Gawa Capital: structuring a fund

Fund information

Manager	Gawa Capital
Fund name	Kuali Fund
Status of Fund	Open
Asset class	Private debt and private equity
Target return	Internal Rate of Return (IRR) of 10% p.a. (in EUR)
Target sector	Investments supporting climate change resilience in emerging markets
Target geography/ region(s)	Latin America and Asia
Fund objective	Kuali is a €300 million fund managed by GAWA Capital, Spain’s leading impact investing firm with €220 million of assets under management (AUM). The fund invests in financial institutions and climate solution providers to increase climate solutions suitable for smallholder farmers and small businesses. Investors in the fund include private and institutional investors, including family offices, pension funds and insurance companies, and catalytic capital providers such as Cofides (Spain’s development finance institution) and AECID (the Spanish development agency). An additional contribution from the Green Climate Fund is undergoing due diligence.

Alignment with Just Transition Criteria

Criterion 1: there is a product-level commitment to the three Just Transition Elements	The fund’s theory of change is grounded in the recognition that communities facing the greatest risks from climate change in emerging markets are also the least equipped to build resilience. The fund’s theory of change is grounded in the recognition that communities facing the greatest risks from climate change in emerging markets are also the least equipped to build resilience. A key reason for this is the lack of funding and adaptation to needs of existing climate solutions. Kuali Fund therefore invests debt and equity in financial institutions and climate solution providers that can support smallholder farmers and small businesses, and to increase the number of “tailor-made” climate solutions to help these communities increase their resilience to the effects of climate change.   The fund defines its target stakeholders as: – small financial institutions who are working with vulnerable communities, particularly smallholder farmers and small businesses – innovative companies providing climate solutions for smallholders or small businesses – other actors in the value chain including aggregators, small and medium entreprises (SMEs), processors and retailers that are essential to increase the income of smallholders or small businesses – the vulnerable communities suffering the effects of climate change. The fund also provides a general public good for the planet with the increase in the adoption of adaptation and mitigation solutions that will reduce green house gas emissions, restore land and preserve biodiversity. To make possible the systemic change approach of the fund, the investments are complemented by a €12 million technical assistance facility that builds the capacity of its investees and stakeholders to customise the solutions provided to vulnerable communities according to their needs.
Criterion 2: Each investment within the product is assessed to avoid harm to any of the three Elements	The Fund uses an environmental and social (E&S) classification system that classifies the investments according to their social and environmental impact. The E&S classification is a key part of the preliminary information memorandum presented to the investment committee for approval. Transactions with a low E&S score are rejected. Additionally, as part of preliminary evaluation, the fund performs an analysis to assess the project to be implemented will provide solutions tailored to the needs of the communities. This assessment is also included as part of the preliminary information memorandum and transactions with low transformative power are rejected. Finally, a list of excluded activities that are harmful from a social or environmental perspective for local communities is added to each of the investment agreements.
Criterion 3: Through its investments, the product makes a positive aggregate contribution to all three Elements and, over time, each underlying investment contributes to all three Elements	The fund aims to achieve and assess each of its investments in line with the selected key performance indicators (KPIs) below, which are applied across the portfolio: Element 1: Climate & environmental action Kuali aims to mitigate 7 million tons of CO2, through providing small-scale mitigation solutions for small businesses and carbon sequestration derived from nature-based adaptation solutions for smallholder farmers. Element 2: Socio-economic distribution & equity The fund’s goal is to transform the investee’s business models (products people and processes) to offer and expand adaptation and mitigation products for smallholder farmers and small businesses. The fund aims to support resilience for 600,000 smallholders/small businesses. Additionally, an impact evaluation will also be carried out to assess how climate change resilience has increased the revenues of farmers and small businesses and household revenues. Element 3: Community voice Kuali aims to identify the main challenges for vulnerable communities to access climate solutions by giving voice to its target stakeholders. This community input will be used to design technical assistance projects (see box) to be implemented by Kuali’s investees to adapt their solutions to the needs of other target stakeholders. The technical assistance projects will be monitored throughout the life of the investment by GAWA Capital’s transformation and impact team. Part of the monitoring activities will include engaging in periodic dialogue with the stakeholders. Through the impact evaluation, Kuali will assess whether its investments and the technical assistance provided has been relevant and coherent to the vulnerable communities’ needs and whether it has been efficient and effective in providing resilience and in increasing the revenues of the beneficiaries’ activities and households. Kuali will work in collaboration with the European Union and the Spanish development agency’s delegations in the target countries. Local organisations will be hired to implement the technical assistance projects.

Inclusion as a core component

The fund has a strong gender focus. It recognises women entrepreneurs in its target markets face specific barriers. Most women are stuck in the informal sector, lacking access to financial, human, and social capital. Latin America is the region with the second highest level of failure in women-led businesses in the world. Women are also more vulnerable to the effects of climate change, as they spend more time and energy on activities related to the environment. As a result, women find themselves with less time for education, income-generating activities, and participation in community decision making processes, further entrenching gender inequality.

To help overcome these challenges, Kuali performs a gender analysis and assessment in all specific target countries and investments. The fund aims to help its target stakeholders’ ability to reach women with their products and improving the products and services offered to them.

During due diligence, a gender gap assessment is conducted in each potential investee, which is supported by conversations with local women’s organisations. This forms the the basis for developing specific gender policies and procedures for the investee. Kuali will assess the project specific gender vulnerabilities so that an gender action plan is agreed with the investee. Specific related provisions regarding the gender action plan will be introduced in investment agreements. Kuali leverages GAWA Capital’s gender officer, who will report to the Investment Committee whenever an investment is to be approved and provide gender-related information to support decision making.

Each action plan will include an improvement of equality and non-discrimination in aspects such as: staff composition, access to leadership positions, recruitment, promotion, training and equal remuneration for work of equal value, so that diversity is protected.

Kuali will target a minimum of 30% women representation in the board and management of investees and will target a minimum of 40% women staff. In addition, workshops and training regarding entrepreneurship and financial literacy for women and other underrepresented groups will be conducted with the support of the technical assistance facility. Kuali expects to complete over 2,000 trainings, reaching 73 individuals. Its targets a minimum of 5% of total attendees being indigenous women and 5% afro descendant women.  Through these interventions, Kuali expects to increase climate change resilience for at least 150,000 women.

Catalytic capital for a just transition

Catalytic capital is used to support a target of x4 leverage factor by mobilising €213 million from private and institutional investors, including family offices, financial institutions, pension funds and insurance companies. In addition, the fund’s €12 million technical assistance facility will be used to support Kuali’s investees, give voice to the different stakeholders and amplify fund impact in these vulnerable communities.

Private investment is de-risked with €37 million first-loss tranches that protect their return under adverse scenarios. First-loss tranches safeguard private investors’ contribution, requiring losses to exceed €50 million before they incur a loss. Subsidised junior debt recoups on an equal footing with private investors, although at a lower rate 1-3.75% of return per annum. Any excess returns go to the private investors. This provides further confidence for private investors, on top of GAWA Capital’s strong track record of 70 investments in the last 14 years with zero losses.

This case study is provided for information only and should not be interpreted as constituting investment advice or any regulated activity. The information and figures provided are accurate as per the latest information publicly available and/or made available to the Impact Investing Institute for the purpose of this research at the time of publication.