A conversation with Samantha Attridge - Center for Global Development

Setting the Stage: Critiquing the Billions to Trillions Agenda Welcome to Untapped, an ILX podcast. Speaker 2 Where you will hear different perspectives from the development, finance and impact world. Speaker 1 Hello. My name is Sofia Vera. I am the Head of Communications at ILX, and I will be your host today. In today's episode, we're speaking to Samantha Attridge, Senior Fellow at the Center for Global Development. Hi, Sam. Speaker 2 Hi, Sophia. Thanks for inviting me to talk. Speaker 1 Very welcome. Samantha is a leading expert on development finance with a focus on mobilizing private capital for sustainable development. Prior to joining CGD, she's been many years at ODI Global where she LED research on this topic and worked closely with MD, BS DFI's government and institutional investors. In this conversation, we will explain why the billions to trillions agenda has fallen short of expectations, how mobilisation should be understood and what is really constraining institutional investments from allocating the scale. To start this off. So could you briefly introduce yourself and explain your research focus? Speaker 2 Yes, Sophia. So my research over the last 10 years has basically looked at how we use public money to mobilise private money for the Sustainable Development Goals and climate goals and also how we can use it better. So and I look at this issue kind of through three lenses. So the first is the supply of capital. So who are we trying to mobilise and better understanding them? I think that to date, the policy discourse has tended to view them as one homogeneous BLOB, but not all investors are the same and not all markets are the same. So that's important. And then the second kind of lens that I look at is the demand for capital. So those investors are looking to invest their their assets, their financial assets into real assets to generate returns. So they're looking for investable projects and markets. And then in the middle, we have the intermediation kind of pillar, which intermediates that supply of capital into projects. And given that most of the opportunity, and I can touch on this later, is in private markets, there's a really important role for multilateral development banks, MDBS, I'll refer to those as MDBS and development finance institutions intermediating between the two. So this is how I think about private capital mobilisation. Speaker 1 OK, that sounds great. I'm very excited to hear further about the three lenses. Let's talk a bit about the billions to trillions agenda. We You've mentioned your research before, that it set an ambitious vision for private capital mobilization in emerging markets and developing economies. But you've also argued that it created unrealistic expectations. What went wrong? What should a better narrative look like? Tailoring Approaches for Diverse Emerging Markets So the core problem, Sophia, is that I think it treated the billions to trillions agenda as if it was mainly about redirecting a small share of the large pool of global assets which are under management. And I think that fundamentally kind of misread and misunderstood what the challenge was. So the idea, I think, was really inspiring. The SDGS needed transformative finance and the private sector and private finance had to play a much bigger role than with the MDGs. But I think 4 things in my mind kind of went wrong with that agenda. So the first thing is that I think it turned the whole idea into a numbers game rather than a market building agenda. So that's the first thing. I think we are focused on volumes and not kind of the quality of the finance and the impact of the Finance 2. I think it blurred 2 very different objectives, which we'd probably talk about in the podcast, kind of frontier market impact investing, which is not the same as basically mobilising pension fund capital in, if you like, larger, more advanced emerging markets at scale. So they're two different things. The third issue with that agenda is that I think in my own opinion that it led to a laser focus on MDB and DFI deal structuring or transaction structuring really focused on individual transactions. But I think it largely kind of abstracted itself from these larger systemic issues which frustrate the movement of capital and still exist today. And finally, I think basically policy makers and frankly MDBS and DF is didn't really understand in detail who they were trying to mobilize. So how do these investors make strategic asset allocation? What are their behaviours and, and the kind of regulatory kind of constraints? And so they assumed that all of these assets under management were up for grabs on the table, so to speak, but but they're not. And so the results so far have been, you know, kind of smaller than that rhetoric kind of implies. And in 2023, MDBS and Dfis mobilised 80, basically around 88 billion in private capital, which I think on it's own sounds quite impressive. But when you look at that in relation to the aid number that year, it was just over 1/3 of what donors gave an aid. So the new narrative I think should focus on three things or you know, should be anchored in three things. One is I think we need to be honest about the actual size of the market and what's realistic in terms of what we can mobilize from these kind of investors. The second is I think we need to focus much more about origination of opportunity, So the demand side, the investable opportunity, creating pipelines, improving kind of the enabling environment to enable