Halfway through its latest five-year strategy, British International Investment has launched the second of its Kinetic catalytic capital facilities, ImpactAlpha has learned. The UK’s development finance institution is accelerating its effort to mobilize private capital for sustainable development.
Quasi-public development finance institutions like BII, which often operate like commercial investors, are under increasing pressure to play a more catalytic role in mobilizing private capital. The new facility will invest in utility-scale renewable energy generation and transmission; water, waste-to-energy, and battery storage; and lending to climate-focused businesses through banks and specialist finance companies in emerging markets.
BII’s Mobilization Facility aims to attract hundreds of millions of dollars from “deep and long-term pools of capital,” such as pension fund managers and life insurers. Its role model: the $1.1 billion SDG Loan Fund from German insurer Allianz.
The SDG Loan Fund is an example of the rising ambitions of blended finance. It’s buffered by multiple layers of concessional capital, including a $111 million first-loss layer from Dutch development bank FMO and a $25 million unfunded guarantee from the MacArthur Foundation.
“The SDG Loan Fund was catalyzed by that $25 million first-loss guarantee,” BII’s Matt Robinson tells ImpactAlpha. “The scale of the capital needed to mobilize quite large amounts of commercial capital is not as big as one might assume. That’s the kind of role this facility will allow us to play.”
Institutional roadblocks
Trillions of dollars in additional investment is needed to support emerging markets’ sustainable development and climate resilience. Europe’s institutional investors manage about $26 trillion in assets, but just $250 billion of that capital gets invested in emerging markets.
Regulatory and operational restrictions around risk make it difficult for even the largest insurance companies or pension funds to invest in emerging markets. What they do invest in is “highly concentrated in publicly listed, investment grade assets in large emerging markets, with little to no investment in developing economies,” according to a paper by Samantha Attridge, Bianca Getzel and Neil Gregory at ODI.
Kinetic energy
BII’s Mobilization Facility will look to derisk institutional capital in funds and new social or green bond issuances. The facility will give BII the flexibility to use a variety of mechanisms, including first-loss capital or guarantees, to get the risk/return profile of a deal to match institutional investors’ requirements, explains Robinson. “They need help with the economics to get into these markets in real scale.”
He adds: “The idea of facilities like this is to be transitory for maybe five to 10 years, and then we hope that they won’t be needed anymore.”
Catalytic series
The Mobilization Facility is being funded by the UK government’s Foreign, Commonwealth and Development Office. FCDO provided £240 million ($330 million) for BII’s Climate Innovation Facility, the first in BII’s Kinetic strategy for investing in and managing deals in emerging markets that require concessional capital to attract commercial investors.
“They have different purposes. Climate Innovation is taking high business model and technology risk. Mobilization is trying to bridge a risk/return gap on more mature assets,” Robinson explains.
BII has not disclosed the amount FCDO committed to the new facility. It plans to roll out additional investment strategies under Kinetic.
Head of mobilization
As pressure has mounted on development banks to take more risk and concessions to coax private capital into underinvested markets, BII has worked to be “more systematic and and intentional” about how it can use its capital to mobilize more, says Robinson.
The institution underwent a major investment strategy reevaluation a few years ago that reshaped its mission around impact investing and impact target setting. Last year it created the head of private mobilization capital role, which Robinson holds.
“We know that the size of all the multilateral development banks’ and development finance institutions’ balance sheets put together are not much more than a few drops in the ocean compared to the need,” says Robinson. “It’s got to be a partnership between public and private capital.”
