responsAbility Investments AG

Report: Beyond Investment: The Power of Capacity-Building Support

responsAbility, a Swiss asset manager, has been active in impact investing since 2003. Its aim is to drive the growth of development-related sectors—namely finance, agriculture, and energy—through return-seeking debt and equity investments.

Background

responsAbility, a Swiss asset manager, has been active in impact investing since 2003. Its aim is to drive the growth of development-related sectors—namely finance, agriculture, and energy—through return-seeking debt and equity investments. As of 2017, responsAbility has USD 3.2 billion of assets under management invested in 550 companies in 97 developing countries. Though its early portfolio did not include any capacity-building complement, responsAbility has identified opportunities for capacity-building support as its portfolio has diversified, discovering in particular that capacity-building support can add value beyond mitigating risk to bolster the performance of
its investments. responsAbility established its first dedicated technical assistance facility in 2009. As of 2017, a dedicated team manages four such facilities. Each facility is dedicated to different investment strategies, focusing primarily on climate finance and energy access. Plans are underway for a fifth facility, focused on agribusiness.

Capacity-Building Objectives

responsAbility selectively provides capacity-building support to improve the performance, growth, and sustainability of portfolio companies, pilot new business models and technologies, and develop clear strategies for growth and sector development. Each project is intended to benefit the investee and strengthen responsAbility’s portfolio.

 

Sample Capacity-Building Projects

Product-Line Conversion

One client, a rice producer in Cambodia, was struggling to compete with government-subsidized players from Thailand and Vietnam in international markets. The client believed a competitive advantage could be realized by shifting production to certified organic rice, a crop with fewer competitors and higher prices. To meet buyer expectations, this change required training in the cultivation and harvest of organic rice to meet certification requirements. Through its TAF, responsAbility contracted an external consultant with expertise in organic farming to facilitate this training, provide the certification, and enable the client to enter the new market segment. At interim points, responsAbility evaluated the project’s success based on the percent of crop production from the client’s farmers that shifted to organic from traditional rice and the farmers’ resulting income increase.

Market Assessment

In India, one client produces biomass from post-harvest residue. As alternative energy sources have grown more cost-competitive, the company has diversified its production to focus on other products, such as pellets. However, Indian government regulation requires all oil-producing companies, including biomass producers, to derive at least 20% of their revenues from alternative energy solutions. To address this requirement, responsAbility provided capacity-building support for the biomass producer to conduct a market assessment to understand the availability of biomass in different locations and to validate its supply. Furthermore, it supported the development of a supply management plan for the client to collect the post-harvest residue efficiently and economically.

 

How it Works

STEP ONE. IDENTIFY CAPACITY-BUILDING OPPORTUNITIES

The responsAbility investment team typically identifies investee needs that can be addressed through capacity-building support during due diligence. The investment team contacts responsAbility’s TAF team to verify that the identified need falls within the TAF’s scope, following a set of criteria defined jointly with the facility’s donors. The exact scope, timing, and conditions are then discussed with the investee to specify the need in detail and ensure the investee’s commitment to the project.

STEP TWO. DESIGN A CAPACITY-BUILDING PROJECT

Based on investee feedback, the TAF team prepares TORs tailored to the investee’s needs that identify the different tasks involved in the project, outline the qualities sought in an external consultant, and define milestones by which to measure the project’s execution and success. Milestones are designed to assess a project as it advances, including, for example, interim progress reports or discussions to reflect on intermediate results. By preparing the TOR together, responsAbility and its investees identify shared objectives, address concerns about the role or expectations of an external consultant, and design a project with which both parties are comfortable. The Technical Assistance team then presents the request to finance the project to the Technical Assistance Committee, which comprises representatives or nominees of the facility’s donors.

STEP THREE. IMPLEMENT THE CAPACITY-BUILDING PROJECT

The TAF team tenders the assignment in line with international standards for procurement. In calls for proposals, responsAbility looks for consultants with experience in the region, who speak the same language as the investee, and who have deep experience in the topics to be addressed through support. Consultants are selected based on pre-defined evaluation criteria, with the selection then approved by the Technical Assistance Committee.

STEP FOUR. MONITOR AND ASSESS THE PROJECT

responsAbility seeks to measure the results of all capacity-building projects it supervises. Since its projects are often implemented in phases, payments are delivered in tranches based on the achievement of key deliverables, as outlined in the initial TOR. Given the challenging contexts of responsAbility’s investees—which, for example, operate in frontier markets, prove new business models, or work with emerging technologies—workplans sometimes have to adapt as a project progresses. If a project struggles to achieve certain milestones or underperforms along the way, responsAbility’s TAF will reevaluate the project plan.

The TAF also reviews key indicators on both the project or firm level and the level of the TAF overall. Example indicators include the number of people with improved energy access, carbon emissions avoided, or volume of finance catalyzed as a result of capacity-building support.

Funding

responsAbility funds its capacity-building support through three core mechanisms.

  • External donors: responsAbility primarily funds its dedicated TAFs with the support of one foundation, alongside a broad funding base from different DFIs. responsAbility believes other foundations have interest in supporting this type of work.
  • Investee cost-share: Investees are usually required to contribute to the cost of the project. The specific percentage of costs funded by investees varies by type of project and with the specific TAF.
  • Management fees: responsAbility also manages other capacity-building projects separately from its TAFs. These projects derive their funding from its management fees rather than from a pool of donor capital.

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