investment to flow. And then I think we need to think about how do we measure or think about success. And that can't just be about volume of finance. It has to be in my mind about are we building markets and are we removing bottlenecks? Speaker 1 OK. Thank you. It's very clear we're going to dive deeper into this topic in this conversation. You've also described before private capital mobilization as a spectrum rather than a single approach. Could you unpack a little bit what you mean here? Why does it matter so much how we think about it? Growth, Demographics, and Portfolio Diversification Opportunities Yeah. So I mean, overall, I just think we just need this nuanced kind of discussion around private capital mobilisation. So you know, a more nuanced understanding of who we're trying to invest and into what because not all investors and markets are the same. So that's the first thing. But I think the second thing is and the simple way to think of this is as I said, at one end of the spectrum, you've kind of got, you know, very challenging markets like frontier, you know, frontier markets fragile and conflict affected states. And to my mind the issue there is much more about demonstration investment and doing investment to create markets and prove viability. And you're not going to see huge sums, you know, of commercial capital flowing at scale there. But at the other end of the spectrum, if you like you'll, you've got kind of more the opportunity to mobilise larger sums of commercial capital at scale from pension funds into essentially kind of, you know, larger emerging markets. So in frontier markets. So what, what, who are we talking about here? Not to name any, you know, particular country, but these are kind of countries in the MSCI Frontier Market index, kind of Cote d'Ivoire, Mali, Mongolia. Much of the heavy lifting or what MDB's and DFI's need to do is the upstream kind of work. What do I mean by that? Strengthening that enabling environment. So the macro environment, the policy environment, the regulation, the regulatory environment, building pipelines and taking first mover risk. And sometimes, you know, MDBS and DFIS can use concessional finance, IE they're subsidizing investment to ensure that the risk adjusted rate of return is competitive to other options that these investors have. And so I call that kind of frontier blending. And that's about proving viability and catalyzing markets as I mentioned, which is as I said, very distinct from working for example, in India and Brazil where often, you know the pipeline may exist. But the issue there is quite often about risk perception and unfamiliarity, although some of those issues exist in frontier markets. And so there I think the issue is around risk perception and then about kind of product I think and how MDBS and DF is, are structuring products to entice pension funds for example into those markets and issues around data to address this kind of risk perception issue. And often if you like subsidy may not necessarily be required in those kind of markets. And I call that kind of market blending and it needs to be kind of discipline to crowd in private finance. So they're they're very different, you know, kind of approaches and tools which MDBS and Dfis use. And the reason it's important is I think as the international community kind of are thinking about potentially setting targets on private capital mobilisation, you skew incentives to go after the mobilisation at scale agenda in those easier markets or that they're still challenging. And then what happens, you know, to your low income countries or fragile conflict affected states. So, so it's important to kind of think through how we are kind of targeting and incentivizing who's doing what. Some institutions will be have a comparative advantage in some markets. MDBS are well placed to go after the large pools of capital because of the size of their balance sheets, for example. Speaker 1 OK, I understand. So you're trying to make a distinction between the markets. OK, thank you so much. Before we dive deeper into the barriers, I first want to build a positive case. Why should pension funds and other institutional investors actually care about investing in these markets? And wasn't it for them? Wasn't it for the benefit beneficiaries? Speaker 2 I think that's a really great question. And I think there are three reasons as to why pension funds and other institutional investors such as insurance companies should be are interested in this or should be more interested in this. And I think it's three things. One is growth, The second is demographics and then the third is portfolio diversification. And I think that case gets stronger the longer the investment time horizon that they have. So if you take the growth issue, so emerging markets and developing economies, I'll refer to them as Emds as we go through the podcast, they're already contributing about 60% of global GDP. And that share of global market capitalisation, given the kind of underlying demographics and economics is set to grow. So population growth, infrastructure demands, kind of climate investment needs to tackle climate change are almost kind of like acute in those kind of countries. Whereas Europe, by contrast, is projected to just grow at 1.545% through to 2029. And that compares to a growth forecast of 5 to 6% over the same periods in Emds. So if you're managing money to pay retirement incomes of an ageing European population, the growth you need is not going to come from Europe. You need to invest in these countries to be able to