Interview on Mobilizing Private Capital with the USAID INVEST Team
This interview with Lala Faiz and Cameron Khosrowshahi from the USAID INVEST team was originally published on the Convergence blog and was authored by Sijia Yi.
USAID INVEST unlocks the power of private capital to drive inclusive growth. It reduces barriers for investors and makes it easier for the U.S. Agency for International Development (USAID) and the investment community to work together. USAID leads the U.S. Government’s international development and humanitarian efforts. It recently issued a private-sector engagement policy that is transforming the way it works to support countries on their journeys to self-reliance. INVEST is part of this effort.
The centerpiece of USAID INVEST is its network of 175 partners from the investment and development community. This network enables USAID to access niche technical and financial expertise to execute on investment opportunities that can help USAID reach its development goals. Convergence is part of this network.
In addition to cultivating this network, INVEST structures blended finance funds and financial instruments, provides transaction-advisory services, and conducts investment-related feasibility studies and assessments.
Convergence interviewed Lala Faiz, the original architect of INVEST and its first technical director, as well as Cameron Khosrowshahi, INVEST’s new technical director as of May 2019. Together they gave us an expansive view of how INVEST came to be, the challenges it faced, and where it’s headed.
How did INVEST come about?
Lala: We realized that if USAID wanted to engage more in private capital mobilization and partner with the right firms, we had to create an initiative that would overcome three operational barriers. The first barrier was project development timelines. We were sometimes losing our partners in the private sector because it took years to structure a deal. Second, USAID needed access to experts and firms that really understood both investment and development, in a wide range of sectors and countries. And third, we needed to figure out how to align USAID’s objectives and those of the investment community.
So, we launched a co-creation process with 33 organizations, including Convergence. We brought everyone into a room, and we said, “Here’s what USAID wants to do and here are the barriers we need to overcome,” and from that process we came out with INVEST. It would focus on rapid procurement, bring in new partners and expertise, and use flexible, iterative project design and implementation. And underlying all of that would be a strong research and learning agenda so we could share lessons from across the portfolio across USAID and with others in the field.
How does INVEST solve for the barriers identified in that process?
Cameron: We really prioritized building a network of niche players that could provide USAID with the blended finance expertise it needed – and provide it at speed. The team at DAI, our primary facilitating partner on INVEST, is focused on growing that network to quickly roll out procurements and hand-hold both the new partners and our USAID Missions and Operating Units, who are our ultimate clients, in learning how they can leverage the private sector and private capital better.
The INVEST team works collaboratively with firms from the partner network, and it guides new partners as they learn the ropes and figure out how to navigate USAID requirements. That way we can quickly push implementation down to the local level while staying compliant and without sacrificing quality. This gets us better results and it levels the playing field for new or small partners who have not worked with USAID before. At the same time, the INVEST team manages a strong research and learning agenda, so we can aggregate knowledge and learning across the portfolio and use fast feedback loops to integrate those lessons into ongoing and future work, both within INVEST and at USAID as a whole.
Lala: In addition to building the right network, we focused on how to make the procurement process work for these new partners. When we put out a request for proposals for a given piece of work, we want to make sure we get the information we need from firms that are interested, but we don’t want to force them to write long, labor-intensive proposals. Instead, DAI invites them to submit a 10-page slide deck, and follows it up with an oral interview to answer specific questions.
We are also very thoughtful when we develop scopes of work for our projects. We are as explicit as possible about the expertise we are looking for. That might mean spelling out the technical knowledge or in-country relationships we would value. This makes it easier for reviewers to make a good decision quickly and it gives small firms juggling multiple proposals a better sense of how competitive they are, based on their qualifications.
Finally, we provide substantive, concrete feedback to every partner that applies. We offer a debrief to each firm, outlining the strengths and weaknesses of its proposal and offering constructive recommendations. This can be particularly valuable to organizations unfamiliar with USAID, helping them navigate the procurement process. It’s really working, and the quality of the proposals we receive has been increasing steadily.
Can you give me an example of a specific blended finance deal that INVEST has been involved in?
Lala: We just provided $500,000 in catalytic capital and $100,000 in technical assistance to Women’s World Banking Asset Management (WAM), a blended finance fund focused on low-income women. It’s a deliverables-based contract, which means we give them $250k when they close their first round of funding and then another $250k when they raise the entire fund.
Leah Pedersen, a Senior Advisor at USAID’s Global Development Lab, led this initiative with WAM and explained, “By providing downside protection to investors, USAID’s contribution to WAM’s blended finance fund crowds in commercial investment to improve financial inclusion for low-income women. Increasing women’s access to financial services and products is critical to breaking the poverty cycle. In addition, USAID’s technical assistance will help Women’s World Banking Asset Management expand its due diligence to evaluate potential portfolio companies’ digital financial services, which are critical to reach low-income women in developing markets. USAID’s INVEST mechanism made it possible for the Agency to efficiently mobilize commercial investments in developing markets, through market-driven innovations such as blended finance, to address challenges such as financial inclusion and women’s economic empowerment as part of USG’s broader Women’s Global Development and Prosperity Initiative.”
Cameron: For a long time, the Agency could never really figure out a way to work with asset managers like WAM. We’ve done a few deals here and there where we’ve used catalytic capital to work with asset managers, but since we can’t be a traditional investor--we cannot hold equity and we do not deploy debt-- it’s difficult for the Agency to work out that kind of relationship. In this case, we’re injecting a slice of first-loss capital into the fund structure, which is going to be owned by the asset manager. This allows asset managers to take that first-loss commitment from USAID and go and fund-raise for private capital in a more efficient way with a focus on investments that will impact low-income women. Assuming they are successful in their fund raise, they can secure our support. It’s also a good example of a way that USAID and the future USDFC can work together through INVEST. We are providing a form of catalytic capital that OPIC currently does not have the capability to provide, while OPIC is contributing $25 million in debt financing.
As an aid agency in the blended finance space, can you tell us about some of the challenges USAID INVEST has navigated?
Lala: For me, it was really tempting to just dive in and get a bunch of individual transactions done that achieved our development goals and the financial and social and environmental goals of our partners. But then we realized that we needed to focus on creating a system that simultaneously enabled both technical innovation and operational innovation in order to enable diverse organizations to work together and have greater impact.
How do you see INVEST evolving in the future?
Cameron: I agree with Lala that the change needs to be institutionalized. USAID’s private sector engagement policy laid out the vision and INVEST is a piece of how that vision is being implemented. But for all its creativity and flexibility and speed, it’s just a small piece of what USAID is doing, and we want to mainstream this approach. The ideal should be that it is internalized and institutionalized, that it will expand and become more the norm of doing business.
What advice do you have for other aid agencies who may be new to the space or are interested in entering the blended finance space for the first time?
Lala: Listen. Listen to your counterparts in terms of what they need and understand your operational strengths and limitations. Also, really understand your role in the ecosystem and what you should focus on to make the field grow. Realize that you’re not alone and that you’re part of a solution that is bigger than yourselves. And finally, know that it’s OK to make new mistakes but there’s no reason for all of us to make the same mistakes over and over again. There’s so much we can learn from each other and share. I think doing that well will advance the field tremendously.
Cameron: I would say don’t be afraid to step outside of your comfort zone. That’s where the innovation comes from. I think in the development agency world we’ve gotten far too used to doing things the way we do things. That system has been in place for 40, 50 years. If we want to change and work differently, we need to step outside those rules.