It was working as the International Finance Corporation’s representative in Senegal’s capital, Dakar that gave Faheen Allibhoy, head of JPMorgan’s newly established Development Finance Institution (DFI), a sense of the potential assistance that the private sector could offer in driving economic growth.
She saw that development dollars alone could not help Senegal exit the trap of mediocre growth and high poverty, nor help its government leverage the discovery of oil in 2014; its ticket to prosperity. It needed substantially more cash.
The World Bank is one of Senegal’s largest donors – extending $365 million in 2019 and $715 million in 2020 – but the amount of official development assistance (ODA) it gave the country “pales in comparison” to what Senegal was able to raise in the markets, Allibhoy says.
“The annual budget support provided by World Bank and other donors, which is attractive because it is concessional in nature, is relatively limited vis-à-vis the needs of the government.
“But the Senegalese were able to go to the public market and raise billions of euros,” she says. “You can’t compare that. If you can demonstrate growth, good governance and political stability, the capital markets are receptive to giving you money at larger volumes than you can get from ODA.”
Senegal’s experience highlights the challenge faced by many developing nations, now exacerbated by the onset of a global health pandemic and an economic crisis.
This is a watershed moment historically
Faheen Allibhoy, JPMorgan DFI
According to the United Nations, the 2015 sustainable development goals (SDGs) – widely viewed as a full list of this generation’s development challenges – will require some $5 trillion to $7 trillion of capital per year; in developing economies there is an annual investment gap of $2.5 trillion.
In 2019, total ODA from members of the OECD’s Development Assistance Committee stood at $152.8 billion, while money sent home by workers is now over three times larger than this, making it the most important source of capital for funding development.
Remittances were on track to reach $551 billion in 2019, overtaking foreign direct investment as the biggest source of external financing for low and middle-income countries.
In response, JPMorgan has launched the DFI initiative to channel private-sector capital to help countries narrow the financing gap and meet the SDGs. Led by Allibhoy and Daniel Zelikow, JPMorgan’s global head of public sector, the DFI was launched on January 21 this year. It announced its first deal, for Georgia Global Utilities, in July.
The project was born out of a desire to increase financing to developing economies – which represent around 60% of global GDP and offer commercial growth opportunities for the bank – as well as in response to increasing demand from investors.
The DFI is in many ways a natural fit for JPMorgan, which has a commitment to driving economic development. In February, chief executive Jamie Dimon pledged $200 billion to advance the UN SDGs.
Rather than deploy its own capital to finance projects, the DFI will work alongside JPMorgan’s bankers to provide projects with a ‘development intensity certification’ to create a tradable asset class similar to green or social bonds.
The aim is fourfold: to mainstream development finance within JPMorgan; originate and structure transactions as the DFI, which JPMorgan would then execute; work more closely with existing DFIs; and to identify and partner with an emerging class of impact-focused investors.
At the heart of the offering is the development finance certification. While environmental and social assessments are now essential parts of bank due diligence, there is no commercial bank that goes on to assess the developmental impact of its projects – until now.
Using a methodology transposed from the IFC, Allibhoy and her team will measure the development impact and intensity of projects and give them a development intensity score.
The entry of a powerful intermediary with huge capacity to leverage the private sector and raise billions of additional dollars to help meet the SDGs is seen as an important step by the development finance community.
It is important to see powerful intermediaries in this market
Nick O’Donohoe, CDC
Nick O’Donohoe, chief executive of development institution CDC Group and JPMorgan alumnus, says that JPMorgan’s role as an intermediary is an important one, and a role that, until now, has been largely ignored.
“When Jamie [Dimon] decided he wanted to have a social finance group, I was asked to take responsibility for it from a management committee perspective,” O’Donohoe says. “Jamie has always had the view, even before it was trendy, that banks need to play an important role in the global community.
“It is important to see powerful intermediaries in this market,” O’Donohoe adds. “There is no doubt more transactions and more money will get done because they are dedicating resources to this effort.”
‘Additionality’
Traditional development finance hinges on the concept of ‘additionality’, the idea that any investments made by DFIs should not crowd out the private sector but rather bring fresh capital to projects and countries that could not be found elsewhere.
