by marten | January 11, 2017 10:04 am
Building and upgrading the infrastructure to underpin sustainable development in emerging markets and elsewhere requires additional investments estimated at around one trillion dollars annually. To support expected economic growth rates, and meet the UN’s Sustainable Development Goals (SDGs), the McKinsey Global Institute calculated in 2013 that at least 60% of infrastructure spending needs to be directed towards emerging markets. Since then, the gap between actual and required spending on ports, roads, power stations and other drivers of growth has only widened. The need to proactively address climate change adds urgency with another $100 billion at least needed annually to offset global warming.
The conundrum now faced is how to engage – and mobilise – private capital. It is estimated that of the approximately $80 trillion administered by pension funds and insurance companies worldwide, only about one percent is invested in infrastructure, and very little of that in developing countries. This is where the International Finance Corporation’s Asset Management Company (IFC AMC) may help. IFC AMC chief executive Gavin E.R. Wilson points to a mismatch between real and perceived risk as one of the main reasons for the reluctance of private investors to engage with emerging markets: “At IFC, we now have more than sixty years of experience in spotting opportunities and managing risk in developing countries and we benefit enormously from having investment professionals based all around the world. The combination of sector expertise in our global industry teams and our up-close understanding of local business conditions helps us assess, mitigate and manage risk. Sometimes it is simply a question of risk perception, other times we need to reduce risk meaningfully, often by blending public with private expertise and capital.”
“We bring our investors into opportunities they wouldn’t typically see, with the risk mitigation they seek as they look for yield in riskier locations.”
– Gavin Wilson
A wholly-owned subsidiary of the IFC and member of the World Bank Group, IFC AMC is a fund manager that offers investors an opportunity to invest in companies and projects that are off the beaten track but have passed IFC’s high diligence standards. “Infrastructure equity investors have tended to define their asset class, in comparison to private equity, as lower-risk lower-return and almost exclusively in developed countries. Yet the opportunities in emerging markets infrastructure cannot be categorised so easily. At IFC we see a diversified mix of excellent investment opportunities that range across the risk-return spectrum and, viewed as a portfolio, look particularly attractive in a zero interest rate environment.”
Describing IFC AMC as a conduit to help global investors gain more exposure to private investment opportunities in markets where capital markets are often undeveloped and private transactions provide the capital that is fuelling growth, Mr Wilson emphasises that the terms of trade favour the capital provider: “There is a shortage of intelligent capital ready to invest in private enterprises that meet all the usual requirements of portfolio managers but happen to be located outside their immediate field of vision or comfort zone.”
Capital committed via AMC invests alongside IFC and benefits from its global footprint and local presence, including its network of government and business connections, which offers institutional investors an added layer of security. The default rate on private sector infrastructure loans in emerging market is in fact broadly the same as that of comparable transactions in the developed world. “But the ever-present problem, which we are well placed to mitigate, is a trust deficit between the private and public sectors, especially in long-term infrastructure projects.”
The investment funds that AMC manages have the right, but not the obligation, to participate in IFC-funded projects. This allows investors to tap into IFC’s unique pipeline of investment projects, but with a selective approach to portfolio construction. AMC runs a separate investment decision-making process, owing its fiduciary duty to its investors and aiming to build fund portfolios with a diversified mix of investments and good risk-adjusted returns. “An important feature of our approach concerns IFC’s well-established reputation for investing only in projects that fully meet current ESG [environmental, social, and governance] standards. This is not only important in itself, but in our view is a key way to reduce risk. We consider ESG awareness an important indicator of a management team’s quality and capabilities, and therefore a predictor of its ability to deliver on its growth plans.”
Amidst the interplay of global goals, development needs and investment models, Mr Wilson sees three converging trends that are likely to shape how growth capital is mobilised in emerging markets: investors will venture farther afield in search of yield (1), resulting in private capital becoming increasingly critical for delivering growth and development impact in emerging markets (2), while efforts to achieve the development and climate change goals merge (3) into a single push towards sustainable development. With its track-record of mobilising private capital and its understanding of the challenges involved in trying to transform “billions into trillions”, the IFC is well-placed to lead this redefinition of what development and climate finance means.
“We provide growth capital for growing companies in economies that need that growth. We bring our investors into opportunities they wouldn’t typically see, with the risk mitigation they seek as they look for yield in riskier locations. Profitability and development are not in contradiction: they are in fact mutually reinforcing.”
IFC Asset Management Company (IFC AMC) was set up in 2009 as a wholly-owned subsidiary of the International Finance Corporation, the private sector investment arm of the World Bank Group. The company, headquartered in Washington DC, manages IFC and third-party capital – mostly from investors with long-term time horizons that are interested in participating in IFC’s approach to investing in developing countries. Whilst part of the IFC, the Asset Management Company makes independent investment decisions in the interests of the funds it manages.
AMC manages a portfolio of thirteen funds, divided according to geography, sector and/or asset class. To date, AMC funds have made investments of over $5 billion in about 90 companies and funds in emerging and frontier countries. The company has raised a total of $9.8 billion including about $7.5 billion of external capital, invested in its private equity, private credit and fund-of-fund products.
An example of the latter is its Catalyst Fund, launched in 2012 with a focus on the clean-tech and renewable energy sectors.
The Asset Management Company enjoys access to the full range of expertise and on-the-ground presence of the International Finance Corporation and is thus able to select the most promising projects for inclusion in its funds. Additionally, the AMC offers investors the full scope of risk mitigation facilities – including compliance with ESG (environmental, social, and governance) standards – that the IFC attaches to its undertakings.
As a result, institutional investors not normally committing funds to emerging markets may gain exposure to the strong returns offered in these markets whilst reducing the associated risks. The IFC Asset Management Company is an essential part of the World Bank Group’s efforts to turn “billions into trillions” by facilitating emerging market access to large pools of private capital.
Leading the IFC Asset Management Company since its founding in 2009, Gavin Wilson brought a wealth of experience to the start-up. Mr Wilson earned his spurs in London where he started his career at McKinsey and Company – the global management consultant firm. He joined the World Bank Group in 1988 under its Young Professionals Programme and worked on a number of assignments in Africa for the World Bank and in several regions for the International Finance Corporation’s investment and advisory businesses. He also served a term as the IFC’s resident representative in Poland and as a special advisor to the Bank of England.
In 1996, Mr Wilson started work at Goldman Sachs in London where he became a Managing Director in the Investment Banking Division. Here, he also co-headed the bank’s EMEA (Europe, Middle East, and Africa) Industrials Group after first leading Goldman’s New Markets investment banking execution team which focused on emerging markets across EMEA.
Mr Wilson is a British citizen and holds a BA degree from Oxford University. Mr Wilson obtained his MBA at Stanford University where he was a Arjay Miller Scholar. He serves on the Business and Sustainable Development Commission and on the WEF’s Global Future Council on International Governance & Public-Private Cooperation.
Source URL: https://cfi.co/africa/2017/01/gavin-wilson-ceo-ifc-amc-mobilising-private-capital-for-sustainable-development/
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