pay the pensions of an ageing population. So that's the first thing, the growth, the growth issue and the growth objective of investment. The second is when you think about the demographics, as I said, pension funds exist to pay future pensions and the working age populations who are going to generate those returns, where are they based? They're based in emerging markets and developing economies. And so that's a structural kind of decade long dynamic. It's not a market cycle. So again, the demographics point to why these investors should be paying more attention to these markets. And then finally, you know the the theoretical portfolio diversification kind of argument where EMD assets have a low correlation with developed markets. They don't move in lockstep with European and US equities and bonds, for example. So that would reduce overall portfolio risk, which is arguably what long term institutional investors want. So I think the question that pension fund kind of trustees and asset owners should be asking is not why would we invest in these countries, but it's how do we justify not investing more? Speaker 1 And like how you're framing, this is a good opportunity because that's also what we see on our side. In practice, however, private capital mobilisation hasn't delivered the scale that many had hoped for. Structural, Behavioral, and Fiduciary Challenges for Investors What would you say the main barriers? And please let's focus on pension funds here, which contains and most binding right now. Speaker 2 So as I said, you know, in my mind, the money exists. It's about a kind of a plumbing problem. So the system is basically, in my opinion, just not set up to deploy into these kind of markets. And the constraints, I think are threefold, which I'll talk to, 1 is structural, 1 is regulatory, and then the final one is behavioural in nature. So if we look at the structural barriers, So what do I mean here? So EMD investments are typically smaller, they're less liquid and quite often more kind of bespoke. And that's the exact opposite of what these large institutional investors are set up to buy. They want scale, they want standardized assets, They want to, you know, have easy due diligence. But these kind of opportunities in these markets require a lot of local knowledge, familiarity and you know, and issues around governance and governance capacity. Then if we think about regulation, I mean just quickly on insurance companies, our work has shown that there are hard barriers, you know, like solvency too. But for pension funds, our research has shown that the issue is much more kind of behavioural in nature, that regulation is not necessarily a binding constraint for increased EMDE allocation. So for example, in the UK pension funds, there's no regulatory restriction on allocation, There's no kind of quantitative kind of like caps. Yet our research has found that they only allocate only nought .5% of their assets under management to EMDADES. That's a cultural problem. It's not a rules problem. And so what's happening here is that most kind of asset owners are essentially outsourcing the asset management if they're small, if they're large, they might have it in house, but quite often it's they, they outsource the management to asset managers. And if those and they rely also on investment consultants. And if these consultants have limited emerging market kind of like experience and many do, they default to developed market kind of liquid strategies. And so you get this kind of home bias which gets baked in very kind of like early on. So I think there are issues around behaviour within the investment ecosystem which are kind of prohibiting kind of the allocation to Emds. Speaker 1 Do you think this behavioural bias is would also be tied to the wider version of the fiduciary duty? I feel that that's something that we hear about quite often when speaking to pension funds. You have the pension funds to focus more on the fiduciary duty of just providing returns, while others have a bigger vision that involve also creating, creating, facilitating A livable world. Would you tie that to the behaviour? Speaker 2 So fiduciary duty is certainly an issue and in our research we found that asset owners rely heavily on investment consultants and there's a quite a narrow interpretation of fiduciary duty which is squarely around maximising the risk adjusted rate of return. So this big focus on kind of like return and that's quite narrow for two reasons. 1 is that our research actually shows that investing in Emds, if you're taking a long term investment horizon doesn't mean that you're giving up, you know, return. And our analysis of representative equity indices showed that emerging markets performed just as well as U.S. markets between 2002 and 21 and even outperformed non-us developed markets. So that's on their equity side of things. And then in terms of bonds, emerging market bonds also outperformed developed market bonds in most years since 2008. So this idea that you know, you're giving up return and that investing in these kind of markets doesn't sit with that really narrow interpretation around maximizing kind of risk adjusted rate of return doesn't stack up in terms of when you look at the long term performance of relative of respective kind of equity and and debt indices. And then secondly, I think another kind of like important issue that comes up is, is this issue kind of like around ESG and kind of first level, you know, kind of ESG materiality and second level ESG materiality. So the first level is, you know, really