Report: Catalytic First-Loss Capital
Peak II engages in equipment finance lending in Tanzania.
The government of the Netherlands; program managed by FMO, the Dutch development finance institution.
The fund has three investor classes: A, B, and C. Investors in A & B classes benefit from the protection. These investors include foundations, charities, impact investing funds, and high-net-worth individuals.
EUR 1 million (USD 1.2 million) provided as grant to shareholders in Equity for Tanzania Ltd. (EFTA), then converted into equity (class C shares). EFTA is the fund manager for Peak II.
The fund has three investor classes: A, B, and C. Any losses are completely borne by class C investors first, then B class investors and then by A class investors. Investment proceeds will be distributed first to class A investors, then class B investors, and finally class C investors, until all have received a return of capital + 10 percent. Further proceeds will be shared by class B and C investors. To date usd 4.8 million has been raised from investors in all three classes, so the CFLC comprises 25 percent of the fund. Because the target fund size is usd 10 million, the CFLC will dilute to 12 percent of its fully capitalized amount.
The government of the Netherlands sought to be catalytic, and to support this objective they are also offering technical assistance for underlying Investees in addition to the grant converted to equity for CFLC purposes. For Lundin Foundation—an investor—the fund manager’s micro-asset leasing approach presented a “compelling” impact, but it had limited track record and the nascent space was seemingly high risk. The CFLC allowed Lundin to gain experience in the new market with some downside protection.
The fund manager reflects that the structure has worked very well for this fund, firstly because the CFLC is also utilized for investment, and secondly because, despite the fund manager’s track record, there was still some uncertainty around the exact return levels this relatively young business model would be able to deliver, which this structure cushions.
The government of the Netherlands provided Equity for Africa, Equity for Tanzania’s parent, with a EUR1 million grant, which was administered by FMO. The grant was restricted to being invested in the fund’s C class commitments. Once the grant was provided, it was a meaningful enough size for Equity for Tanzania to finalize a variety of investors, some of whom invested in both classes A or B to achieve target risk-return profiles. Lundin Foundation made its commitment conditional on the first-loss capital provision. The foundation determined that the ratio of first-loss to fund size was acceptable based on the fund manager’s track record and its own projections. The capital raise took a long time, and the fund manager reflects that there would also be merits to a “plain vanilla” guarantee with a more recognized structure, which in some cases would have made it easier to market to investors, as it was challenging for investors to categorize the risk.
| INVESTEE DETAILS | |
| Fund Manager | Equity for Tanzania Ltd. (EFTA) |
| Inception Year | 2012 |
| Geographic Focus | Tanzania |
| Term | 7 years |
| Impact Focus | Reduce poverty in Tanzania by empowering entrepreneurs to deliver sustainable employmentintensive growth. |
| AUM | Current: USD 4.8 million; Target: USD 10 million |
| Fund Capitalization | Private equity fund with three classes, one debt-like and two equity like (of which one takes first loss) |
| Investment Period | Up to 7 years |
| Investment Size | Varies |
| Target Return | 24-28% (Tanzanian Shilling) |
| Management Fees | PEAK II pays 2% management fee to Equity for Tanzania |
| INVESTMENT APPROACH | |
| Investment Instruments | Standardized equipment finance product-financial leases |
| Investment Period | 3 years |
| Investment Size | USD 10,000-50,000 (in local currency equivalent) |
| Track Record | 26 deals approved so far; 15 disbursed, as of October 2013 |
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