Achieving the Sustainable Development Goals and delivering meaningful climate action requires trillions in investment – far beyond what public finance alone can provide. Increasing the flow of private capital to emerging economies is essential to bridge this gap, accelerate economic growth, and drive sustainable development.
The good news is that this money exists. Institutional investors, including pension funds, insurers and asset managers, collectively manage trillions of dollars globally. Yet only a small fraction of this capital reaches low- and middle- income countries. This is due to a range of barriers, including unfamiliar legal frameworks, limited in-house expertise, and perceived risks that deter investment.
Development finance institutions (DFIs) like BII have an important role to play in attracting more private capital into emerging economies. It is one of the most powerful ways we can scale our impact.
Mobilisation is not a new concept. DFIs have long brought private investors into individual transactions such as syndicated loans and equity investments. One recent example is Zambia’s largest pension fund investing alongside DFIs in Growth Investment Partners Zambia, an SME financing platform launched by BII.
But this individual transaction approach has its limits. It has not scaled at the pace nor volume required to meet global development challenges. One reason for this is that it does not meet the needs of institutional investors seeking large, diversified and long-term investment opportunities.
In response to this challenge, at BII we’re actively exploring new approaches to mobilisation. We are committed to sharing lessons we’re learning along the way, including from this latest report from independent experts as part of the FCDO-BII Evaluation and Learning Programme.
What have we learned?
The report provides practical insights and examples on the approaches and tools that can help DFIs mobilise more private capital in low- and middle-income countries. It identifies four key shifts that DFIs could make to mobilise private capital at scale:
- Scale origination
To support larger volumes of private investment in the markets they operate in, DFIs need to scale their origination and portfolio management capacity, with the intent to share a large part of the assets with private investors. This can be achieved through larger investment teams, partnering with local banks and fund managers, and investing in venture capital and private equity funds that can create co-investment or follow-on investment opportunities. For DFIs with the ability to invest equity and play a sponsorship role, one approach is to create platforms which generate investment opportunities, either directly or through affiliated projects. One example is Ayana, a renewable energy platform in India launched by BII in 2018 – which has mobilised over $1 billion at project and platform level.
- Pool and share assets
To attract private investors, DFIs must make their assets align more closely with institutional investors’ requirements, including larger ticket sizes. One way to do this is by ‘pooling’ their assets and sharing the credit risk with private investors on a portfolio (i.e. multiple asset) basis. This can be structured in a variety of ways, including through securitisation or fund structures.
Sharing risk with private investors frees up DFI balance sheets, while retaining some exposure and continued oversight of development impact and environmental, social and governance (ESG) management. This enables them to originate more assets, thereby enhancing their ability to deliver on their mission.
- Make assets more investible
DFIs can also use tools which give private investors less exposure to risk, for example by taking junior positions in the capital structure, or by using insurance or guarantees to transfer risks to third parties. Blending concessional finance into individual investments or multi-asset pools can further enhance returns or reduce risk, making investments more attractive to private investors[1].
- Collaborate with others
Even with these approaches to expanding origination, individual DFIs may not generate sufficient volume of investments to support the creation of multi-asset, risk-diversified pools from their transactions alone. Pooling assets across multiple DFIs could help to overcome limitations in origination, create efficiencies and help to create larger, risk-diversified structures more attractive to investors.
DFIs can also work with private asset managers to supplement their own capacity to structure, manage and share assets. For example, earlier this year BII and the Public Investment Corporation (PIC), one of Africa’s largest asset managers, signed a Memorandum of Understanding to accelerate collaboration in investments across the continent.
While designing their mobilisation strategies, it is important that DFIs consider their own role in the eco-system and ensure that their efforts complement those of other DFIs, MDBs and investors. Mobilising private capital at scale is vital for global development and we hope this paper will support DFIs and MDBs to unlock more private capital where it’s needed most.
[1] Good practices have developed for minimising market distortions and ensuring that concessionality is only offered to the extent needed for capital to flow.
