HYBRID FINANCE FOR IMPACT VENTURES

FINANZIERUNGSAGENTUR FÜr Social Entrepreneurship


Eine Initiative von

HYBRID FINANCE FOR IMPACT VENTURES

Laura CatanaEuropean Investor Relations Manager @FASE

* This presentation is meant for the CSR Manager Network – Webinar sugli investimenti a impatto, 13 July 2021. Please do not share further.

July 2021

FINANZIERUNGSAGENTUR FÜr Social Entrepreneurship 3

Impact First Investing in Germany still niche market, as requirements for well-functioning ecosystem not yet in place

1 Total financial assets under management of institutions in 2020 (estimation by Bundesinitiative Impact Investing, 2020)2 Broad definition of impact investing (ESG/SRI/Finance/Impact First), AuM in 2020 (estimation by Bundesinitiative Impact Investing, 2020)

Impact investing still nichemarket in Germany, … … as various requirements not yet in place for a well-functioning ecosystem

Impact First Investing~ 0,06 bn EUR

Impact Investing (ESG/ SRI/Finance/Impact First)~6,46 bn EUR2

Institutionalinvestments~18,14 bn EUR1

Assets under Management (AuM)

▪ Perceived hard boundary between donating for non-profit purposes (w/o accepting business approaches) and investing with pure profit orientation (w/o acknowledging social mission)

▪ Lack of common language

▪ Combination of charitable and for-profit models not possible without limitations

▪ No or very limited public incentives to develop market▪ Impact measurement is not standardized and expensive

▪ Very limited number of specialized intermediaries▪ No established financial institutions involved

▪ Social enterprises lacking investment readiness▪ Limited number of investment opportunities, given small

investment tickets and limited number of organizations

▪ Risk-return profiles not attracting largest investor groups (e.g., institutional investors, family offices, retail customers, banks)

▪ Mostly philanthropic funds committed (e.g., HNWI, foundations)


§ Background

§ Co-founded by Ashoka Germany in 2013, helps bridge the finance gapbetween startup & growth phase

§ Thought leader in social finance e.g. G7 Impact InvestingTaskforce, GECES, EVPA, OECD Good Practice Compendium

§ Supported by the EU to pilot hybrid financing model

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About FASE

Selected Partners:

60 dealsclosed

€30m financing

raised

1300 EU impact

investors


The challenge (I): investment capital doesn’t find appropriate investees

-100 %(grant)

Strategic financing gap- Early stage financing -

„Too large for philanthropists,too small (and risky) for

institutional social investors“

Hybrid financingCombination

of philanthropic capitaland impact „first“ investments

Experimentation Scaling

Early-stage growth Later-stage growth

Market rate return

Start-up

< 50 TEUR

§ Equity§ Donations

50 - 500 TEUR > 1 MEUR > 1 Mio. EUR

§ Multiple financing options


The challenge (II): early-stage social enterprises do not fit into traditional types of funding

Non-Profit• No return• Short-term

horizon

Commercial• Market-rate

returns• Exit options

Hybrid• Moderate returns• Few exit options• Not ‘one’ financing solution


Hybrid Social Finance

Hybrid Financing Mechanisms

Tailored Financing Models

= different financing instruments are combined and tailored to the specific

social enterprise‘s financing needs

Hybrid Cooperation Models

= different types of investors come together in one single financing transaction of a

social enterprise

Hybrid Financing Vehicles

Hybrid Funds =developed to provide

finance to SEs in a more efficient way, while satisfying different

risk/return/impact profiles of investors

Hybrid Social Finance


The FASE solution: building a bridge between social enterprises and impact investors

Investors benefit from

ü access to investment opportunities in leading, investment-ready social enterprises

ü customized impact investing opportunities

ü clearly structured and transparent investment and transaction processes

ü syndication

Social entrepreneurs receive

ü Support with investment readiness andstructuring the right financing

ü Transaction Management and Investor Relations, Syndication

ü Comprehensive consulting and coordination


Our clients: FASE addresses a large variety of financing models / sizes and impact sectors

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Social problem

Increase of breast cancer rates & high unemployment among blind women

Solution

superior early breast cancer detection through Medical Tactile Examiners (MTE)

Business model

direct fee generation in Germany & social franchise fees abroad

Expansion plan

growing the core market & scaling the solution to other countries

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Training and employing visually impaired women for early breast cancer detection


A hybrid fund with public guarantees

Benchmark performance

Impact investing fund performance

Funding social startups implies specific challenges. A hybrid structure reduces risk and allows for attractive investment opportunities

Return

Risk

Guarantees from public authorities reduce fund risk

Performance gap

Hybrid fundTraditional

fund

▪ Compared to "traditional" VC funds, an impact investing fund for scaling social startups has

– … higher transaction cost due to smaller ticket sizes

– … typically lower cash returns of the social enterprises owing to theirsocial nature

…

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European Social Innovation and Impact Fund (ESIIF) as firstfinancial intermediary in Germany with EaSI-guarantees


Overriding fund investment principle: matching investments of direct investor(s) in social enterprises

Fund Investors

ESIIF

SocialEnter-prise

DirectInvestor

DirectInvestor

DirectInvestor

DirectInvestor


Investment Returns

Open pipeline of social enterprises: direct investor(s) are identified by FASE for each individual social enterprise and have to be accredited by the fund

SocialEnter-prise

SocialEnter-prise

SocialEnter-prise

Diversification on fund level& EU guarantees (EaSi)


Fund structure yields moderate target returns for investors in a multilayered structure

Lower risk

Higherrisk

Multilayered hybridfund structure

Description

Junior tranche(65 % +)

▪ Higher return potential than senior tranche (target return 4.1 % - 4.5 % IRR after costs, before agio)

▪ Secured by guarantees (subject to availability based on cash distribution mechanism)

▪ Higher risk than senior tranche; structural subordination

Senior tranche(up to 35 %)

▪ Strong risk reduction through guarantees, junior tranche subordination and other structural mechanisms

▪ Return fixed at 1.5 % IRR (after costs, before agio) – possibly 2.0 % IRR

EaSI-Guarantee ▪ Hybrid fund structure through EU guarantees enabling investmentsthrough risk reduction

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Risk reduction: EU-guarantees can provide a first loss downside protection for fund

EU Employment and Social Innovation (‘EaSI’) Guarantee

Guarantee

• Capped guarantees to share risk between financial intermediaries and the European commission

• Eligible is mezzanine capital at a maximum of 500 TEUR per financing round• Capital losses can be covered by up to 80% for initial ~20%1 losses

Guarantee 80%

Portfolio of debt/mezzanine financings to SEs

Expected losses (max. 20%)

Guarantee 80%

Risk remaining with the fund


Contacts

Laura CatanaEuropean Investor Relations ManagerTel: +352 - 691 113 097E-Mail: [email protected]

Financing Agency for Social Entrepreneurship GmbHPrinzregentenplatz 1081675 MunichGermany

www.fa-se.de/en/

Documents

HYBRID FINANCE FOR IMPACT VENTURES