Finance Champions: April 2024 Summaries and Takeaways from the INVEST Activity

This blog originally appeared on Marketlinks. Read the piece here.

The Finance Champions group was established in March 2023 in order to share learning on the topic of mobilizing finance for development and sharing innovative approaches to finance being tested by USAID Missions, Bureaus and Independent Offices. This group, which is internal to USAID, meets every six weeks, subsequent to which a recap is provided on Marketlinks.

The April 18 Finance Champions meeting included the following presentations:

1. Learnings from the INVEST activity on the use of Transaction Advisors.
2. The INVEST RFP database (a compendium of all the RFPs issued by INVEST over its life).

INVEST Activity and Transaction Advisors

Sharon D’Onofrio (INVEST MEL Director) reported on the INVEST Activity’s arrangements on its use of transaction advisors, including their compensation arrangements. Transaction advisors are individuals and groups used to identify and facilitate financing transactions; they accounted for 84 percent of the $1.4 billion of financing mobilized by INVEST.

Given its significant footprint, there was great interest in understanding how DAI ‘made the sausage’ in mobilizing private capital: INVEST’s Monitoring, Evaluation and Learning (MEL) team wanted to answer two questions.

USAID INVEST: Performance Incentives for Capital Mobilization

1. How has INVEST approached the use of success fees when working with transaction advisors?

INVEST has used transaction advisors on almost all of the activities in which its objective was mobilizing finance. All contracts with transaction advisors are done through sub-contracts (rather than grants) using a cost-build up model, in which the payments are paid on the milestones below.

• Complete Work Plan: Define activities to be undertaken
• Develop Pipeline: Develop a pipeline of potential candidates
• Provide Letters of Engagement: Agreements to work on capital raises with specific enterprises
• Undertake Advisory Support: Production of work product (pitch decks, etc.) needed to reach close
• Provide Transaction Close Report: Financing mobilized and expected impact
• Provide Periodic or Final Close Report: Key metrics, lessons learned, key findings, etc.

In the sub-contracts, success fees ranged from 5 percent to 57 percent of the amount of the sub-contract, with a medium success fee amount of 32 percent. INVEST defines success fees as the payments that are directly related to closing transactions. This means that in some sub-contracts the success fees amounted to only 5 percent of the total award and in others 57 percent. The question was raised as to whether this is truly ‘pay-for-results’. Sharon noted that INVEST often deals with transaction advisors who have experience in operating on a fully commercial basis (payment is based strictly on closing transactions). She also indicated that in the not fully developed markets in which USAID is operating this is not practical, and that there is a market development aspect to transaction origination — spillover effects which require compensation. For example, companies which receive transaction advisory support but do not receive immediate financing, may receive financing down the road from some other source as a result of the support they received.

2. Is there a correlation between the use of success fees and capital mobilization?

The amount of the relative value of the success fee paid does not impact the level of financing raised. This was not anticipated (and is counter-intuitive). As the late Nikita Khrushchev once said “Say what you will, but incentives make people work harder.” Nonetheless, transaction advisors are responding to the incentive structure which INVEST defined. In some cases, INVEST believes that had it offered a higher incentive amount, this would have encouraged ‘easier’ transactions — ones which could be done without as much intervention. So in INVEST’s view, the transaction advisors are actually working harder — being paid to dig deeper, target hard to reach sectors, offer more intensive support in investment readiness, and structure innovative deals, not just close transactions.

How INVEST came up with its compensation approach for transaction advisors

First, DAI considered the Market Building aspects of transaction advisory services — costs which provide a general good — such as investor outreach, preparing firms for financing, and pipeline development. Second, it looked at Roles (and particularly the role of USAID, which has specific financing targets i.e., gender, WASH, etc.) all of which require unique arrangements). Third, Fit for Purpose (or context) is a factor. Markets and transaction types differ (requiring unique payment arrangements) and there is no standard template for transaction origination.

A question was raised as to whether the success fee payment is built into the transaction advisor’s cost structure, or on top of the transaction advisor’s cost structure (i.e., the transaction advisor will still recover its costs even if it does not reach its target. The answer is nuanced — INVEST uses Firm Fixed Price Contract in which the sub-contractor assumes full risk and reward, determining their profit or loss based on the contract’s terms. In large measure, it depends on how well the sub-contractor plans their work and their expenses.

Takeaways:

• Transaction advisors have been instrumental in the overall financing which INVEST has mobilized.
• INVEST structures contracts with its transaction advisors on a milestone basis rather than pure success-fee basis — given the markets in which they operated, as well as the role which they played in market development.
• Interestingly, the percentage of the success fee available in the contract had no correlation between the amount of financing mobilized.
• Transaction advisors played a role in market development, even when financing was not mobilized — increasing the sustainability of INVEST’s efforts.
• By paying on milestones that are not directly related to transaction closes, INVEST incentivizes transaction advisors to maximize additionality of USAID support that includes, but is not limited, to raising capital.

INVEST RFP database

Matt Nigrelli (IPI/DFPU) reported on the INVEST RFP database, which includes 120 requests for proposal (RFPs) issued by INVEST over the activity life — providing an invaluable resource for procurement templates for Finance-oriented solicitations.

The database is invaluable when facing “the tyranny of the blank page” as Matt put it. It can be sorted in a number of ways and provides templates for interventions in a number of countries and sectors.

See all of INVEST’s learning resources in this resource guide.