Patrick Goodman, founding partner at Innpact, discusses various gender-related challenges in finance. Innpact Fund Management, a Luxembourg-based alternative investment fund manager and a 100% subsidiary of Innpact, serves as the global portfolio manager for the Global Gender-Smart Fund (GGSF). Launched in January 2024, the GGSF is the world’s largest gender-focused investment fund. Its mission is to empower underserved women and improve working conditions by providing financial services that promote gender equality and enhance livelihoods in developing markets. In an interview with Paperjam, Goodman emphasised the importance of addressing the gender gap in finance, explaining that the GGSF reflects the fund’s broader commitment to tackling a range of gender-related challenges beyond simply financing women-owned or women-led businesses.
Kangkan Halder: What motivated the renaming of the Microfinance Enhancement Facility, initially founded in 2009, to the Global Gender-Smart Fund on 1 January 2024? How have the goals evolved over the years?
: Discussions on the future of the fund known at the time as the Microfinance Enhancement Facility or MEF originally started with founding shareholders and with Innpact at the time of the 10-year anniversary of the fund in 2019, and continued on as the initial maturity of the senior shares (set for February 2025) was becoming closer.
The key question was, as a liquidity provider set up a time of crisis, is the fund still playing a role that is relevant and impactful in the world today? It was very clear from an early stage in those conversations that the fund needed a compelling impact strategy and theory of change which leveraged MEF’s comparative advantages. It was thus understood that the fund would potentially continue its role as a vehicle which supports financial inclusion globally in developing countries, benefiting from a blended finance structure and strong support from shareholders.
However, the message had to go beyond this to have a clear and measurable impact that would address an identified market need and be in line with shareholders' expectations. In this context, in the course of 2021, it was decided to focus on a key area of development: gender finance, in line with SDG 5, in response to a clear $1.7trn gender finance gap. Building on the fund’s successful 15-year track record and global outreach, it was evident that the fund could make even more of a difference if it added to its original financial inclusion mandate a well-defined and ambitious gender strategy that would be fully embedded into the whole investment and portfolio monitoring process, thus also setting new standards and creating a demonstration effect.
Could you elaborate on the new strategy of GGSF and its anticipated implications?
In order to ensure that the gender strategy is implemented throughout the portfolio, all financial institutions that are potential investees are required to conduct a detailed gender assessment, which is harmonised through a questionnaire that we have developed with a company called Equilo.
On the basis of gaps identified during such assessment, financial institutions then need to implement a gender action plan to address priority gaps, which can be either at the level of its end-clients in terms of product design or outreach, or at the level of the institution itself in terms of internal policies and gender representation. A technical assistance facility has been set up alongside the fund in order to support such gender action plans, we expect that about a third of investees would benefit from technical assistance support. Finally, the financing provided by the fund is earmarked to target borrowers, being women as well as women-owned and women-led small businesses, which the institutions also report regularly on.
The aim is to highlight the fund seeks to intentionally and measurably leverage the financing provided to address gender disparities
What is the rationale behind naming the fund ‘gender-smart’ instead of women-owned or women-led businesses?
The objective of the fund goes beyond extending financing to women-owned or women-led businesses, as it also aims to address other gender-related challenges as mentioned above. By naming the fund ‘gender-smart’, the aim is to highlight the fund seeks to intentionally and measurably leverage the financing provided to address gender disparities and better inform the investment decision as well.
How does Innpact contribute to this initiative?
Innpact has been the general secretary of the fund since inception in 2009, with our role growing over the years, leading to Innpact Fund Management becoming the alternative investment fund manager (AIFM) as of 1 January 2024. During the transition process over the past couple of years, Innpact has been leading the effort in coordinating discussions with the investors, with the board and with the shareholders, conducting the tenders for the portfolio managers and for the technical assistance provider and ensuring transparent communication and collaboration between all parties in the finalisation and implementation of the strategy and structure.
What makes our role unique today is that we operate in a model with three different portfolio managers who have delegated authority on portfolio management for their individual pools, while we retain at our level the role of global portfolio manager, which includes the coordination of portfolio managers and service providers, implementation of the fund’s policies and procedures, management of the investment approval process and related tools, and monitoring and reporting on the overall portfolio allocation and headroom against the fund’s limits. In addition, we retain core AIFM functions--risk management, compliance oversight and regulatory reporting-- as well as responsibilities for impact management, asset and liability management, investor relations and reporting, and fund promotion and public communication.
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Can you provide examples of the types of investments the GGSF makes to support gender equity?
The GGSF provides senior and subordinated loans to the financial institutions. As mentioned above, the key aspect is that any financial institution that receives financing from GGSF needs to commit to a gender action plan, and the financing provided is earmarked to target borrowers. The gender action plan can address a number of topics… examples of activities that have been targeted by loans that have been approved this year [include] financial processes, survivor-centred prevention for gender-based violence and harassment risk (GBVH), workforce participation, gender lens in policies and gendered approach to value chains.