concerned around the, the, the risk to your investment kind of return that ESG factors pose. So it's trying to minimize if you like that downside. But then there's kind of second level material ESG kind of considerations, which is actually trying to do good and have positive kind of impact. And that kind of, if you like second materiality ESG consideration. That is where it's, you know that the the regulations and the guidance for pension funds kind of trustees could be made a kind of a lot clearer. And in the UK, for example, pension funds are allowed to consider that second level if the beneficiaries want them to do so and to the extent that it does not adversely impact the financial rate of return. So it is a big issue. Speaker 1 OK, thank you. That's very clear. I want to stay on this behavioural biases topic. It's clearly a significant obstacle. Can you give a concrete example of how investor behaviour limits mobilization in practice? Speaker 2 Sure. So what springs to mind is what I call the benchmark trap and I think it's probably the clearest example of how good intentions get swallowed up by the kind of default systems system settings. So as I mentioned, most asset owners employ an asset management, a math manager either in house or out house to manage the pension assets. And their main strategy, not all cases, but their main strategy is that they passively track established indices. So pension assets are to the extent that they're allocated to emerging markets and developing economies, they follow indices such as the MSCI Emerging Market Index. And so one might think that that sounds kind of reasonable until you look kind of you like under the Carbonnet and see what's under that. And what we find are that the top four countries which are China, Taiwan, India and South Korea, they together account for 75% of that index weight. So countries like Kenya and Bangladesh and Senegal, for example, are absent or or negligible in these indices. And so you see this kind of reflected in those allocations, as I mentioned, kind of, you know, there's, there's very low EMD allocation by UK pension funds and and there's certainly basically 0 allocation to private assets by UK pension funds. And that was recently in a report published by the UKEMD Investor Task Force. So, you know, I think if a pension fund kind of generally wants to kind of support, you know, climate transition in for example, sub-Saharan Africa, I think it would find that its entire emerging market allocation would be flowing to these large cap probably tech firms in Shanghai or Seoul, which might not be a bad investment, but it's not, you know, it's not doing what we need it to do necessarily. So the behavioural I think is kind of a lock in. So these tools that investors use, benchmarks, passive investment strategies, the consultant kind of portfolio model, all point in One Direction. And I think changing the outcome means actively these people actively swimming against the kind of the current. And I think, you know, people might think that their careers are at risk. Speaker 1 Yeah, nobody is going to get fired from investing in renewals in the US, Yes, but it's a bit different even though it's not a riskier investment in emerging markets. OK. So now we've established the investment case and you are talking about the fact that UK asset owners are not investing in emerging markets. What would you say is actually going on between the capital that exists and the opportunity that needs financing? Addressing the Gap Between Capital and Investable Projects So I think they're, they're kind of there's a mismatch which runs kind of like in, in both directions in terms of supply and demand of capital. But I think we've spent too long focused on kind of one side and that says supply side. So people often cite there's 62 trillion in, you know, institutional assets under management and OECD countries. And if only we can, you know, reallocate nought point, nought, nought, nought nought X percent, we you know, go a long way to solving this, this problem. But that assumes that that's all on the table to be allocated and it's not as I said, most of that capital comes with conditions attached. These investors like liquidity, they like investment grade kind of assets. And we spoke about sometimes some fiduciary issues and the fiduciary mandate. So actually that kind of the portion or the addressable market is actually much smaller I think than if you like policy makers like to think or the headlines kind of like comply. And so our research has kind of shown that with real ambition kind of dealing with some of these behavioural issues even before you tackle any regulatory issues. We estimate that we could probably see a doubling of flows from Europe's top 35 largest asset owners and that would reach 120 billion annually. And again, that sounds quite a nice number, but it's actually about the size of the World Bank Group's annual investment. So again, you know, it's not huge of sums of money, but it's important and it would still be concentrated in listed investment grade assets in the largest markets, so not in frontier economies for example, and necessarily in in the private kind of like asset class. And then the second issue I think is that we've really underplayed the demand side. So you know, these huge SDG and climate financing gaps that are quoted, there's two issues with that. One is that not all needs can be financed by private finance and secondly, not all gaps are investable opportunity. So you know in many countries we have weak enabling environments