Allianz Global Investors (AllianzGI) is part of Allianz Group. AllianzGI is an active asset manager with over 25 offices around the world and more than EUR 546 billion in assets under management. AllianzGI is one of the few large-scale asset managers with a dedicated Development Finance team that has raised more than USD 2 billion in commitments towards development finance strategies since 2016. The Development Finance team is part of a wide private markets platform including the Infrastructure Debt team, which has over 20 years of collective experience in infrastructure investing, globally.
When it comes to blended finance, AllianzGI works closely with development banks to create investment solutions that support the UN Sustainable Development Goals (SDGs) and promote greater private capital mobilization into emerging and frontier markets. AllianzGI is committed to structuring deals that multiply the impact of every dollar for both the donor and the investor, while also scaling societal impact where it is needed most.
With plans to expand their sector focus, Convergence connected with Nadia Nikolova, Lead Portfolio Manager of AllianzGI Development Finance, to learn more about AllianzGI’s approach to blended finance, the structuring of investment-grade solutions, and her perspective on how to attract other institutional investors to emerging markets through these blended finance products.
How did AllianzGI’s journey in blended finance begin?
Back in 2015, International Finance Corporation (IFC) was capital constrained and approached AllianzGI to explore ways to mobilize private capital into their respective local markets. At the same time, institutional investors that were clients of ours were seeking to diversify their portfolios into these markets through investment-grade transactions. So, we asked what to us was an obvious question: Why not use structured finance techniques like those utilized by the European Investment Bank’s Project Bond Credit Enhancement product rather than have IFC de-risk on a per project basis? De-risking on a portfolio level is much more capital efficient. It all started over tea and biscuits in our offices. Once we started the partnership with IFC, a process which we really enjoyed, we continued to look for other investments in emerging markets with a blended de-risked profile.
As one of the two asset management entities of Allianz SE, what is unique to your investment mandate, and why is blended finance a viable structuring approach to invest in emerging markets?
AllianzGI is specialized in alternative investments, particularly in private markets. AllianzGI was one of the first infrastructure debt investors to do direct origination, and we have kept that innovation and first mover approach to many of the new strategies we launch, including Development Finance. As a team, we really have our heart in development finance and creating scalable, lasting sustainable impact. From the start, blended finance was a viable approach because it helped satisfy the requirements of all stakeholders, be it an institutional investor looking for investment-grade transactions, a capital constrained development bank requiring on-demand capital, or an asset manager like us.
The structures we create offer an appropriate return for all parties. I think this is paramount for the “future-proofing” of any investment strategy. If you view our approach from an SDG lens, what we really specialize in is partnering for the Goals (SDG 17). Our partnerships with development banks are fundamental to our strategy. We source investments from them, lean on their expertise, co-invest with them, rely on their preferred creditor status and halo effect, and trust their track record. Take this pandemic as an example; it is almost impossible to do deals now without having a local presence. Our team does not have 700 people scattered across the world that have local connections and can carry out due diligence in the field, so in the current situation we are facing, our partnership strategy helps us keep pace in mobilizing capital. Now, for portfolios where we do not have partnerships with development banks, being locally present is very important. For that reason, when we built our Asia Private Credit team, which is making direct investments in mid-cap entities all over Asia; we set up a local team, which now sits in India and Singapore. When you are not investing through partnerships, local presence, particularly in emerging markets, is key.
Allianz has partnered with IFC to invest in a portfolio of loans IFC issued to infrastructure projects through the Managed Co-Lending Portfolio Program (MCPP). The transaction was blended: it received a SIDA guarantee to cover first loss in a portion of the portfolio. Can you share some key learnings or reflections from structuring this blended transaction?
We started structuring the IFC vehicle in 2016-17. The market has changed dramatically since. Three years ago, Environmental, Social, and Corporate Governance (ESG) was a new concept. Now, if you do not have an ESG strategy, you are not in the market. There are plenty of lessons learned from the MCPP, including:
- It is better to go big. It takes such a long a time to launch a fund that it is best to build funds that are large scale. If we were to redo the IFC vehicle, we would double the size. There is so much up-front effort put in these structures that it makes sense to leverage on that work.
- The power of data is essential for private capital mobilization. We were able to participate in the transaction with IFC because they opened their books for us and provided full visibility on their track record for us to do comprehensive due diligence. As a result, we were able to estimate how much first loss we needed for the senior investors to access an investment grade product. If we want this type of structure to be replicated to further mobilize true private capital into emerging markets, the investment performance data and track record of development banks needs to become public. This is why the discussion around the Global Emerging Markets (GEMs) Risk Database is very important.
- Language comprehension is vital. Development banks are often not driven by the same issues and concerns as institutional investors. Often, their perspective is driven by a policy requirement which could be obscure to a private investor. The opposite is also true. So, the lessons for me have been two: (i) make no assumptions, ask questions, and (ii) always explain why a certain point is so vital. Once we speak each other’s language, progress is much faster.