How does the GGSF select businesses or projects for investment that are aimed at gender impact?
The sourcing of investment is done by the portfolio managers through their network of offices in emerging markets worldwide. Through their discussions either with existing clients or with new prospects, they identify financial institutions that would be interested in receiving funding from GGSF and that would commit to improving on gender aspects. Once interest is confirmed, they conduct a due diligence on the performance of the institutions, and in particular the development and management of its underlying portfolio, in terms of financial aspects, risk, environmental and social performance, and impact, in particular gender aspects.
The financial institutions the fund invests in are also required to apply client protection and responsible finance principles which require that the institutions provide appropriate products and services with reasonable and transparent pricing, thus ensuring that end-borrowers are indeed receiving financing that they need and that they are able to use and repay. Post due diligence, the portfolio managers go through their internal investment committee approval, following which the investment proposal is submitted to Innpact for no objection, which is provided on the basis of risk and impact analysis, the latter ensuring that the proposed investment is indeed in line with the fund’s strategy and meets the related requirements.
What advantages does Luxembourg offer to the GGSF?
Luxembourg has offered the ability to structure the GGSF in a very flexible way with a blended finance structure offering several tranches of different risk/return combinations, making the GGSF very attractive to different investors with very different risk/return profiles. For example, the German government, through BMZ, Sweden and Austria through the OeEB, the Austrian Development Bank, were keen to provide first loss funding in the form of junior shares. This allowed three important development finance institutions in the field of financial inclusion, KfW, the German Development Bank, IFC, a member of the World Bank Group, and again OeEB to provide financing to the GGSF through junior shares.
These tranches of shares offer a very good protection to subordinated noteholders and senior noteholders who are therefore able to invest significant amounts of money in developing markets to finance financial inclusion and gender finance which they would not have done otherwise without these layers of junior and senior shares. The Luxembourg legal framework offers tremendous flexibility as well as the right level of regulation to satisfy all these different types of investors.
How does being based in Luxembourg help the GGSF attract investors?
GGSF as a specialised investment fund regulated by CSSF, the Luxembourg regulator, offers great comfort to investors around the world, with the necessary checks and balances provided by Innpact Fund Management SA, as AIFM.
Have there been any challenges with the GGSF’s gender-smart strategy since its inception?
Given the specific structure of the fund with three portfolio managers, one global portfolio manager, board, investors and technical assistance providers, it was key to coordinate among all parties to ensure that processes that are put in place meet the ambitious objectives of the fund while being operationally feasible. This has required extensive consultation and coordination and led to delays in implementing certain processes, as a result of which new disbursements were limited at the start of the year, but the pipeline has since then picked up quite a bit.
On the other hand, we expected that it would be more challenging to develop such a pipeline given the additional requirements that the fund’s strategy is placing on investees, however, we have seen strong demand and interest from financial institutions that are keen to move forward on their gender journey and to receive support from the fund in doing so.
With total assets of around $500m as of June 2024, the aim is to increase the fund to around $700m by 2026
How will the GGSF track and report its progress on gender equity?
We are using a number of KPIs to track the performance of the fund, both within financial institutions and in terms of outreach to end-clients. Such KPIs include the number of financial institutions collecting gender-disaggregated data and who have a gender-smart strategy, the number of products/services developed or altered to be more gender-sensitive, the number of target clients and the amount of loans to target clients, and the share of women on the board, senior management, middle management and total employees at the level of financial institutions.
These KPIs are reported on by the investees on a quarterly basis for portfolio data and on an annual basis for all KPIs, based on which we provide quarterly updates to investors, and we will include progress on the gender strategy in our annual report as well. In addition, we are grouping investees into performance groups depending on where they stand on gender aspects, and we will track the progress of the institutions to ensure that they move from one performance group to the next. Finally, the fund is a member of 2X Global, a field-building organisation which has developed the 2X criteria, a global baseline standard for gender finance. We are aiming to measure investees against the 2X criteria, using the Equilo gender assessment mentioned above, in order to encourage investees to become 2X-aligned, and for those who wish to do so, to make public gender-related information on the 2X Challenge platform.
What are the GGSF’s goals for the next few years?
With total assets of around $500m as of June 2024, the aim is to increase the fund to around $700m by 2026. In doing so, the fund’s portfolio will increase with more investees implementing gender action plans, with the aim, among others, to increase by 50% the number of women, women-owned or women-led business borrowers by 2029, and reach 50% female employees at the level of financed financial institutions by 2033. This will also be supported by around 30 technical assistance interventions per year.