and policy and stability, shallow capital markets, kind of poor regulatory frameworks, etcetera, etcetera. And that basically translate into a lack of kind of bankable projects for investors to invest in. So this is where I think, you know kind of MDBS kind of sits at this kind of intersection kind of working upstream to kind of develop the pipeline of opportunity. We need to focus much more on that and then structuring to kind of enable that capital to flow into those opportunities that are created. And we need to get much better at kind of moving beyond individual transactions to think much more about market building to generate this pipeline at scale which is going to feed these vehicles, you know, and ILX money. Speaker 1 Let's talk a little bit more about the MTVS and the advice that you're mentoring right now. What role can they play? Can you expand further on what you're just said? Speaker 2 Yeah. So as I mentioned, much of the EMD opportunity currently sits in private markets and that's exactly where, you know, the barriers I think are quite high because in most emerging markets, in developing economies, the public capital markets are thin or underdeveloped. So you have, you know, limited listed kind of equities, limited kind of corporate bonds. And so the ability of these investors to access kind of liquid index tracked instruments, which they know best is limited. So the kind of the infrastructure, the energy transition investment, kind of private credit, real assets, that's all in private markets. So the majority of that is in private markets. And the the core problem is that it's not just that it may be that they're riskier, is that there's a kind of this gap between investors perceived risk and then actual risk. So there's this limited kind of familiarity with those markets and that combined with kind of very limited data on actual risk and return in those markets leads investors to apply these conservative assumptions around risk and demand higher hurdle rates than they would in, you know, for comparable investment in advanced economies, even if the fundamentals are strong. And that has real kind of consequences because higher perceived risk raises required returns, raises the cost of capital, and that suppresses investment flows. So you get the structural under allocation, not because the assets are bad, but because investors don't have the information they need. And so I kind of, I, I set that up because that is exactly, you know, where MDBS and DF is can play a really important role and important partners for MDBS and DF is who have decades of experience in originating, structuring and managing these kind of private assets in Emdes. They have the local market knowledge, they have the government relationships and you know, on paper and they're starting to do this. They're able to structure these large pooled kind of portfolio instruments and vehicles which are investment grade and have really strong ESG, you know, kind of due diligence and reporting an impact reporting what these institutional investors want. So by working with MDBS and DF is they can get that exposure without themselves having to build that capacity from scratch. Speaker 1 OK, so I'm hearing you put MDBS and DF is at the centre of this mobilisation. What does this mean for them? Transforming MDBs with Originate-to-Share and GEMS Data For their approach? Speaker 2 So I think this is, this is a really good question actually, I think really to to to shift the needle on this, there needs to be some changes to their business model. So historically or most MDB's you know, pursue this kind of originate to hold model, which basically means that they lend, they hold onto the loan on their balance sheet and they wait for repayment. But really to mobilize at scale and to attract institutional investors, they need to move to a model which is known as originate to share, which involves the MDBS and DFIS. If you like packaging up these individual transactions and selling that exposure in large ticket kind of investment grade kind of products which institutional investors like which would free up their balance sheet to originate more. And maybe I'll speak about that a bit later on. And we're starting to see a shift in that. But that has quite big implications for MDBS and how they, you know their business board or how they finance themselves, how they recover their costs, etcetera, etcetera. But also even kind of this issue around then if you are originating to share, you need to ensure that you have a pipeline of investable opportunity if you like to feed those vehicles. So that would also imply a shift if you like to more upstream and developing kind of like pipelines. And again, that has quite a lot of implications for the, if you like the finances, if you like of these kind of institutions. Speaker 1 Thank you for this, because in practice I likes a good example of the original to share model as we continuously have a 1 billion pipeline of investable opportunities coming from the NDBS and DFIS. Speaker 2 No, that's, that's great. And I think it underpins, you know, your comparative advantage and your ability to kind of understand institutional investors and mobilize them and then connect them to kind of like the opportunity originated by MDBS and DF is. Yeah, exactly. So another really important area I think in terms of their business model is actually making data provision part of that business model. And it's absolutely critical and a low hanging fruit to help address this issue around high perceived risk, which raises the cost of