But JPMorgan’s DFI is not about additionality in the traditional sense, the bank says. Official-sector DFIs use public-sector money provided by shareholders at no cost, meaning there has to be a strong case for why that money is used rather than that of the private sector.
“Given that we are the private sector and not using public sources of funds, achieving additionality is not as relevant,” says Zelikow. “That said, we do achieve additionality in some of our transactions, through innovation or something that creates a market.”
At the CDC, O’Donohoe believes JPMorgan’s DFI should aspire to do more and use its rigorous risk management, know-you-customer and origination capabilities to bring about deals that otherwise would not have happened.
“I understand why they want to move carefully on day one, but a firm like JPMorgan has the capital, the people and it is creative enough to find new ways of bringing additional capital,” says O’Donohoe. “My hope is they will help show us transactions we wouldn’t otherwise see, or help us structure transactions that we wouldn’t otherwise be able to do.”
Zelikow says JPM’s DFI has two overarching aims: to increase JPMorgan’s contribution to the UN’s SDGs in the developing world and to achieve the bank’s own commercial objectives.
However, if the bank is not willing to deploy its own capital, the initiative could be seen as window-dressing, a repackaging of the extensive work that it is already doing to finance development. The ability to bring fresh capital and new funding options to these markets is the real barometer of its success.
The DFI community is understandably keen to see JPMorgan increase capital flows to the toughest markets, either by directly banking projects there or by freeing up DFI capital to invest further down the credit spectrum.
“I don’t think we should be churlish about this,” says O’Donohoe, “I think it is a good idea that they are doing this and they will do it very well and they will make a difference. Our role may be in the DFI community to welcome them and to try and push them a little bit harder.”
The DFI itself estimates that JPMorgan will be able to finance development activities valued at more than $100 billion annually from investment banking transactions alone. This figure is based on extensive back testing of the developmental impact of previous deals financed by the bank.
We want to help create development finance as an asset class
Daniel Zelikow, JPMorgan DFI
Zelikow is keen to emphasize that all decisions will be made on a commercial basis; projects that are not deemed bankable after extensive analysis will not be financed by the DFI.
“Will we do transactions that before we wouldn’t? I don’t think so,” he says. “If a transaction isn’t bankable before, it isn’t going to be bankable now.”
DFI projects must be originated in World Bank-eligible countries, excluding the likes of Cuba and North Korea.
In 2019, JPMorgan served clients in 82 of the 144 World Bank-eligible borrowing countries, but there are still countries in which the bank does not operate; those 62 are the ones that find it most difficult to access capital.
“[DFI has] the capacity and huge amounts of capital, both financial and human, and they have an appetite for taking risk. Ultimately this is all about moving into the toughest markets, about how much risk are you willing to take or to encourage other people to take,” O’Donohoe says.
“The real test is whether the initiative increases capital flows to the toughest markets, rather than just the broader emerging markets.”
A key determinant in the drive to encourage investors to take on this kind of risk is the growing demand for impact investing
“I think there is a growing trend in general – our DFI is just one example – to have greater accountability for use-of-proceeds finance,” says Zelikow. “That is: what are you raising the money for? How are you going to invest it? What good things will happen as a consequence?”
As Allibhoy began to gather data on the pool of potential capital, she was pleased to find some substantial interest from investors.
“American investors are starting to open up to this, Europeans are clearly in the lead, and there is emerging interest in Asia,” she says. “This consciousness is growing.”
Some of the biggest funds in the world are carving out impact sleeves in existing funds or creating impact-related funds.
In June, Danish pension fund Industries Pension gave Pico DKr8.9 billion ($1.4 billion) to invest in bonds from companies that contribute to one or more of the UN’s SDGs.
Also, that month, Finnfund launched Finland’s first impact fund to invest in emerging markets, raising €76 million in the first round.
More established players, such as Blue Orchard, disbursed more than $7 billion across 80 different emerging and frontier markets, contributing to 13 out of the 17 SDGs as of March 2020.
“We are discussing ways we can have partnerships,” says Zelikow.
Asset class
A focus on the bottom line begs the question of how the bank will manage any possible conflict between its commercial and developmental agendas.
Allibhoy does not see this as a concern.
“All of our deals will be commercial, just as our exclusions and product filters have to make JPMorgan’s commercial sense. I think all banks have those levers to do deals that are more or less profitable,” she says.
