Funding Mechanism
The advantage of EFSE's funding strategy is to use scarce donor funds to leverage additional large scale funds for development purposes. This is achieved by issuing different tranches of risk. These comprise a Junior Tranche (First-Loss Tranche/C Shares), a Mezzanine Tranche (B Shares), and a Senior Tranche (A Shares and Notes).
The Junior Tranche is exclusively reserved for public donors.
While mezzanine and senior investors invest at a 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.
Different sources of funds representing different risk tranches are pooled to constitute one single source of financing.
The Fund uses this pool of funds flexibly within each country and, based on its overall investment policy, to maximise efficiency and to effectively address 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 institution, the grant funds constituting the Junior Tranche are affected first. Only when these are fully depleted, the mezzanine capital is affected, being followed by holders of senior capital.