capital and constrains capital allocation. And actually the MDBS and DF is are sitting on one of the largest kind of databases there is around their private markets in emerging markets and developing economies. And it's called the GEMS database, which stands for the Global Emerging Markets Risk database. And in there we've got 30 years of defaults and recovery data on MDB and DFI originated credit loans. And the most recent release actually shows that there are much lower default rates actually compared to purely kind of commercial lending in EMDES. And also we see kind of low default rates of around 3.54% on MDBDFI loan portfolio of 500 billion which has been extended and a recovery rate of 72.9%. So, you know, I think that completely kind of that alters the picture about what the actual level of risk is certainly investing alongside or with MDBS and DF is. So this is, this is in a really important kind of like asset and there've been some issues around, you know, is it in a form that enables investors, you know, to use this data to help them make their strategic asset decisions. And I think there's some gaps that remain and and some more work or homework if you like the MDBS and DF is need to do. And I think one of the important things to note is that, you know, this database just covers private credit. It doesn't cover, for example, equity or guarantees. So we need to see the database expanded for the range of kind of instruments which these institutions kind of deploy. But also starting with debt, for example, we need to get more granular across the kind of instrument types. So for AB loans, for example, for guarantees or project versus corporate finance, for example, which matters, you know, for investors, but also importantly for regulators to calibrate, if you like, the risk capital that banks, for example, are required to hold. And I think most critically, there's no return data in there. And of course, you know, as I've mentioned, institutional investors are kind of optimising currently for risk adjusted rate of return. So we don't know what the returns are. And so I think these institutions need to move towards publishing kind of returns starts starting on the private credit side of things. So what do we need these institutions to do? We need more granularity and returns data as I say added as a priority on loans. I think we should be thinking about expanding it to include for example export credit agencies, not just kind of MDBS and DF is. I think investors want a genuinely searchable kind of stand alone platform that they can interrogate, get the data to inform their kind of risk models. And then we need to take a serious look at these kind of non disclosure agreements in legacy contracts, which MDBS and DF is are saying kind of precludes greater transparency and disclosure. Speaker 1 Great. So you're saying that this gem data is just the beginning of what we need to do to increase transparency in data and emerging markets? Speaker 2 I think the other thing is that it's, you know in compared in terms, you know, all the billions that's being poured into kind of blended concessional finance or subsidizing, it's a low hanging fruit and doesn't cost as much. So, you know, I think the information asymmetry is a critical enabler to enable investment to flow. A Strategic Approach to Blended Finance and Market Reform I'm glad you're bringing up blended finance as is often cited as a solution and always comes up when we're talking about mobilization of private capital. You've talked a lot about it and you've argued for a more strategic approach. How realistic would you say that is? Speaker 2 So the problem I think with blended finance is that it's too transactional. So it's deployed deal by deal, kind of transaction by transaction. So DF is and MDBS are doing their own thing and there's little coordination. I mean there are obviously exceptions to that generalisation, but I think that's my characterisation of of how it's being deployed at the moment and things are starting to change should acknowledge that. So I argue that we need a much more strategic approach, especially when we're using concessional finance, which is kind of sub commercial, you know, sub commercial finance, we're effectively subsidizing to either reduce risk and or enhance the return. I think we need to have a strategic approach which where the MDBS and DF is are saying what market conditions are we actually trying to create here? So it's not just getting a deal done, but it's like how are we going to you know, shift this market, create markets and shift markets because ultimately we we don't want MD big in DFI investment. We want to create markets that can fund them, fund themselves. So, yeah, a more strategic approach I think should ask kind of what you know, what, what's the market impact that we're looking for here. And then it deploys if you like blended finance and subsidy alongside if you like a kind of more the more programmatic kind of coordinated approach, which kind of what does that involve? It's kind of looking at regulatory reform, policy reform, for example, if you're investing in renewable energies, you know, dealing with the off taker risk, for example, if you're dealing with kind of, you know, wind or solar Ipps, technical assistance, all this kind of upstream work. So you're kind of placing the transaction in a broader kind of context about what's happening to develop that that market. So you have a deliberate multi year program that's coordinated with other MDBSDFIS donors and actually importantly with country stakeholders