The Stretch Fund presents an opportunity to change the SDG financing dynamics.
The authors observe a critical need for public or private investors that are willing to target investments with high development impact and at scale, but who also are willing to accept below-market returns.
The Center for Global Development introduced an idea for a “stretch fund” to bridge the SDG financing gap. The fund would fill in a “missing piece” in the development finance architecture, by partnering with development finance institutions to stretch the spectrum of clients, scale and mobilization of finance, range of investments and scope of investible markets.
In a brief titled, ‘The Stretch Fund: Bridging the Gap in the Development Finance Architecture,’ Nancy Lee and Dan Preston recognize that development finance institutions (DFIs) have a similar view of risk and tolerance for risk as their commercial counterparts. Consequently, DFIs have faced challenges in developing “projects that will pass their own credit and investment committees.” The authors identify three gaps that DFIs and private investors typically do not address: early-stage finance for firms and infrastructure; high-risk project tranches; and local currency products and services. They propose a new approach that can help DFIs effectively manage increased risk while increasing their impact.
To bridge the SDG financing gap, the authors argue, the world needs a “new public-private actor…one that has a very different risk tolerance and financial objective” and that prioritizes development impact. Lee and Preston emphasize the a critical need for public or private investors that are willing to target investments with high development impact and at scale, but also are willing to accept below-market returns.
They outline the ways in which the Stretch Fund would differ from existing DFIs and their donor trust fund partners, including by deploying subordinated products and aligning staff performance incentives with an impact mission and a tolerance for a portfolio with financial underperformers. The proposed Stretch Fund would be a pooled investment vehicle, with a focus on transactions under USD10 million and a “substantial share of activity involving deals in the USD2 to USD4 million range.” They recommend that Stretch Fund’s targeted size be approximately USD500 million, with varying sizes of capital infusions from about ten donor governments and philanthropic organizations. The authors suggest that the instrument mix be approximately 55% equity, 35% debt and 10% guarantees.
Lee and Preston conclude that the Stretch Fund presents an opportunity to change the SDG financing dynamics and help bridge critical gaps that block private finance flows in a way that will boost leverage and impact. [CGD Publication Webpage] [Publication: The Stretch Fund: Bridging the Gap in the Development Finance Architecture]