By Tommy Wilkes and Simon Jessop
LONDON (Reuters) - Allianz (ETR:ALVG) Global Investors and Dutch development bank FMO have agreed one of the largest "blended finance" funds on record, raising $1.1 billion to invest in loans that help emerging and frontier countries meet sustainable development targets.
The fund is the largest of its type since 2018 and one of the five biggest to date, according to Convergence, which tracks the market and said the fund also stood out for the high ratio of private capital invested for every dollar of public funds.
Blended finance see providers of public money - typically government aid departments, development finance institutions or charitable donors - agree to accept more risk in a fund to encourage private sector investors to join.
Overhauling the way multilateral development banks lend to catalyse more private investment is a central part of the COP28 climate talks, which begin in Dubai this week.
The needs are vast - one estimate last year said the cost of meeting the U.N.'s Sustainable Development Goals (SDGs), a series of 2030 global targets backed by member states to fight issues such as hunger, poverty and climate change, was up to $176 trillion.
The money raised through blended finance funds is a fraction of what's needed. Convergence said median annual financing volumes in the last decade stood at $14 billion.
The new 25-year SDG Loan Fund is structured so that FMO takes the first loss should the loans turn sour. That's backed up by a $25 million guarantee from the MacArthur Foundation.
Private investors, which include Allianz and Skandia, will be the last to lose money. FMO will also source the loans to invest in.
That gave investors sufficient comfort to provide $1 billion for the $111 million put up by FMO, Nadia Nikolova, Allianz's Lead Portfolio Manager, told Reuters.
The 9-1 ratio is much higher than on average, according to Convergence. It studied a sample of funds and found that the average private sector mobilisation ratio - private sector capital leveraged by concessional capital - was 1.8.
"Pension funds are not comfortable with emerging market risk for 25 years," Nikolova said. But this loan fund structure ensured "everyone's interest is aligned," she said, noting that private investors can start getting their money back when loans begin amortising in a few years.
The fund will co-invest in a portfolio of about 100 loans targeting the energy, financial and agribusiness sectors to help developing countries meet three SDGs - boosting economic growth, equality, and fighting climate change.
The fund, which has already approved nearly $100 million worth of initial loan investments, will invest into higher-risk places including frontier markets, subject to them not being under international sanctions, said Nic Wessemius, FMO Investment Management's managing director.
FMO's team of about 40 due diligence experts will monitor loan recipients to ensure money is used as intended and failure to do so could trigger an event of default, meaning immediate repayment, Wessemius said.