Acre Impact Capital looks to export finance as an impact tool

Export finance is a debt instrument that has been used for more than a century to help exporters get their goods and services to overseas customers.

The credit tool is an integral part of global supply chains and long predates the concept of impact investing, but the way export finance has evolved and the nature of the market’s funding gaps present institutional investors with an opportunity to unlock more than $5 for every dollar spent, said Acre Impact Capital founding partner Hussein Sefian.

The former BNP Paribas investment bank head of strategy and strategic investments founded the firm in 2019 alongside a small group of partners and was backed by the Rockefeller Foundation’s innovative financing program, which supports projects addressing financing gaps towards the sustainable development goals.

AIC held a $100 million first close on its debut Export Finance Fund I in April against a $300 million target, and received commitments from Investec, Rand Merchant Bank, Standard Bank and DFIs such as the European Investment Bank and the Private Infrastructure Development Group.

“Let’s say a West African country wants to do a solar project in 100 villages,” Sefian said. “They’ll typically put out a tender asking companies from around the world to respond to an RFP, which will cover the technical aspects.

“They will also ask them to come back with a financing package called an EPC+F, so engineering, procurement, construction and financing. If a UK-based company responds to the RFP, for example, they will work with HSBC or Standard Chartered or another bank, to put together the financing package and the bank in turn will engage with UK Export Finance, which is the British government’s export credit agency, to see if they’re willing to support that project,” explained Sefian.

Providing UKEF is willing to support the export deal, “they will provide their support to the transaction in the form of a guarantee covering all political risk and all credit risk for up to 85 percent of the value of the transaction”.

For a $100 million export deal, for example, UKEF and ultimately the British government, will step in as guarantor for $85 million of the project in the event of non-payment owing to a credit or political risk event.

This leaves the 15 percent commercial tranche of the deal, which is required to complete the project’s financing package, and is typically provided by commercial banks with the aid of political and credit risk insurance from the private market.

This is where the market dislocation occurs, said Sefian, and is where the impact investment opportunity arises.

Due to fluctuating and often limited insurance availability for emerging markets such as Africa, which is the primary region where AIC intends to deploy its fund, funding for the 15 percent commercial tranche is increasingly scarce, which means more and more deals are falling through.

“By doing that [proving the 15 percent tranche], if we continue to use our earlier example, we unlock $85 million through UK Export Finance, allowing the deal to move forward. That’s why we say that our funding mobilises $5.6 for every dollar, which is just 85 divided by 15.”

The closed-end 10-year vehicle targets returns in the high single digits and does not use any risk insurance, confirmed Sefian, adding that the firm specialises in analysing sovereign credit risk.

And while the 85 percent tranche guaranteed by an export credit agency can have a tenor that stretches for as long as 22-years, the 15 percent commercial tranche has a five to seven-year amortisation.

The vehicle has been backed by commercial investors but no pension funds have made any commitments yet. Depending on the risk appetite of certain pension funds’ impact allocations, the fund may well add a pension to its list of LPs, added Sefian.

Export Finance Fund I targets infrastructure projects in sectors such as agriculture, water, sanitation, energy and transport, among others.

The firm’s impact investment strategy is certainly novel – we have not seen any evidence of another player in the private funds market bringing capital to export finance deals in this way.

AIC’s success, or lack there of, will be keenly watched by anyone managing capital with a civil purpose.