APG has made its first investment in ILX Management’s SDG-focused private credit fund, in a step that contributes to the further development of sustainable investments in emerging markets. The USD 750 million (€650 million) investment has been made on behalf of ABP and bpfBOUW, both of which aim to allocate an increasing share of their assets to investments that contribute to the Sustainable Development Goals (SDGs).
The investment is attractive from a diversification and risk-return perspective, as well as from a sustainability perspective, says Sjacco Schouten, head of Emerging Market Debt at APG. “By investing in this new fund, we gain access to a diversified portfolio of sustainable investment opportunities in emerging and developing economies. Although the SDGs focus to a large extent on those challenges that are most pressing in these countries – such as food security and access to finance – the availability of suitable investments that contribute to these goals is still limited. But we do expect this to change as the role that private initiatives can play in financing sustainability efforts in emerging markets will become increasingly important.”
Cornerstone investor
APG is the first investor in ILX Management’s new SDG-focused emerging market credit fund. The fund will build up an (initially) USD 1 billion portfolio of loan participations in emerging and developing markets. These loans are originated and structured by multilateral development finance institutions (DFIs), such as the Asian Development Bank, the African Development Bank, Dutch Development Bank FMO and the European Bank for Reconstruction and Development. Loans that involve high ESG (environmental, social and governance) risks will not be included in the fund.
“The loans provide medium and long-term finance to projects and companies with a focus on clean and renewable energy, sustainable industry and infrastructure, inclusive finance and food security,” says Schouten. “In the next three years, the fund aims to build up its portfolio, selecting loans that match its eligibility criteria, diversification strategy and risk-return profile. Potential investment examples include the development of port facilities, solar power farms, sustainable agriculture and loans to local businesses.” ILX has announced its ambition to become a multi-billion evergreen fund.
Building a broad and diversified portfolio
But why invest in a fund rather than via individual development finance institutions? “We do make direct investments in bonds issued by such institutions too,” Schouten explains. “However, this initiative allows us to invest in individual projects and to decide what we do and do not want to invest in. The ILX fund combines loans from various DFIs, allowing it to build a broad and diversified portfolio, whereas individual development finance institutions typically focus on a particular region or sector. Investing in the fund offers us more flexibility in terms of our clients’ sustainability requirements, while we still benefit from the underlying DFIs’ long-standing track records in originating and managing private sector projects in emerging markets.”
Equally important, the investment helps APG to diversify and improve the risk profile of its emerging market debt portfolio. “This is because private credit investments tend to have low volatility and a weak correlation with the more liquid credit investments that trade on public markets” Schouten explains. “So these investments help us to spread our risk.”
Furthering sustainable investment
The Sustainable Development Goals were established in 2015 by the United Nations and form a blueprint for a better and more sustainable world. APG and its clients refer to investments that contribute to the SDGs as Sustainable Development Investments (SDIs). Together with other global asset managers, APG has developed an SDI Taxonomy to assess companies’ product and service-related contributions to the SDGs.
In the current emerging market debt universe, there are few possibilities to invest in companies and projects that contribute to the SDGs, Schouten says. “We mainly invest in sovereign bonds and only a few quasi-sovereigns qualify as SDIs according to our own taxonomy. Also, in emerging markets there is still only a limited issuance of green bonds. By investing in the ILX fund, we unlock a new universe of responsible investment opportunities in the private credit space.”
Read here the Press Release