Since launching, Majority Markets has received a number of requests from socially driven investors looking for investment opportunities at the base of the pyramid. The truth is that there is not one answer for these requests, the opportunities and channels to connect are many, and the outlook is looking even more promising as awareness of BOP projects grows and market participants are increasingly eager to explore investment opportunities which have social impact along with financial returns.
For banks, specialized funds, and other impact investors who hope to invest in BOP business projects in Latin America and the Caribbean, a channel worth exploring is the syndicated loan program of the IDB. Through this program, qualified investors can participate in the work of the IDB’s Opportunities for the Majority initiative, helping support projects such as renewing and rehabilitating communities, expanding financial democracy, providing new technology and communication solutions, creating new employment opportunities and increasing access to better products and services for the poor majority in the region. OMJ’s loans typically run in size from US$2 million to US$10 million, and most include the possibility of bringing other private partners into the deals, with a minimum ticket size of US$1 million.
Partners can join in financing such projects by participating in the IDB’s loans through a structure called A/B Loans. The benefits of outside investor participation for the IDB are clear: driving new capital toward highly demonstrative development projects. However, there are significant advantages for partner investors as well. Investors are able to share transaction risks with the IDB and build relationships with new customers.
In the A/B Loan structure, there is one loan that consists of two tranches. These tranches are designated as the A Loan and B Loan, but there is no difference in seniority between them, they are pari passu, or “on equal footing.” The A Loan is funded by the IDB’s own resources and the IDB sells participations in the B Loan to private entities. Prospective B Lenders independently evaluate their involvement in the transaction. The IDB does not offer implied guarantees for B Loans, but both IDB and the B Lenders share in the commercial risk. The IDB is Lender of Record for the entire A and B Loan facility. This enables B Lenders to benefit from IDB’s de facto preferred creditor status, allowing preferred access to foreign exchange, which helps mitigate currency transfer and convertibility risk. For example, when Argentina placed a moratorium on transfer and convertibility during its financial crisis a decade ago, multilaterals like the IDB were given permission to convert pesos into dollars, while other commercial lenders with outstanding debt could not.
Throughout the deal’s life cycle, the IDB also serves as a single point of contact for the borrower, coordinating all activities and managing all communication with the B Lenders. This streamlined process simplifies administration as Borrowers sign only one loan agreement with the IDB. Additionally, given the IDB’s exemption from withholding tax, the money invested via a B Loan can go further in achieving its development objectives.
Several projects in the Opportunities for the Majority pipeline are currently open to participation of B Lenders, including an innovative fund that will support producers of some of Latin America’s most important crops, enabling small farmers to become part of international supply chains; and a project that would make lines of credit available for the first time to community-based institutions in Ecuador.
IDB Syndications Officer Kristin Dacey explains, “There are several ways private lenders and investors can work with the IDB. They can participate in or co-finance our projects. This can help facilitate their origination processes. They can also bring BOP projects to us that need additional financing. We really view our B-Lenders as partners in development and find that we often discover many ways to work together.”
For those interested in learning more about co-financing options that would open the door to sharing in the work of the Opportunities for the Majority initiative, you may contact Kristin Dacey, kristind@iadb.org.
And keep visiting the site, as Majority Markets continues to feature additional investment opportunities.
