Rand Merchant Bank (RMB) is a leading African corporate and investment bank and part of FirstRand Limited, one of the largest financial services groups in Africa. RMB offers their clients innovative, value-added advisory, funding, trading, corporate banking, and principal investing solutions. RMB has a deal footprint in over 35 countries in Africa, as well as a presence in the UK, USA, India, and China.
We spoke with Alessandro Scalco, Blended Finance Lead, at RMB about their blended finance strategies, how they measure impact, their future in the blended finance space, and more.
What can you tell us about your approach to using blended finance?
Although blended finance is an evolving concept in Africa, RMB is very familiar with its features, for example the blending of different risk types in a capital stack. We have identified blended finance as an important capability in delivering on our ambitions for shared prosperity in Africa. We believe that an African corporate and investment bank should be driving blended finance in the region to help find solutions and close developmental funding gaps in Africa.
RMB is currently working on several blended finance deals in South Africa. We are sector agnostic working across a variety of sectors, including healthcare, affordable housing, financial inclusion, and women-led businesses.
Can you tell us about the partners you work with and any commonalities and differences between them?
We work with a variety of partners, including local development finance institutions (DFIs), international DFIs, institutional investors, corporates, foundations, and other investor types. One of our focus areas is fostering relationships with local DFIs to work towards closing development financing gaps in Africa. Many of the foundations we’ve engaged with are reassessing their grant programs and are interested in using innovative finance structures to create more impact with their grants.
What is clear from our blended finance engagements is that across the spectrum of stakeholders both impact and financial return is critical. However, different stakeholders have different priorities. Grant and concessional funders prioritize impact, aiming to catalyze investors into transactions to make them bankable. While commercial investors are more focused on financial returns. However, regardless of the type of stakeholder, impact is an essential component of blended finance transactions. For us striking the right balance between both sides, impact and financial return, is critical.
Can you share an example of a successful transaction that has benefited from your blended finance approach?
Blended finance is quite new to RMB in the sense that we haven't structured for the market, but I’ll tell you about a transaction where we were the social investor.
In March 2023, RMB provided upfront funding as a social investor for the Imagine Social Impact Bond, an outcomes-based funding model aimed at improving the health outcomes of adolescent girls and young women in South Africa. The South African Medical Research Council (SAMRC), in its role as outcomes funder, made payments based on the achievement of pre-agreed impact outputs and proxy-outcomes. As the social investor, RMB only received a return on the upfront funding provided. The outcomes funder is only required to make a payment to the extent that the impact outputs and proxy-outcomes are achieved by the programme implementer, Networking AIDS Community of South Africa (NACOSA). NACOSA delivers a package of interventions targeting the prevention and management of HIV/AIDS and pregnancy within the target population. Outcomes achieved each quarter are verified by an Independent Verification Agent (IVA).
The implementation risk of the program is transferred to RMB and the efficiency of public health service funding is increased. In addition to defining a package of health services that improves health outcomes for adolescent girls and young women in 14 schools based in Moretele and Newcastle, the program seeks to test the funding model for scale to enable greater investment from the private sector and achieve both financial and social returns.
Our goal with this transaction was to deepen our understanding of blended finance. It was a key step in our journey towards establishing our blended finance capabilities and getting buy-in from relevant stakeholders, as well as a proof-of-concept that these transactions can work. After seeing the impact that the transaction had and is currently having, we decided that we are quite well suited to structure blended finance transactions and take them to market.
We're already talking to SAMRC, NACOSA, and other organizations about how we can support future funding in the space and structure for that market.
What are some ways that RMB measures and evaluates the success and impact of blended finance transactions?
