Development finance institutions are often seen as “the usual suspects” when it comes to backing fund managers and infrastructure projects in emerging and frontier markets. But while the quasi-public DFIs are willing to go where others sometimes fear to tread, they have often come under fire for being too slow, too opaque and too risk-adverse to be effective market builders.
Leslie Maasdorp, who took over as CEO of British International Investment last year, is pushing the UK’s development finance institution to lean into the challenge of mobilizing institutional LPs around climate and development finance in underinvested markets.
“We need a commercial return,” Maasdorp tells David Bank on the latest episode of ImpactAlpha’s Agents of Impact podcast.
But: “There’s been a lot of introspection by the development finance system,” he insists. “We are now looking at increasing our focus on private capital mobilization. We want to see to what extent we can be more catalytic.”
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Catalytic capital
The tumult of the past nine months has forced a reckoning in development finance. The blow-up of USAID and reduced foreign aid budgets in other countries has made starkly clear that new approaches are required.
Maasdorp sees greater opportunities for BII and its peers to make greater use of guarantees to buffer risk and junior equity to boost returns for other investors.
“As DFIs, we have to play a greater role to derisk a lot of these investments,” he says.
BII has for a decade been ratcheting up its mandate as a catalytic investor. It launched its experimental Catalyst initiative in 2014, which has since deployed about $2 billion through catalytic instruments and impact funds. Three years ago, it launched its more flexible and risk-tolerant Kinetic initiative.
Some of BII’s more experimental investments include efforts to seed impact secondary markets, and launching “basket bonds” to enable green small-business lending at scale.
A key focus now, says Maasdorp, is how to streamline blended finance instruments, and reduce the complexities for fund managers and project developers raising capital from multiple DFIs. “We are aiming to harmonize our frameworks so that it becomes a much more simplified and easier process.”
Institutional mobilist
The UK government in February committed an additional £100 million (then about $127 million) to its MOBILIST initiative to encourage private equity investors to invest in sustainable development in emerging markets. BII has been in talks with Brookfield, Prudential and other large private equity firms and insurers about how DFI capital could incentivize them to co-invest in its core markets.
“The energy transition in Asia in particular presents a strong commercial opportunity for the entire development finance system,” says Maasdorp.
With a new five-year strategy starting next year, BII is especially focused on ramping up its climate portfolio in Asia’s large, coal-dependent markets. “A lot of institutional investors would be very willing to invest alongside us,” he says, “if barriers are removed.”
