Investors are more willing to put money into something when they are confident of being able to take it out again. That is why “secondary” markets, where investors can buy and sell claims in existing investments, are so important. The largest secondary markets are public stock and bond markets, such as the London Stock Exchange, but development finance often involves making investments in countries where public markets are relatively inactive or non-existent, and in companies or projects that are not immediately suitable for listing on a public market. Most of the investments that BII makes are private, meaning that they do not involve issuing or buying securities on a public market.
This report, Secondary Market Vehicles in EMDEs: Lessons and Implications for Development Actors, focuses on the potential of vehicles that specialise in acquiring private assets from existing investors, to encourage more primary investment by making it easier for them to exit and recycle capital. We commissioned the report in partnership with Mobilist, a UK government programme that helps developmental investments list on global and local public exchanges.
Weak exit routes constrain investment activity in emerging markets and developing economies (EMDEs). Across infrastructure and real estate, project developers struggle to refinance operating assets and release capital for investment in new projects. In private equity, fund managers in Africa and Asia can successfully invest to grow businesses but then struggle to find buyers for them, reducing the pace at which capital is returned and redeployed into new funds, and resulting in ongoing management costs that eat into returns.
The analysis shows that the development of secondary vehicles is gaining momentum in specific markets and asset classes. Case studies from India, Mexico, South Africa, and Kenya illustrate that where supply, demand and system enablers are in place, vehicles such as Infrastructure Investment Trusts (InvITs), YieldCos, and Real Estate Investment Trusts (REITs) are pooling underlying investments and enabling their sale to new investors. In private equity, however, dedicated secondary vehicles are still rare, particularly in Africa and South Asia, where the lack of exit options has contributed to long-dated or “stuck” capital in tail-end and underperforming funds.
The report concludes with a discussion of the role of development finance institutions (DFIs) and other development actors. DFIs can play a catalytic role by anchoring early pilots and working with regulators and exchanges to refine infrastructure and real estate vehicle structures in markets where asset pipelines and institutional appetite are already emerging. Longer-term progress depends on supporting purpose-built secondary vehicles that can provide repeatable exit pathways. The ability of DFIs to take these actions depends on expanding (and in some cases shifting) mandates and incentives, including recognising secondary market creation and capital recycling as development outcomes.
Case studies connected to the report:
- YieldCos in the United States
- Infrastructure Investment Trusts (InvITs)
- Real Estate Investment Trusts (REITs) in Mexico
- Private Market Secondaries
- Developed Market Listed Investment Trusts
