What is the role of Environmental Social Governance (ESG) in IFC’s infrastructure investments?
RK-H: ESG is part of IFC’s strategic priorities and is an integral part of our approach to risk management. Clients continue to indicate that IFC’s environmental and social expertise is an important factor in their decision to work with IFC. The Equator Principles, a voluntary set of standards developed by 79 private sector banks based on IFC’s Performance Standards, are evidence of this global recognition. We have in-house ESG experts based around the world who review each investment and ensure that they meet our Performance Standards. In addition, we do public disclosure as we believe that transparency and accountability are fundamental to fulfilling our development mandate and strengthening public trust in IFC and our clients.
How does IFC’s position in the global infrastructure market differ from other investors?
RK-H: We only invest in IFC’s developing member countries (we do not invest in deals in OECD markets, but can support OECD-based companies which are developing projects in emerging markets) and the investments must have development impact. We provide a range of products ranging from debt, quasi-equity and equity that differentiate IFC from other investors and meet the changing and expanding needs of private sector investors.
We see our role as a catalyst to mobilise private sector investors. We are able to do this by being an all-encompassing service provider – offering a range of financial products to suit our clients’ needs, mobilising additional funding, providing political risk mitigation to shareholders and lenders, as well as having in-house technical and environmental expertise to assess each deal – all targeted to achieve our goal of promoting the private sector and enhancing developmental impact.
How has IFC’s infrastructure investment strategy evolved in the last decade (by geography, sectors, investment type etc.)?
RK-H: Investment in infrastructure projects forms a key part of IFC’s institutional strategy. In recent years, our investment strategy has shifted to frontier countries and regions such as Africa where our services are most needed (10 years ago IFC invested under $100 million in Africa while in full-year 2013 IFC committed nearly $750 million).
Because of IFC’s increased concern about global climate change, our resources are increasingly focused on renewable energy and energy efficiency projects (renewables, including hydro, currently stand at about 45 percent of our power portfolio). We have also become increasingly more active in supporting water projects to avert a looming crisis.
In addition, we are doing larger equity tickets, more co-investments with our investee funds and are looking to do more “transformational” deals that have the potential for significant impact. You may have heard the news about IFC’s wholly owned subsidiary, the Asset Management Company (AMC) having raised a $1.2 billion Global Infrastructure Fund. The way AMC invests is solely alongside IFC, building on IFC’s global platform and expertise, enabling us to bring in more investors into what we see as a growing need and opportunity for longer-term private funding for infrastructure.
What would you NOT invest in?
RK-H: Liquor; arms; nuclear; precious minerals; gambling, casinos and equivalent enterprises.
Lots of investors prefer mature markets, seeing infrastructure as a long-term investment with stable yield. How does IFC view and manage the risk in its infrastructure portfolio, which has high exposure to frontier countries and regions?
RK-H: IFC has a thorough approach to risk management in emerging markets, which includes rigorous and conservative capital adequacy; conservative portfolio diversification guidelines by company, sector, and region; credit risk assessments and integrity due diligence for all investments; and the highest social, environmental, and corporate governance standards. Our significant in-house expertise on technical, legal and ESG enables us to analyse all our investments and take calculated risk. In addition, our political risk mitigation enables us to mobilise both equity and debt funding.
Investors feel comfortable to invest alongside us as we have a successful track record in infrastructure investments. In full-year 2013, our global infrastructure portfolio was $13.4 billion with $3.1 billion committed in that year alone. Over the last 10 years, we have committed to 208 infrastructure projects and achieve an IRR of 19 percent.
Direct investment, co-investment, separate accounts, blind pool etc. – what is your preference?
RK-H: Most of our investments have traditionally been direct investments, but we are increasingly doing co-investments as well as having a team dedicated to investing in funds. For example, in June 2013, IFC invested $25 million equity in Zhaoheng Hydro, an offshore hydro-power holding company with a total 683 megawatts (MW) or equity adjusted 588MW, and provided a $50 million loan to three onshore project subsidiaries to fund six greenfield small-to-medium-scale hydro projects with 75MW in total in China. This is a co-investment with Olympus Capital, which is one of our investee funds.
As you mentioned earlier, IFC has just raised a $1.2 billion Global Infrastructure Fund backed by 11 investors, including IFC itself and other sovereign and pension fund investors. What is the rationale behind raising this fund?
RK-H: Many of the global asset managers have existing allocations to infrastructure, but these allocations in many cases are limited to brownfield assets and/or to OECD countries. Infrastructure in emerging markets is often viewed as risky and lacking the scale that is needed to justify the expenditure of building investment expertise.
The Fund’s objective is to help investors overcome initial barriers to entry and become an efficient platform to intermediate long-term capital to infrastructure projects and companies in emerging markets, including International Development Association (IDA) countries and frontier regions. Because of IFC’s successful track record in investing in infrastructure in these markets, our global footprint and focus on sustainable ESG and in-house technical expertise, we provided the right platform for these investors to partner with.
What key trends do you see in the global infrastructure market?
RK-H: With the rise of the middle class in emerging markets, we see a strong driver for growth in emerging markets, creating demand for transport, water, power and telecommunications. This, combined with the deleveraging taking place, will open the door for investors like IFC to finance an array of infrastructure
projects. Institutional and other investors may increasingly seek out less liquid, more stable cash flows as low interest rates and high market volatility impact their decisions.
On the other hand, we do see a lot of capital waiting to be deployed without a corresponding number of attractive investments. There is a lot of uncertainty with respect to political and regulatory environments, particularly in emerging markets, creating hesitation on deploying the needed capital and a spike in valuation in those assets deemed investor-ready. This is where IFC sees it can play a role – to try and bridge this gap and help institutional investors identify and assess the risk as well as provide the political risk umbrella many investors feel they need when entering this asset class.
Rana Karadsheh-Haddad is a principal investment officer, infrastructure and natural resources, at the International Finance Corporation