Greetings Agents of Impact! It was great to see so many of you on our lively Call yesterday. Thanks to Ruth Gao, Jazmin Segura, Devin Culbertson, Paul Bradley and Michael Lohmeier for putting an ownership lens on the preservation of affordable housing. We’ll have a roundup and a replay in tomorrow’s Brief. – David Bank
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In today’s Brief:
- Data to debunk emerging market risk
- Fearless Fund inks first deal since suit
- Kataly backs bonds as part of spend down strategy
- Kickstarting small, modular nuclear reactors
Featured: Development Finance
New release of GEMs loan data debunks misperceptions of risks. A new look at some very old data offers empirical evidence of something emerging markets investors, fund managers and business leaders already knew: The risks of lending and investing in emerging markets are much lower than the capital markets generally perceive. A rare data release of more than 15,000 emerging market credit transactions from the Global Emerging Markets, or GEMs, database reveals that, in 40 years of lending, the average default rate for non-investment grade borrowers in emerging markets was just 3.6% – roughly equal to companies given a B rating by S&P or Moody’s. “These results suggest that investing in firms located in emerging markets is not as risky as might have been expected,” Susan Lund and Federico Galizia of International Finance Corp. write in their analysis of the GEMs data.
- Reputational risk. GEMs purports to be the “world’s largest credit risk databases for the emerging markets,” assembled from anonymized lending data from 26 multilateral development banks, or MDBs, and development finance institutions, or DFIs. The full dataset has never been publicly released. That’s despite years of calls for access from both public and private institutions, which see the information on credit default and recovery rates as essential to getting more and lower-cost capital into underinvested markets. A new report from Publish What You Fund, a UK-based nonprofit that advocates for transparency in the humanitarian aid and development finance sectors, identified “confidentiality clauses” as one of the top reasons DFIs and MDBs are against disaggregated data disclosures. Digging deeper, interviews conducted for the report found that, in fact, “concerns around disclosure related largely to reputational risks rather than commercial confidentiality.”
- Data trove. GEMs released the data as a downloadable spreadsheet of tables and charts on credit default and recovery rates, categorized by year, region, country, public versus private borrowing entity, sector and income-level. One can learn, for example, that the average annual default rate for emerging market energy investments is less than 1%, compared to defaults in communications services of about 5.1%. Or that energy investments in Latin America are less at risk of default (less than 2% annually) than are those in the Middle East and North Africa (4.1%). What one can’t learn from the data is, say, how utility-scale solar projects perform compared to wind or hydro projects, or how commercial banks perform in Africa relative to those in Latin America, or how well telecom companies in one Asian country service their debt relative to those in another country.
- Transaction transparency. The release of the anonymized, aggregated data only whet the appetite of those in the development finance field pushing for more transparency and raw, disaggregated data from GEMs, MDBs and DFIs. Thomas Venon of Eighteen East, an impact financial advisory firm, says the slow trickle of disclosures from GEMs and individual institutions fails to meet the urgency of the moment. “The question everyone keeps asking about the new GEMs data is, ‘Is this enough?’ Venon told ImpactAlpha. “No one knows who is going to come up with an idea that will help capital mobilization really take off. No one can foresee all of the solutions. We need to make as much data available as possible to unlock the market’s creativity.”
- Keep reading, “New release of GEMs loan data debunks misperceptions of risks,” by Jessica Pothering on ImpactAlpha.
Dealflow: Racial Equity
Fearless Fund backs Black woman-led ecommerce startup Zimi. The Atlanta-based fund manager has made its first investment since shutting down its grant program for Black women business owners as part of a legal settlement with the American Alliance for Equal Rights (for background see, “Legal challenge to Fearless Fund misses the mark on racial bias in venture capital”). Fearless Fund made a seven-figure investment in Zimi, a company working to break down barriers to trade for African merchants by making it easier, faster and cheaper to sell their products globally. The company, launched in August, touts its “Amazon Prime-like” fast-delivery service that it says is up to 80% cheaper than alternative shipping methods. Fearless Fund made the investment through its second venture fund, which is backed by Bank of America, Costco and Mastercard. The capital will go toward Zimi’s ongoing funding round that is also backed by Y Combinator.
- Returns on inclusion. Fearless Fund, which invests in tech-enabled consumer businesses led by women of color, “is actively diligencing numerous opportunities,” the fund’s co-founder Arian Simone told TechCrunch. Fearless Fund’s other co-founder, Ayana Parsons, stepped down as chief operating officer in June. Simone says the firm remains steadfast in its commitment to funding female founders of color. She recently announced plans to roll out a $200 million debt fund with a community development financial institution that will offer loans ranging from $5,000 to $250,000.
- Check it out.
