When Gary Hattem and Asad Mahmood of Deutsche Bank AG closed the $15 million Eye Fund I in 2010, they completed what had become a more than five-year endeavor.
"When it started, the problems were conceptual. People were not ready for it," says Mahmood, a managing director who oversees $500 million in loans and investments. "The common perception was that bringing debt into hospitals that are serving the poor was not an acceptable way of doing things."
The Eye Fund is a social investment project that provides low-cost loans to eye-care hospitals in China, Nigeria and Paraguay. Patients with greater economic means pay more and subsidize care for poorer patients. The institutions produce enough cash to repay loans.
Many foundations and eye-care corporations were just not comfortable with the loan model.
Deutsche Bank has had a prior history in microfinance. In fact, the German bank has been engaged in microfinance and community development finance for more than 20 years.
In addition to Hattem, who is managing director of community development finance and president of philanthropic unit Deutsche Bank Americas Foundation, and Mahmood, the Eye Fund team includes fund manager Ben Midberry.
The Eye Fund has distinguished collaborators that include David Green from Ashoka, a global organization for social entrepreneurship, who is also a MacArthur fellow and a recipient of Helen Keller International's award for humanitarian work to prevent blindness. Green helped develop the Aravind Eye Hospital, an institution in southern India, and Auralab, which manufactures low-cost lenses used in cataract treatments and other medical products. He has also created solar power and general healthcare funds.
Another partner is the International Agency for the Prevention of Blindness, a group based in London working to eradicate the causes of avoidable blindness.
With the financing, the partners aim to increase the number of eye surgeries at the three hospitals by 150% within seven years.
"The reason why these eye hospitals can use this debt financing so effectively is that they can invest this capital in facilities, often towards the high end of their business, which is then going to be the source of payment of the loan and of perennial subsidies for the philanthropic side of their business," Midberry says.
Hospitals have used loans to buy Lasik surgery equipment. The profits allow free or heavily subsidized cataract and glaucoma surgery, leading causes of preventable blindness among the poor in the developing world.
The fund is structured like a collateralized debt obligation, with some important differences. The riskiest tranche, for instance, collects the lowest payout. "In the Eye Fund, the people who are investing in the riskiest piece do so because they are interested in leveraging resources for their cause," Mahmood says.
DB Americas Foundation put in a $1 million first-loss equity investment. By taking the risk, Deutsche Bank shields more senior investors. "Because of the credit enhancements, the senior tranches have a 70% protection," says Mahmood. "We can lose 70% of the fund and the senior investors would not see a dollar loss."
Ashoka's Green says that such credit enhancements are critical to further development. "Social investing grew up around microfinance, but people are starting to see the opportunities outside of microfinance," he says.
For social investing to take off in a big way, he adds, "it needs to have that leveraging effect so that you can put together financial models that look vanilla to investors like pension funds, insurance companies or university endowments."
The challenge is to create an asset class with liquidity and exit opportunities that appeals to a pension fund while ensuring fidelity to social goals.
But there is more to it than simply recasting philanthropy as structured finance. "The beauty of the Eye Fund is not that it is a commercial transaction," Mahmood says. "The beauty of the Eye Fund is that we are using business methods and combining energies from differently motivated money to, in pragmatic ways, do something meaningful and sustainable."