We currently have a pipeline of about five transactions across healthcare, student accommodation, affordable housing, financial inclusion, and conservation. Measurement and evaluation of success is different for each transaction. The critical first hurdle for us in any transaction is what is the impact? That's always the first question we ask. Then, what is the commercial investor trying to get out of this? What is the return or the impact that they're trying to get and how can we get that right for them? The second aspect is looking at the implementer or the beneficiary of the transaction. What's critical is that there is a measurable outcome, a tangible impact resulting from the measures implemented. Another important element of measuring success for us is ensuring that there's a stretch element to the impact. We want to push the institution or the beneficiary to drive impact and go above and beyond what they might normally do, while still being sustainable and achievable.
In a market like Africa and South Africa you also need to be careful in striking that balance, because if you go too far many projects will fail from an impact perspective, which could lead to the perception that blended finance is ineffective. However, on the other hand if you choose easy targets, you could get criticism that transactions are not impactful enough.
We measure our success and impact by looking at the replicability, scalability, and additionality of each transaction. For example, if we are looking at an outcomes-based funding structure in the conservation space, success for us would be:
i. creating a transaction that results in the conservation project securing the required funding to achieve scientifically tested and agreed upon success metrics
ii. crowding in commercial investors to take on the implementation risk (but with the potential to outperform if successful)
iii. developing the market for these types of instruments, thereby crowding new capital into conservation and shifting the way traditional grant/donation funding is channeled into these projects.
As a corporate and investment bank, what are some unexpected challenges or opportunities you’ve experienced navigating blended finance transactions?
Blended finance is still new to the market and a lot of energy is expended on explaining what it is. There is also the risk that some of the deals are too highly structured or complicated and will not be replicated or taken up by traditional investors (i.e. investors other than DFIs or impact focused investors). Access to deals seems to be a common theme in this space right now. This doesn’t mean there aren’t companies who need the capital, we just haven't bridged the gaps to provide funding to those businesses yet.
The opportunity for us as a bank is to explore how we can close those gaps and create more bankable deals. We are in a good position as RMB to close this gap in that we have a variety of capabilities and skills at our disposal. Additionally, the brand backing goes a long way in legitimizing the importance of blended finance in Africa.
The struggle we have as a bank is getting the deal size right. We acknowledge that we'll need to look at deals that are not our usual deal size, so we can build our blended finance capabilities. Too often the knee jerk reaction in Africa is to use a debt structure because it's more palatable to investors, but there is a need to use more patient capital. That's something we need to navigate.
How does RMB apply a gender lens?
We haven’t reached the maturity yet where we can say we specifically apply a gender lens on investments, but we look at it on a deal-by-deal basis.
The issue facing the South African market now is that there is a lack of investable deals, this is not to say there is a lack of businesses looking to be funded, but rather the traditional sources of funding (i.e. banks) won’t fund early-stage businesses, and if those businesses do find alternative funding, it will often be at a rate that will likely cripple them. It is important that we use blended finance to bridge this gap and create an enabling environment that will result in businesses, particularly those led by women and youth, being able to access patient and enabling capital to support them so they can grow and prosper.
That’s the key here, by creating a universe in which you can do that you will then be able to apply a gender lens and a youth lens and fund the space more actively because people will feel confident that there is access to finance.
How do you see RMB’s blended finance activities evolving in the future?
At RMB we like to stay one step ahead of the market, but also one step abreast with the market. Evolution will be led by the demand in the developmental space. Climate and just transition are the focus right now, but that space is starting to get crowded. We need to identify the next developmental focus area and determine the funding nuances in that space. Healthcare, affordable housing, and water in particular, are becoming very topical on the African continent. It is going to be an evolving space and each of these sectors will have different funding needs.
More patient capital will be required going forward, so I suspect we will see more “equity like” capital instruments (i.e. convertibles being introduced to bridge the gap between the needs of the market and the developmental funding need). I also believe the use of guarantees will become more prominent as a tool in blended finance, especially to catalyze investments into early-stage projects where the risks are higher or perceived to be higher. Blended finance is going to become more mainstream in Africa, however I would caution that we often overcomplicate blended finance, we structure the structure too much and that crowds out the market. We need to create structures that are replicable, scalable, and simple enough that investors can be comfortable and allocate capital to them.
