Evaluation of the Instrument of Fiduciary Holding Funds
As well as facilitating development impact, fiduciary holding funds are intended to mobilise additional private capital, which goes towards achieving the United Nations (UN) Sustainable Development Goals. Against this backdrop, DEval is evaluating to what extent the funds are realising their objectives and examining how they might be set up and managed in an evidence-based way.
Today, we face a range of global challenges and limited public funds, making it increasingly necessary for the public and the private sectors to cooperate to achieve the Sustainable Development Goals agreed upon in the UN’s 2030 Agenda.
Fiduciary holding funds are one way to promote joint financing with private stakeholders. The aim here is to mobilise private investment for development initiatives.
Private investors are often reluctant to invest in these types of initiatives, as they consider them too risky. Public funds, however, lower these barriers to investment. In the case of fiduciary holding funds, which include different risk categories (structured funds), official donors invest in the riskiest tranches, allowing private investors to invest in lower-risk tranches. In the case of so-called flat funds, all investors take on the same level of risk and the same expected proportional returns.
With its evaluation of ten structured funds in 2020, DEval already made an important contribution to contextualising and assessing various fiduciary holding funds. The current assessment builds on the previous evaluation’s findings. However, it will examine all 59 fiduciary holding funds that are supported by the German Federal Ministry for Economic Cooperation and Development (Bundesministerium für Wirtschaftliche Zusammenarbeit und Entwicklung, BMZ).
Background
It is estimated that the Global South needs several trillion more US dollars in funding each year to realise the UN Sustainable Development Goals. At the International Conference on Financing for Development in Addis Ababa in 2015, donor countries agreed to make greater use of innovative financing instruments to mobilise the private sector. To minimise the financing gap, fiduciary holding funds are one important instrument that is used in German and international development cooperation.
This cooperation with the private sector is aimed at lowering barriers to investment relevant for achieving development objectives. This is necessary because investment in development initiatives is often perceived to be prohibitively risky due to a lack of information about markets and conditions. In addition, there can also be a lack of investment opportunities in these markets altogether. Fiduciary holding funds create these investment opportunities and use public funds in a targeted way to reduce risks for private investors, thereby mobilising private investment in relevant sectors and encouraging market development in partner countries. This includes the support of micro, small and medium-sized enterprises, financial market development and investment in biodiversity, food security and climate financing. Moreover, funding is often accompanied by capacity-building initiatives to support overall development objectives.
Objectives
The goal of DEval’s evaluation is to contextualise and assess the instrument. This will include the assessment of Germany’s development engagement through such funds, as well as the identification of potential improvements in three key areas.
These are:
- leveraging private capital by utilising public funding
- the management of the funds
- the development impact of the funds
The additionality of the funds will also be analysed as part of the evaluation, particularly with regard to the efficiency of the use of public funding and its development impact.
DEval will use a systematic classification, based on the funds’ characteristics, like its structure, use of debt or equity capital and specific development objectives, to assess the scope of the instrument. Based on this classification, DEval will also examine differences between the various types of funds.
Contact
Magdalena Orth-Rempel
Phone: +49 (0)228 336907-952
E-mail: magdalena.orth@DEval.org
Amélie Gräfin zu Eulenburg
Phone: +49 (0)228 336907-930
E-mail: amelie.eulenburg@DEval.org