like national governments and regulators, etcetera. And we need to be really disciplined about where we deploy subsidy and what do I mean by that? That's kind of kind of concessional report support where it's actually needed. So I think kind of in more commercially mature markets, the the issue as I mentioned is risk perception, not risk reality or the reality of risk. And so for that, you know, especially when money is scarce, maybe we need to focus much more on kind of data and transparency and perhaps save the subsidies for doing the hard stuff, you know, in some of the harder, harder markets. And then with regard to systems change, I mean, this, this sounds daunting. And I think in all my work where I've kind of got to my thinking is that, you know, we tend to so focus in kind of on a set of actors, MDBS and DF is and structuring a product. But there's just so much, as I say, kind of on the supply and the demand side, which we need to be dealing with. But I think we've got some examples that can inspire us. So the Dutch financial system I think shows what kind of political commitment can achieve. So you've got pension funds like APG dedicating I think nearly 20% of its assets under management to SDG aligned investments. That's that's pretty impressive. Recently in the UK, we've set up a EMD investor task force. And what's really important, this kind of behaviour change that I was talking about is convened at the highest level of government, so by the Minister for International Development and the Economic Secretary to the Treasury. It then has C-Suite kind of level, you know, investors on that task force. So at the very highest level, you know, kind of a decision making or trying to replicate. I think something that was done in in the Netherlands where asset owners, managers, DF is consultants, credit rating agencies, they're all working together on data regulation and product innovation. And so, you know, this is, I think it's possible, but it's, it's a, it's a quite a broad kind of coalition of actors that need to get together to look at this issue in a more holistic way, because MDBS and DF is can't just do it on their own. They're part of a solution, but not the entirety of the solution. And so I think we should be inspired by the Dutch and UK, you know, kind of example. Speaker 1 Yeah, that's a lot of what we see in the Netherlands, but it's also a smaller market, so the conversations between the different players are a little bit smoother and easier. We also see that the Nordic market is quite advanced as well, following closely of the Dutch market. Speaker 2 So that that task force that I mentioned recently put out a report where they're trying to address some of these kind of behavioural issues. And they think that, you know, maybe UK pension funds could increase their EMD exposure and increase it from 60 billion to 119 billion kind of overall, and then increase their allocation in private markets from 2 billion to 30 billion. So there's a prize, you know, there's a prize they're worth going for. And these investors are committed to that. Speaker 1 I mean, it's very tight to emerging markets being a good opportunity, which which we've been discussing. Replicable Models and the Need for Market-Wide Coordination I want to stay on this positive note. Where have you seen private capital mobilization actually work? Speaker 2 Yeah. So again, I think the most encouraging examples aren't just these kind of individual transactions, they're ones that are replicable and scalable. So they're kind of replicable and scalable models and I think this is pointing, you know the direction of travel that we're starting to see. So I mean you yourself are from the ILX funds and I think this gives a great way for pension funds to kind of Co invest alongside MDBS and DF is without having to kind of originate or structure the deals them themselves. And so I think that bridges that gap really nicely between how MDBS and Dfis work and what these large asset owners want. I think also what we're seeing, you know, I'm excited about, we're starting to see is this originate to share model that I mentioned earlier. So you're starting to see multilateral development banks and international financial institutions such as IFC and IDB invest starting to securitize the assets on their balance sheet, which has has benefits 22 benefits. One, you're tapping, you know, institutional capital markets, which hitherto they haven't really done. They focused a lot on commercial banks, but also enables them to shift stuff off their balance sheet and recycle their capital faster. So you know there are a number of two examples which your readers may be familiar with or want to or listeners, sorry may be familiar with and might want to kind of look up on on the Internet. And the first was the IDB invest scaling for impact 1 billion securitization track transaction in 2024. I think this is really important. It was like the first of its kind is a landmark in kind of Latin America. And I think it was a proof of concept of this originate to share kind of model that MDB's are are moving towards. And interestingly, they came back to the market again in 2025 to tap the market again on that securitization and for just under another half, half a billion. So it shows that you know it's credible and that this is what investors want. Then you have the IFCS inaugural securitization last year of half a billion. What was interested about that was listed on the London Stock Exchange. As I mentioned, pension funds are quite interested in kind of liquid tradable