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Route17 (I/IV): the mobilizing private capital equation

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By Robert W. van Zwieten, Harald Walkate

· 6 min read

This is part one of a four-part series on mobilizing private capital. You can find part two here, part three here, and part four here.

Introduction and supply of bankable projects: “bankability

On September 20 of this year, Route17 and Dimensional Fund Advisors hosted an invite-only group of approximately 50 representatives from a range of sectors – government, development banks, asset owners, asset managers, investment and commercial banks, academia and think tanks – to discuss blended finance.

The morning program consisted of presentations by Route17 partners Robert van Zwieten and Harald Walkate, Jim Whittington of Dimensional Fund Advisors, Professor Christian Leuz of Chicago Booth School of Business, and a team from Allianz Global Investors.

In these presentations, the case was made that to close the investment gap for the Sustainable Development Goals and for the just energy transition – approximately $4 trn annually – we need to drastically scale up private capital investment from the institutional investors that represent the deepest pockets in the world (asset owners: pension funds, insurance companies, sovereign wealth funds). And since most SDG and climate problems do not represent commercially viable solutions, this private capital will need to be ‘mobilized’.

Fortunately, the case was also made that we have very good tools to achieve this – the financial structuring instruments that are now typically referred to as ‘blended finance’ – but that there are certain barriers to scaling this up. 

The “mobilizing private capital equation” 

The rest of the day was devoted to analysis of these barriers, and discussions revolved around the framework that Route17 developed for this symposium: the Mobilizing Private Capital Equation.

Building on the music analogy we used in our series of articles “Blended Finance is Like Music”, we liken the desired output – the amount of private capital mobilized – to music coming from an amplifier that has four dials, that can all be turned up or down. If one or more are turned to zero, no sound comes out at all. The more the four dials are turned up, the more sound comes out.

This can also be likened to a mathematical equation, where the outcome (the level of private capital flowing towards SDGs) is a function of four variables: (1) the supply of bankable projects, (2) the ‘mobilizing power’ of the risk mitigation capital that is used, (3) the linkages between the development banks (DFIs and MDBs) and private sector investors and, finally, (4) the orientation of private investors towards this kind of investing.

In the afternoon program of the symposium, these four barriers were analyzed by four separate break-out groups and then discussed in a plenary session, with the break-out group leaders forming a panel. 

In this brief series of articles, we’ll discuss these four barriers one by one and reflect the most relevant observations and takeaways.

Supply of bankable projects – “bankability”

This is the first barrier in our equation: if there are no projects to invest in, then logically no investment capital will flow. A couple of brief notes on what is meant here: 

  • “Bankable” signifies, in short, that the project should generate, or have the potential to generate, some kind of positive return. If there are no positive returns, banks or investors will not be interested in financing the project. The project sponsors may then still seek pure government or philanthropic funding.
  • We are focused especially on projects in low- and middle-income countries – this is not to say that projects in developed countries should not benefit from blended financing but the need for concessional funding is much higher in less developed countries.
  • While less developed countries have the greatest need for capital investment, the cost of capital is often a multiple of more developed countries, reflecting the perceived higher risks of the less developed countries.
  • We have separately denoted the enabling environment – while the enabling environment is crucial for the preparation and development of any given project, it will be difficult for the actors in the blended finance ecosystem (other than the government itself) to influence, and hence we have considered it out of scope for this framework.

The topic for discussion in this break-out group was: “How can we create an increase in bankable projects at scale in low- and middle-income countries?”

With a mix of development bankers, investment and commercial bankers, and government representatives, and with Dr. Fadel Jaoui of the African Development Bank reporting back in the plenary session, the group tried to identify how existing bankable projects can be found; what can be done to generate more of them; and what ‘bankable’ really means.

The main takeaways from the discussion were:

  • Development banks (DFIs/MDBs) play a key role in sourcing bankable deals – investment banks generally are not involved since origination is costly. Most of the DFIs and MDBs have local presence in low- and middle-income countries and have dedicated resources and as such are well-positioned to identify bankable projects – development banks were likened to ‘rating agencies’: doing due diligence on projects to determine whether they can be funded, and providing a ‘stamp of approval’ of sorts.
  • In addition, development banks are in a position to build relationships with ‘clients’ whose projects have been financed which can lead to the generation of further projects.
  • Development banks can, and do, partner with external firms or NGOs that can identify or generate projects – it was observed that the shortage of supply of deals does not always mean that there are no projects, but that project managers (entrepreneurs for example) don’t find their way to development banks.
  • There was discussion about the enabling environment, especially regulatory, legal and financial aspects, and agreement that this is a task primarily for governments. Political risk is also a key factor here. Paradoxically the countries that have the weakest public institutions – and therefore the weakest enabling environment – are least able to address this.

Conclusions from this break-out group were structured around time horizons:

Short term

  • Development banks should be more proactive in identifying bankable projects, and in better project preparation, potentially working with external partners;
  • Development banks should develop capabilities to identify non-bankable projects and bring them to bankability levels;
  • Governments – as shareholders of development banks – can and should facilitate these actions.

Medium term

  • Developing terms and structures in terms of longer tenors and appropriate guarantee terms. 

Long term

  • Focus on the enabling environment: government action and development of conducive regulatory, legal, and FX environments.

The supply of bankable projects, of course being “upstream” in our framework, can be a key bottleneck in ensuring that private capital can contribute more to addressing society’s challenges. 

But there are more bottlenecks: whether or not bankable projects can receive private capital funding depends to a large extent on how effectively the risk-mitigating instruments are deployed by the public sector. Our next article in this series will therefore focus on the second dial in our framework: Risk Mitigation Capital Used, or “Concessionality”.

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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About the authors

Robert W. van Zwieten is a founding partner of Route17, an independent blended finance advisory firm. He is a Research Fellow of the Transition Investment Lab at NYU Stern School of Business Abu Dhabi, and a former Adjunct Professor in Finance with the Asian Institute of Management. He previously worked in senior executive positions at EMPEA, Asian Development Bank, Singapore Exchange, General Electric and ABN AMRO Bank.

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Harald Walkate is a founding partner of Route17, an independent blended finance advisory firm. He is also a Senior Fellow at the University of Zurich Center for Sustainable Finance and Private Wealth (CSP) and a member of the ESG Advisory Committee of the Financial Conduct Authority (UK). Previously he was the Head of ESG and member of the Executive Committee of Natixis Investment Managers, and the Global Head of Responsible Investment at Aegon Asset Management.

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