Kataly Foundation charts an equitable bond strategy as it looks to spend down its reserves. “Is it possible to fully divest from Wall Street and invest in community with hundreds of millions of dollars?” Kataly Foundation’s Lynne Hoey asked to launch her ImpactAlpha series on Kataly’s efforts to do just that. The foundation, co-founded by Regan Pritzker, is now executing on its strategy to shift its $235 million in unrestricted reserves into values-aligned investments and to wind down the foundation by the end of the decade. A key component: corporate and municipal bonds. Xponance, a Black woman-founded, employee-owned investment firm, will manage Kataly’s $117 million corporate bond portfolio.
- Access to alpha. The Philadelphia-based company has the exclusive license to develop products for pensions, endowments, foundations and other investors using As You Sow’s racial justice and diversity, equity and inclusion data. The bonds are screened for involvement with surveillance, prisons, Israeli occupation of Palestinian territories, and weapons, as well as conventional environmental, social and governance factors. Xponance is focused on “transforming access to alpha,” says founder Tina Byles Williams, and helping clients “in the expression of their portfolio priorities, which include religious, environmental and racial justice, and workplace equity factors.”
- Muni impact. For its municipal bond strategy, Kataly is looking to Next World Assets, a registered investment advisor unit of Activest, to invest $50 million in muni bonds that aim to improve conditions in predominantly Black communities in the US. The foundation is also parking $65 million in cash with Inclusiv, which will invest the money in term deposits with credit unions and cooperativas in the US and Puerto Rico. Still in the works: a partner to manage a loan portfolio comprised of Native CDFIs.
- More.
Dealflow overflow. Investment news crossing our desks:
- The US Energy Department’s Loan Programs Office extended a $861 million loan guarantee to Clean Flexible Energy to finance the construction of four solar and storage projects in Puerto Rico. The agency also offered a $670 million conditional loan to Aspen Aerogels to build a plant in Georgia to manufacture protective barriers for EV batteries. (DOE)
- UK-based Hometree added £50 million ($65 million) of mezzanine debt from Canada Pension Plan Investment Board with a £250 million senior loan from Barclays to finance and install solar panels, batteries and heat pumps in residential homes in the UK. (Hometree)
- Opportunity Finance Network has fully allocated $25 million of catalytic philanthropic capital secured in 2021 from Wells Fargo to CDFIs financing small businesses in the US. (OFN)
- The International Finance Corp. committed $25 million to the senior tranche of Acumen’s Hardest to Reach Fund, which is targeting $200 million for pay-as-you-go solar in Africa. (IFC)
Signals: Nuclear Revival
Amazon and Google pre-purchase nuclear energy to kickstart ‘small modular reactors.’ Big Tech is going all-in on nuclear power. This week, Amazon inked new agreements to build small-scale modular reactors, known as SMRs, to power the data centers used to support AI programs for its Amazon Web Services division. The technology giant’s cloud-computing platform is a major government contractor. Amazon also led a $500 million Series C round in X-energy, a nuclear energy reactor and fuel company in Rockville, Md. Other investors include Ares Management, Citadel founder and CEO Ken Griffin, private equity energy investor NGP, and the University of Michigan. X-energy’s designs will be used in a project by Amazon and state-run utility consortium Energy Northwest to construct four SMRs with up to 960 megawatts of capacity in Washington. Amazon also signed a deal with Dominion Energy for an SMR project near Dominion’s nuclear power station near Richmond, Va. Separately, Google said it would buy energy from SMRs with 500 megawatts of new capacity that startup Kairos Power plans to bring online in the US by 2030. Google called the deal the “first corporate agreement” to buy nuclear energy from multiple SMRs.
- AI and global warming. Rising global demand for electricity – from data centers, air conditioners, EVs and other electric appliances – is making it harder to meet climate targets. Growth in renewable and nuclear power isn’t yet displacing fossil fuels and, amid the data center boom, US utilities are adding in more natural gas. “We’ve seen a pivot back toward natural gas interest in the last year or so on the heels of this AI data center energy demand,” S&P Global Market Intelligence’s Adam Wilson said on a webinar. Ex-Google CEO Eric Schmidt reportedly said, “My own opinion is that we’re not going to hit the climate goals… I’d rather bet on AI solving the problem.” AI is right now part of the problem. Data center hyperscalers like Amazon “are looking for any and every available power that’s out there,” said S&P’s Dan Thompson.
Agents of Impact: Follow the Talent
Blythe Burkhart, previously withGoldman Sachs, joins Blue Earth Capital as a growth equity analyst… Impact Finance Belgium taps Pierre Harkay, formerly with the Belgian Investment Company for Developing Countries, as CEO… Global Partnerships seeks a credit director in Bogota… Rabobank is looking for a portfolio management associate for its energy transition work in New York.
Acumen has an opening or an ESG manager in Lagos… Maine Development Foundation is hiring a finance director… Novata is recruiting a senior ESG analyst… The Aspen Institute is hosting a discussion with Milken Institute economists Kevin Hassett and Robert Shapiro on the economic impact of early wealth-building accounts, Monday, Oct. 21.
👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.
Thank you for your impact!
– Oct. 17, 2024
