The John D. and Catherine T. MacArthur Foundation has teamed up with Allianz Global Investors and FMO Investment Management to create a unique fund structure that will lend to companies developing impact projects in frontier markets.
The SDG Loan Fund has raised $1.1 billion to put to work in frontier markets, including Latin America, Asia, Africa, and Eastern Europe, in three sectors: energy, financial institutions, and agribusiness. The fund will lend capital to small and medium-sized businesses in those regions that address the United Nation’s Sustainable Development Goals.
“The fund takes pieces that already existed and brings them together in a very powerful way,” said Debra Schwartz, managing director of impact investment at the MacArthur Foundation.
Allianz, FMO, and Swedish financial services firm Skandia are among the institutions that committed capital to the SDG Loan Fund.
In addition to providing capital to the fund, FMO has agreed to commit $111 million in a first-loss structure. The MacArthur Foundation has provided a $25 million unfunded guarantee in this structure as well.
If losses are incurred, they will first be funded by MacArthur, up to the $25 million guarantee. If there are further losses, FMO will cover them up to $111 million. Allianz shareholders will bear any losses after that. Given the nature of the investments, Schwartz said she expects that the fund will not be able to avoid losses completely. However, the first-loss structure should provide a safety net for institutions in the main SDG Loan Fund.
“In this case it would be very unusual to have zero losses,” Schwartz said. “We’ve structured a fee for the guarantee that we believe will offset the losses overtime.”
This isn’t the foundation’s first time providing guarantees in a blended finance structure. In the past, MacArthur has offered these guarantees in U.S.-focused transactions, primarily in the affordable housing arena. One notable deal was a $20 million guarantee in the years following the Global Financial Crisis, which provided $20 million to make affordable housing transactions that required large cash reserves possible.
Because the impact portion of the MacArthur Foundation’s mandate doesn’t need to achieve the highest possible returns, it can offer these guarantees, Schwartz said.
“Our return objective for the impact fund is to preserve the foundation’s capital,” she said. “This allows us to take risk. It has the discipline of an investment. It is structured and analyzed like an investment.”
One of the factors that makes the deal noteworthy is its size. A $1.1 billion fund is relatively large in the impact universe, particularly in a blended finance transaction. This amount of capital allowed Allianz and the others to tap institutions that may otherwise be wary of investing in smaller mandates.
“There are investors who want to make larger investments,” Schwartz said. “That’s important to them. The fund has to also be larger. It’s a really important threshold.”
“The SDG Loan Fund reaching over $1 billion of commitments is a great example and strong signal to the market of how to crowd in institutional capital in size,” added Carsten Quitter, Allianz Group Chief Investment Officer, in a statement.
The expertise involved in the fund also enticed investors. Allianz has a team devoted to blended finance transactions like these, which Schwartz believes is an edge in this deal. FMO has 50 years of experience originating loans in emerging markets.
“FMO had a well-established track record of doing this kind of lending,” Schwartz said. “It didn’t have to be invented from scratch. If it came to the market de novo, then investors may not have been comfortable with that.”
And the SDG Fund’s investors are already at work. Capital has already been called for investments, and Schwartz said she expects capital to be moving into the markets imminently. FMO has warehoused $100 million in loans thus far.
The capital is sorely needed: An estimated $3.9 trillion is needed to achieve the UN’s sustainable development goals.
According to Schwartz, this investment fund is just one piece of that puzzle. The firms expect that once the fund is fully invested across 100 loan participants, it will support almost 60,000 jobs and will avoid a significant amount of greenhouse gas emissions annually.
“We know that there are many challenges that we face in emerging and developing markets,” Schwartz said. “They may require different kinds of solutions and capital and combinations. We see this as an important, notable, and successful example of mobilizing private capital for the SDGs.”