investment grade kind of like assets with good transparency. You get that with with listing and then actually just a couple of other quick examples. There's, you know, this is what I think is kind of positive and I'm getting excited about is you look at IDB Invest, which I think is quite innovative in its approach and you've got this thing called Reinvest plus. Again, look up what's interesting there is that they securitize performing loans in local currency on local banks balance sheets. So they're addressing this issue around the lack of local currency finance, which I thought was really really kind of like interesting. So there's lots of kind of like innovation and energy and I find that exciting. And maybe just because, you know, I'm a researcher, a kind of a word of caution or I think kind of with this, I think each of these, you know, are signaling a direction of travel for sure, which we can all get excited about. But I think what we really need is a is a step change in ambition. So what do I mean by this? I'm worried that each MDB will go off, do their own platform, their own fund structure, their own reporting template and what we're going to add end up with this fragmentation. And what we really need is multi originator platforms. So MDBS, you know, kind of these securitizing platforms, not just having IFC assets or IDBIDB invest, you know, kind of like assets or EIB, but a whole range of kind of assets from these institutions, mega funds, you know, funds like ILX, you know, really, really scaling to absorb, you know, the significant amounts of pension capital that that's out there. And then finally, I think kind of around standardization, it will enable a faster, faster progress with this issue around standardization because at the moment you've got each institution doing its own thing with its own kind of contracts and structures. And institutional investors don't like that. They want kind of standard kind of structures. So I think we're going in the right direction, but I think the system still needs to kind of coordinate around it. Data, Leadership, and Ecosystem Drive Optimism You're calling for a further standardization, communication and more market wide perspective, right? Speaker 2 Yeah. And working, Yeah, working, working together because, you know, these, someone said, you know, I can't remember who that Naomi Campbell didn't get out of bed. You know, for less than half a million, pension funds don't get out of bed. For less than half a billion, you know we need big, big ticket sizes. Speaker 1 I like that. I love to see how much enthusiasm you're bringing here and with this innovations. So as a last question, I'd like to close it with what makes you most optimistic about the future of development finance. Speaker 2 So I think there there are three things I'm kind of, you know, optimistic about. 1 is I think I do think this data issue and the conversation is moving and generally improving. We've seen, you know, improvements in GEMS, we've seen SNP using that data to recalibrate what MDBS and DF is, you know, have room to kind of increase their lending. So I think we're moving to a place and I hear that return data might be included in the next release, You know, so I think we're moving to a world where investors will be able to actually make allocation decisions based on a better understanding of actual risk, which is lower than perceived risk, and that will be beneficial. So I'm, I'm quite optimistic about that. I'm also hopeful that the G20 under the UK presidency will push this agenda because I think it's, it's a, it's a low hanging fruit and it's cheap. The second thing I think we're starting to see leadership from the asset owners themselves. And I look at the UK and the UK EMD investor task force, you know, we see C-Suite, uh, large asset owners, you know, kind of getting into this space and looking for ways. So I'm excited about that. And then finally, I think, I think the ecosystem is, is, is developing and maturing. So we're seeing better products, better structures, you know, better intermediaries. And those examples kind of I just mentioned would probably have looked very exotic 10 years ago in the development finance space, but today they're kind of proof points. And so as I said, finally, like, you know, kind of the question is whether or not we can coordinate and scale, you know, kind of what's working rather than letting, you know, kind of many but hundreds of individual initiatives kind of bloom and and fragment. And so, you know, just to finish, I think the problem is not that we lack capital, it's that we haven't yet built a system that can move that capital at scale into the places where development and climate investment is most needed. And that's why I think we need to be thinking about it as a market building and system design challenge and not just a fundraising kind of exercise focused on MDBS and DF is. System Design Challenge, Not Capital Shortage That sounds like a very optimistic no. I'm very happy to hear this because I am seeing that the part of the places where you're optimistic in are first dent into the barriers that you've been discussing. Data behaviour system change, so that means that we're going in the right direction. Speaker 2 We certainly are. Speaker 1 Well, thank you so much for this conversation. Speaker 2 Thank you for having me. Speaker 1 Very insightful and hopefully we'll do one again soon. Thank you. Speaker 2 Thank you for listening. If you want to learn more, visit ilexfun.com. Speaker 1 And stay tuned. Speaker 2 For the next episode.