As providers of financial risk products and services, Cardano Development makes it possible for investment to happen in places that would otherwise be too risky.
The data tells us that the majority of blended finance transactions have targeted middle-income countries – Cardano Development is working to change this. They go where their work can have the biggest impact, that means some of the most capital starved countries and regions in the world. They work nearly exclusively in low-income countries, with a focus on West Africa and South Asia, to manage and mitigate risks so private investors can enter the market.
Cardano Development also has a unique structure. It is made up of one holding company (Cardano Development) and six operating companies that have their own management mandate and board, which allows for versatility. These companies all address credit risk, currency, risk and/or liquidity risk in emerging markets, they include TCX, GuarantCo, BIX Capital, ILX Fund, Frontclear, and the Water Finance Facility. Finally, Cardano Development is a registered charity in Holland, which means all profits are reinvested back into the business.
Joost Zuidberg is the CEO of Cardano Development. Born and raised in West Africa, Joost started his career as a banker, where he first saw the potential of the markets to make a positive difference in developing countries. The potential of private investment to create development impact and his emotional ties to West Africa drew him to FMO, the Dutch Development Finance Institution (DFI), from there he went on to set up Cardano Development.
We spoke to Joost about how Cardano Development and its initiatives engage in blended finance, how they measure impact, and what needs to happen for the blended finance market to grow.
How does Cardano Development engage in blended finance?
All of our operating companies work in developing countries, and everything we do requires concessional capital at some point of its life. Each of our operating companies are structured as blended finance transactions. For example, TCX, which reduces currency risks for local economies, was launched with a first loss tranche from the Dutch government, with further support from BMZ and BMU, which crowded in DFIs and private sector institutions in the more senior tranches.
The participation of the Dutch and German governments allowed TCX to start off at the size it did {with a transaction portfolio capacity of 2.2 billion}. If they hadn’t come in, we would have still started TCX, but it would have been a fraction of the size and I would argue that part of the development impact of TCX was its size. It was strategically important for TCX to start off at the size it did.
So, we use blended finance for specific purposes, whether it’s to overcome start-up risk like with TCX, or to make it possible for us to go into difficult countries, which applies to all of our operations.
How does Cardano Development measure development impact?
We formulate our impact in terms of behavioural economics. Our goal is to see people change their behaviour in financial markets as a result of what we do. For instance, with TCX we measure the number of people doing local currency deals, but we also measure how people are talking about it, like how currency risk is progressing in terms of risk acceptance by institutions. Success for us is when markets start to function in a way they weren’t before, more efficiently, because of us.
Can you provide an example of when Cardano Development had this impact on a market?
I’ll give you an example from GuarantCo, which encourages infrastructure development in low income countries. GuarantCo created a new business concept in Nigeria called InfraCredit Nigeria, which provides a similar guarantee product as GuarantCo, but acts exclusively to serve the Nigerian capital market. The goal of setting up InfraCredit was to enable Nigerian pension funds to invest in Nigerian infrastructure, by providing them with guarantees.
GuarantCo has a respectable track record in Nigeria, but now that we’ve created a locally embedded company, financed with equity from Nigerian institutions, all of sudden the market takes much more notice. Now, InfraCredit is doing transactions at better rates than GuarantCo, because of the psychology of the market, where Infracredit has more impact because it’s considered part of the local system and a market participant rather than a single deal supporter.
Now, if you go to a Nigerian pension fund and ask how they finance infrastructure they will all point to InfraCredit, even though GuarantCo has been around for much longer and done more deals. So, the idea to create a local institution to support that market was a fantastic stroke of genius. I wish I could take credit for it!
Is the capital structure of InfraCredit blended?
Yes. GuarantCo and KFW came in at the second loss position. First loss equity was provided by the Nigerian Sovereign Investment Authority (NSIA) and the African Finance Corporation (AFC), a local DFI. The idea is to use blended finance to help enhance InfraCredit’s capital structure and achieve a higher credit rating, thereby increasing its attractiveness to borrowers and bond investors/banks.
From your experience as a financial risk manager, what do you think needs to happen to encourage the blended finance market to grow?
In one word. Data. We need more data, especially if we want to mobilize the private markets. We need to have much more openness about what the development banks, the donors, have been achieving in transactions. We are already in a very data poor environment, and despite that, there’s still a lot of data that doesn’t get disclosed. For example, we have been beating the door of the GEMS database, the world’s largest default and loss database for International Financial Institutions, to expose the treasure trove of data they have to us and to everyone else.
Access to more data will mean donors and governments will be bolder about what does and doesn’t make sense in terms of blending, because right now most donors that engage in blended finance do so in the dark. They have a belief about the market failure they are helping to address and the potential impact, but they have no way to know for sure.
