– Understand the regional and sector focus: Understanding the target geography is crucial. Some DFIs have withdrawn from some countries that were deemed too mature (e.g Brazil and China). Others are restricted to a very limited region such as Latin America for IADB for instance. My tip here is to avoid presenting projects with global outreach. Even if the opportunity is appealing, it will be hard to find an internal person “in charge” as many departments are divided regionally. Remember that your counterpart at these DFIs is not, at the end of the day, a director or a board member, but an investment officer with predefined objectives, targets and country focus. You have to be able to put yourself in his shoes, and engage with him on an investment proposal that falls within his expertise and do not oblige him to form a complex deal team involving many departments. It is not only about the financial or impact attractiveness of your proposal, but to which extent it fits the existing internal systems. The same goes for sectors or industries. The focus might be Health in Africa and Agriculture in Asia. Is the DFIs also divided by sector? If yes, then apply the same reasoning as for the countries. Try to stick as much as possible to a mono-sector single-country approach.
(Part 2 next week)