Allianz Global Investors and Dutch development bank FMO have agreed on one of the largest “blended finance” funds on record, raising $1.1 billion to invest in loans that help developing and border countries achieve -ot the sustainable development targets.
The fund is the largest of its type since 2018 and one of the five largest to date, according to Convergence, which tracks the market and said the fund also stands out for its high ratio of private capital invested for every dollar of public funds.
Integrated finance sees providers of public money – usually government aid departments, development finance institutions or charitable donors – agree to accept more risk in a fund to encourage investors to private sector to participate.
Overhauling the way multilateral development banks lend to boost private investment is a central part of the COP28 climate talks, which begin in Dubai this week.
The demands are huge – an estimate last year said the cost of meeting the UN’s Sustainable Development Goals (SDGs), a series of 2030 global targets endorsed by member states to combat issues such as hunger, poverty and climate change, amounting to $176 trillion. .
The money raised through the mixed finance fund is a fraction of what is needed. Convergence says the median annual financing volume over the past decade has been $14 billion.
The new 25-year SDG Loan Fund is structured so that the FMO takes the first loss if loans go into default. That was backed by a $25 million guarantee from the MacArthur Foundation.
Private investors, which include Allianz and Skandia, will be the last to lose money. FMO will also take loans to invest.
That gave investors enough comfort to provide $1 billion for the $111 million put into FMO, Nadia Nikolova, Allianz’s Lead Portfolio Manager, told Reuters.
The 9-1 ratio is higher than average, according to Convergence. It studied a sample of funds and found that the average private sector leverage ratio – private sector capital used in concession capital – was 1.8.
“Pension funds have not been comfortable with emerging market risks for 25 years,” Nikolova said. But this structure of the loan fund ensures that “everyone’s interest is aligned,” he said, noting that private investors can begin to withdraw their money when the loans begin to amortize in a few years.
The fund will jointly invest in a portfolio of about 100 loans targeting the energy, financial and agribusiness sectors to help developing countries achieve the three SDGs – boosting economic growth, equality , and combating climate change.
The fund, having already approved nearly $100 million worth of initial loan investment, invest in higher risk areas including border markets, without them being subject to international sanctions, said Nic Wessemius, managing director of FMO Investment Management.
FMO’s team of about 40 due diligence experts will monitor loan recipients to ensure that the money is used as intended and failure to do so may trigger an event of default, meaning immediate payment, said Wessemius.
(Reporting by Tommy Reggiori Wilkes and Simon Jessop; editing by Mark Potter)
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