Funding mechanism

Donor funds used for development finance initiatives in the target region are generally scarce in view of actual needs. The advantage of EFSE’s funding strategy is to use these donor funds to leverage additional funds at large scale for development purposes. This is achieved by issuing different share tranches bearing different risks:

1. Public donors invest in the Junior Tranche (first loss piece),
2. Development finance institutions and international financial institutions in the Mezzanine tranche,
3. Private investors in the Senior Tranche.

While mezzanine and senior investors invest at regional level, donor funds can either be earmarked to a specific country or the region at large. Country-specific donor funds are exclusively used for investments in one particular country, facilitating a possible later transfer of ownership to local stakeholders. Regionally earmarked donor funds allow the flexible use of funds and can therefore best accommodate changing development finance needs in the target region.

In order to undertake investments, different sources of funds representing different risk tranches are pooled. They then constitute one single source of financing for the Fund. Consequently, the Fund uses these pooled funds flexibly within each country based on the Fund’s overall investment policy. This approach creates efficiency gains and also effectively addresses the risks associated with each investment.

For the investment portfolio in each country, however, the proportion of the different risk tranches contributing to the total amount of pooled funds remains intact. Hence, donors as well as the other investors hold a specific share of the pooled funds in the amount of their original contribution to the Fund in nominal terms.

Leveraging private capital is only possible due to the subordination mechanism in place for each country in which the Fund invests. In the unlikely event of losses, for example, due to a defaulting partner lending institutions, the grant funds constituting the first-loss tranche, i. e. C Shares, are affected first. Only when these are fully depleted, the mezzanine capital is affected (B Shares), being followed by holders of senior capital (A Shares).