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Categorized | Insurance

IFC offers yield carrot for investors

Posted on October 4, 2016

Pedestrian walk in front of construction of metro rail in Chennai, India on April 17, 2012. (Kuni Takahashi/Bloomberg)©Bloomberg

IFC advisers helped construction of the Chennai metro in India

A new lending platform is being created by the World Bank’s private-sector arm to mobilise billions of dollars of much-needed funds for infrastructure projects in emerging markets.

The International Finance Corporation has an initial $5bn target for its MCPP Infrastructure initiative, due to be announced on Wednesday. The idea is to help plug the gap between the $2tn the IFC says is needed each year for global infrastructure and the $1tn actually spent on new projects.

    The IFC hopes to take advantage of the frustration among insurers and other institutional investors over the low yields on investments in an era of ultra-low or even negative interest rates.

    Private financing currently accounts for less than a third of the world’s total infrastructure spending, and the IFC hopes to lure investors with the prospect of relatively good returns.

    “This is a golden opportunity,” said Jingdong Hua, IFC treasurer. “We want to unlock a viable alternative with attractive returns. If global interest rates were 5 per cent we would not have this opportunity.”

    To meet the requirements of risk-sensitive private-sector investors, the IFC has structured MCPP Infra’s loans to have a low investment-grade rating and yields 4-4.5 percentage points above the London interbank offered rate. Meanwhile, the IFC and the Swedish International Development Co-operation Agency will absorb the first losses in any project. MCPP stands for Managed Co-Lending Portfolio Program.

    The result should be a collection of highly diversified emerging-market assets at a time when many investors are looking for a safe way to increase their exposure to the higher growth and returns available in emerging economies.

    The Global Investors arm of Allianz has made a commitment to join the platform with an investment of $500m, while Axa and the Asian arm of Prudential are expected to sign on shortly.

    “We obviously avoid investments with negative yield,” said Andreas Gruber, chief investment officer at Allianz. “At the same time, we do not accept higher investment risks just to achieve a specific return target. The first loss piece offered by IFC limits our investment risk and perfectly aligns IFC’s objectives with our business interest.”

    The IFC ultimately hopes to extend the programme to sovereign wealth funds and pension funds. These deep pools of capital have historically been leery of the political and completion risks of new projects in emerging markets, and have tended to invest only in brownfield projects.

    But one of the largest pools of all, China’s State Administration for Foreign Exchange, which is in charge of the country’s $3.2tn in reserves, is likely to come in under a pre-existing arrangement with the IFC whereby it has committed $3bn to piggyback on the IFC’s projects for the past two years.

    In recent years, the IFC has financed 15-20 projects a year and since 2007 has invested $25bn of its own money and mobilised an additional $20bn for infrastructure.

    The World Bank is preparing to seek a capital increase at a time when the tenure of Jim Yong Kim, its president, has been marked by controversy and dissent as the development bank pursues its dual mandate of eradicating poverty and sharing prosperity.