When Typhoon Haiyan slammed into the Philippines in November 2013, donors wanted the funds they pledged to the U.S. Fund for UNICEF (U.S. Fund) to be spent on life-saving initiatives as quickly as possible. Instead of waiting days or even weeks for large pledges to be released, the U.S. Fund used its Bridge Fund to quickly get $250,000 into the region.
“The basic premise of the Bridge Fund is that it’s a more institutional method to fund gaps in pledges made by donors and cash received,” said Edward Lloyd, CFO/COO of the U.S. Fund for UNICEF.
The Bridge Fund is a revolving loan. It starts with a bedrock of grants that act as equity in perpetuity, and Lloyd and Bridge Fund Managing Director Marc Diaz said the goal is $14 million. Currently, the two-and-a-half-year-old Bridge Fund has $6 million. This equity is then borrowed against to secure program-related investments and below-market loans. Prudential Financial is the latest lender, having announced a $12.5 million loan last week, in addition to its $7.5 million loan at the inception of the Bridge Fund.
The Bridge Fund borrows at three-and-a-half times its equity value, currently $6 million. That risk tolerance factor had to be determined early on in the life of the fund. “It’s basically what we’re comfortable with,” said Lloyd. “It’s a combination of internal reviews, the financial capabilities of donors and what makes sense for investors.”
The Fund has facilitated about $35 million worth of activity, with another $8 million set to be used in the near future. “The loan pool is only about $21 million dollars ($6 million in equity times risk factor 3.5), which has grown from the initial $7.5 million (Prudential loan),” said Diaz. “It’s a significant multiplier effect.”
The biggest difference between the Bridge Fund and other forms of impact investing such as social impact bonds is the source of repayment, said Lloyd. “Principal is repaid based on honoring the pledge of a donor,” said Lloyd. “When we underwrite, we’re underwriting the donor who’s making the commitment. We stagger things to know that, when the lender’s money is due, it’ll be there.” Additionally, investments in the Bridge Fund count towards foundations’ 5 percent distribution requirement.
Interest is paid back on an annual schedule. The loans generally range from 0 percent to 2 percent for five-year terms, and are worked out on a case-by-case basis. Lloyd said interest repayments are budgeted for like any other operating or program expense. Lenders, said Diaz, “like the discipline of us having to make that payment.”
Bridge funds have been used for polio eradication in India, Pakistan, Afghanistan and Nigeria; school supplies in Mozambique; therapeutic food in the Sahel region of Africa; medicine in Sierra Leone; and emergency response in the Philippines, among other projects. “We bridge basic commodities and supplies,” said Lloyd. “We don’t bridge staff or anything else that a child can’t use.”
Though a part of the U.S. Fund for UNICEF, Diaz said the Bridge Fund is a separate entity, equivalent to a wholly owned subsidiary in the business world. Its funds are managed and accounted for distinctly from the U.S. Fund. “One thing we’re very careful about, because this is a U.S. Fund fundraising apparatus, we do not cannibalize our other core programs,” said Lloyd. “We found donors and investors want to invest in a different kind of vehicle.”