Deutsche Bank strives to 'be the investment banker for social capital.' This mission drives Deutsche Bank to continuously push the envelope in social finance innovation, consistently being a catalytic leader in providing socially responsible lending, investing and philanthropic activities. Deutsche has used its social financing expertise, investment banking skills, structuring capabilities, business resources and worldwide relationships to create financial instruments and funds that benefit social enterprises. Deutsche will leverage this expertise, team and established processes in the structuring and launch of the Essential Capital Fund.
The Fund will be structured as a limited liability company managed by Deutsche Bank. All investment decisions will be made through an investment committee, which will include representatives from investors in the Fund. All investors will be invited to be part of the governance board, which will have the power to replace the Fund manager. The Fund manager, will be responsible for monitoring and overseeing the Fund's portfolio and will charge a management fee of approximately 2.0% of total capital commitments to cover administrative and operational costs.
Deutsche Bank's Community Development Finance Group, the experienced team behind six investment funds, will serve as the Fund manager, originating and monitoring investments in the form of 1) first loss positions in debt funds, 2) guarantees on loan syndications, 3) loans for impact investments and 4) other innovative financing opportunities.. The investment origination process will involve in-depth on-site and desk due diligence. Throughout the selection process, Deutsche Bank will look to collaboratively partner with debt funds, loan syndications, and impact investors to provide truly catalytic, game-changing capital.
Deutsche Bank and its to-be-determined partners intend to launch this fund in September 2013 with approximately $12 million in portfolio placed. The portfolio will ramp up to $50 million over the course of approximately two years.
Deutsche Bank is committed to working alongside various social impact stakeholders in developing the ECF. To better understand the capital needs and interests of social investors and impact investment opportunities, Deutsche Bank has commenced preliminary discussions with the Overseas Private Investment Corporation ('OPIC'). Going forward, Deutsche Bank expects to continue collaborating closely with OPIC and other institutions.
Specifically, Deutsche Bank targets the below action plan:
Q4 2012: Continue knowledge building and stakeholder engagement. Develop comprehensive Fund financial model.
Q1 2013: Develop in-depth Fund marketing materials and begin discussions with potential investors.
Q2 2013: Undergo due diligence with select investors.
September 2013: Fund launch with at least $12 million placed (average investment size of $2 million) and all investor funds (~$50 million) identified and committed. Minimum investor commitment size of $100,000 with to-be-determined returns.
September 2015: Fund reaches maximum portfolio size, with the entire $50 million placed in investments.
September 2019: Fund matures.
According to the Global Impact Investing Network, 52 impact investors holding nearly four billion dollars in investable capital expect to allocate 5-10 percent of their portfolios to impact investments over the next ten years. However, while there is growing interest in impact investing, the sector remains at a rudimentary stage of development. One barrier to continued growth is the absence of risk mitigation mechanisms for private investors who are reluctant to engage in a sector with little performance data or credit history to date. The provision of credit enhancements - through loan guarantees to social enterprises or the development of risk tranches - is fundamentally important for the future of this nascent industry. Unfortunately, the mandate of development banks restrict them from stepping in to provide this service and taking 'first loss' positions to protect other investors. Foundations, meanwhile, have a limited amount of resources available and their investment committee processes can be complex and time-consuming.
The Essential Capital Fund is Deutsche Bank's pragmatic solution to the problem of inadequate higher risk, catalytic capital that can leverage participation by the private sector. This innovative, $50 million fund - a truly pioneering structure that has no precedence in the social finance sector globally -- offers a 25% first loss cushion and protects development banks and other investors in three ways. First, Deutsche Bank will defer its management fee, thereby creating a reserve fund to protect investors. Second, the fund will feature a 'step coupon' structure and issue investors a lower coupon rate in initial years, with savings from the lower rate acting as an additional reserve. Finally, the fund will seek 10% in guarantees from philanthropic and socially-minded institutions that want to see their money leveraged and the growth of impact investments globally.
ECC seeks to be a collaborative pioneer in lending to social enterprises globally. To the extent that others are entering this field, DB would like to establish partnerships to share knowledge and experiences and contribute to the development of a collaborative industry.
In addition, ECC would also be interested in discussing technical assistance grant funding that may be available to support capacity building among the social enterprises in its portfolio.
ECC is offering senior loans of up to $5 million to social enterprises that directly seek to provide a social benefit to low income populations by supplying products and services in the energy, health, and financial services sectors in the developing world.