In 2019, Allianz became the first large commercial lender to commit long-term funding to a blended Africa-focused infrastructure fund, committing USD110 million in the Emerging Africa Infrastructure Fund. What led Allianz to make this commitment, and how has it helped influence future investment decisions?
Having done the MCPP with IFC, AllianzGI was looking for similar types of investments. What does our vehicle with IFC look like? It is a diversified portfolio of infrastructure loans – infrastructure being core to our DNA. So, we were looking for investment-grade infrastructure-focused opportunities in emerging markets, and unfortunately, these are limited. One of the reasons we decided on investing in the Emerging Africa Infrastructure Fund–where we are a lender and not an equity investor –is because it presented very similar characteristics to the MCPP; it already had an established portfolio of infrastructure loans with a track record over 10 years, it was a well-managed vehicle, and there was a clear alignment of interest and a substantial amount of first loss - that diversification attracted us.
IFC played a significant role in getting us to think about how we want to invest in emerging markets. Our basic investment thesis is that our investors are looking for large-scale attractive investment opportunities with investment-grade type characteristics. In investment-grade countries in Latin America, we do direct origination of single large transactions. As we move up the risk scale, we seek to invest in diversified uncorrelated portfolios, both from a sector and geography perspectives. The more frontier the markets we enter, the more de-risking and first loss our investors require.
Before our partnership with IFC, we were focused on large-scale, individual investment-grade transactions in emerging markets. What we have done with IFC and the Emerging Africa Infrastructure Fund is tap into the significantly larger pool of non-investment grade opportunities, and through structured finance, have converted them into scalable investment grade portfolios for our clients.
In some ways, COVID-19 has turbocharged the need for coordinated efforts among diverse investor groups. Has there been any activity or dialogue in the last 6-8 months that has been particularly encouraging for AllianzGI?
There has been a greater sense of urgency, which we have welcomed. One response to the COVID-19 pandemic that has stood out to us came from MIGA, part of the World Bank Group. Around March-April, they saw emerging market sovereigns and sub-sovereigns were starved for funding and experiencing significant capital outflows. This made it ever more challenging for them to acquire the necessary medical equipment, support their healthcare sector, inject liquidity in the system, and so on. To address this, MIGA decided to leverage its existing sovereign guarantee product but repositioned it and put it on a fast-track to provide urgent liquidity to these countries. Using one of our blended strategies, AllianzGI together with Allianz, created a program that allowed us to invest in MIGA guaranteed facilities alongside commercial banks and support COVID-19 relief. That sense of urgency and ability to take off the shelf products and expedite processes, has been very helpful.
Hopefully, this sense of urgency will systemically filter into the system in a more meaningful way to increase investment in investible SDG-related projects across developing countries.
AllianzGI is now moving away from ad-hoc investment opportunities to being more strategic. When it comes to blended finance, what is changing?
We respond to the market when it is needed, but we also have a long-term vision of where we need to go, whether that is cultivating partnerships with development banks, or operating vehicles that open us up to an entire syndication market. I would say our strategy is two-fold: (i) Through our blended funds and partnerships, investing in vehicles that target riskier markets, and expanding our sector focus to include both infrastructure but also projects focused on addressing gender inequality and social inequalities, and (ii) remaining opportunistic to respond to crises like COVID-19; achieving the SDGs is now a crisis, so we need to respond accordingly as a responsible investor.
The key issues we face when trying to solve some of these development challenges and increase institutional investment in emerging markets is sourcing the necessary first loss and originating individual transactions. For the new strategies we have in mind, we have a much larger investment scope that might range from existing SDGs¬ aligned investing to participating in gender-related bonds or partnering with commercial banks for sustainable investing in a certain developing region.
Do you think institutional investors like AllianzGI want to get more involved in blended finance and, if so, what is needed to get institutional investors more active in blended finance in regions where there may be higher risk, real or perceived?
We need a couple of things:
- The GEMs Database to be published, so that we have investment performance data and a historic track in these jurisdictions.
- A visible and tangible pipeline of projects, so that we can build substantially diversified scalable portfolios–no investor is going to commit capital if they do not believe it will be deployed.
- MDBs and DFIs to actively include institutional investors in their deal syndication rather than follow well trotted paths of other DFI and banks syndications
- More first-loss; most of our funds have a 4-8x mobilization effect, meaning every dollar of public capital, we mobilize $4-8 of private investment. It therefore makes sense to put donor capital in a portfolio of uncorrelated risk to maximize the impact of every donor dollar.
What else would you like to communicate to the market?
To start, blending on an individual transaction level is capital inefficient for the donor. Under this scheme, attracting large pools of institutional capital to emerging markets would require such high degree of blending that it becomes unfathomable. For this reason, a portfolio approach is one that should be considered. Secondly, partnerships are very important to us, and it is something we stand for. We are always open to discuss new opportunities with players in the market
To end, blended finance does not have to be concessionary for anyone. Everyone can receive an appropriate return for the risk they are taking and satisfy their investment strategy, which is very different for a donor than it is for an institutional investor who must comply with credential regulations. For blended finance to be a sustainable strategy, we must prove that there is enough return even for donors so that their capital can over time be substituted by private capital as well.
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