She and her team are working hard on some new mandates, one of which she says will be a “game changer in the market.”
“We are looking at areas where we can have impact, such as gender bonds, diaspora financing, remittance flows and Covid-focused trade finance,” she explains.
While Allibhoy is reluctant to say how the DFI’s involvement impacted the pricing of its first public deal, the $250 million five-year green bond for Georgia Global Utilities in July, she argues that it did bring a deeper and more diverse pool of investors to the table.
“I think in this case what we brought to the deal was some investors who may not have come to the table had the development impact not been articulated,” she says.
JPMorgan believes that by quantifying and grading the developmental impact of projects, it can use its influence to encourage peer institutions to adopt similar criteria and develop some industry-wide standards.
For me, the real objective of this DFI is that there are a lot of companies and countries that do have a positive impact on their stakeholders and shareholders, they just don’t know how to articulate it
Faheen Allibhoy, JPMorgan DFI
While social and green bonds now have global scale, attracting billions of dollars of investment, development finance does not exist as a tradable asset class – yet.
“We want to help create development finance as an asset class and we think the world will be better off, including JPMorgan, if our competitors are doing the same,” says Zelikow.
The bank also hopes to encourage institutional investors to start creating products to attract other savers, developing a tradable market for development finance products. This is why it has been so transparent about its methodology.
“We want people to emulate our approach if they think it has merit. We would be more than happy to sit down with peer institutions and to question whether or not the criteria we have developed is one we as an industry can adopt,” says Zelikow.
Allibhoy says the next step is to roll out platforms or a series of transactions with existing DFIs.
“We’ve spoken to all of [the big DFIs] to understand their strategy and priorities to explore how we can work even more closely together,” she says.
“Eventually down the line when you have enough deals, you pool transactions together, create structured notes, do indexing.”
The timing of JPM’s DFI could not be better. As governments and investors repatriate funds to deal with problems at home, the drop in investment in emerging markets in Africa, Asia and south America will make the UN’s sustainable development goals harder to reach.
Without the financial firepower of developed market countries to fight Covid-19, emerging market countries are increasingly reliant on ODA, aid and the private sector to meet their economic and health goals.
The emergence of a powerful DFI intermediary could just catalyze the private sector to help, but it must use its resources, expertise and balance sheet to make this happen.
“This is a watershed moment historically, and if investors choose to direct their money to impact, the financial system will also have to adapt to it,” says Allibhoy.
The DFI score
Unlike environmental, social and governance (ESG) investing, which is largely focused on developed markets, the DFI world is concerned with transactions in emerging markets. It is not about giving a company a rating, as an equity analyst would, but assessing the merits of a transaction and its impact.
“We are trying to go a step beyond and articulate the developmental impact of our transactions, be they on supply chain, wages paid, the power connections established, the hospital beds created,” says Faheen Allibhoy, head of JPMorgan’s Development Finance Institution (DFI).
“Investors today want transactions that have impact – some in climate, others in ESG – but what investors really want is a methodology.”
Transactions will be given one of four possible scores – low, moderate, high or very high – that is mapped to the UN SDGs. Allibhoy’s team will provide certification, help issuers build the developmental narrative and match them to a growing pool of impact investors.
Execution of a deal will be done by JPMorgan’s existing investment banking team.
“What I am really pleased about is we are touching deals across a variety of products and geographies,” she says. “We have a nice pipeline of transactions where teams are coming to us and saying: ‘Can you do the development finance qualification, because we think this will make a difference.’”
The certification meets a growing demand from the buy side for quantifiable and measurable impact, as well as from issuers who are fostering accountability on use of proceeds. Many issuers have already approached the bank to rate their transactions, says Zelikow.
“For me, the real objective of this DFI is that there are a lot of companies and countries that do have a positive impact on their stakeholders and shareholders, they just don’t know how to articulate it,” says Allibhoy.
“Our role can be to make sure it can be articulated, that there is a methodology and some type of integrity behind it that we can show to investors so that they feel comfortable.”
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The value of transparency
JPMorgan has taken the decision to be completely transparent about its DFI methodology, which is available online, and it has no illusions that what it is offering is the perfect fix-all.
One of the criticisms of private lending is the lack of technical assistance that comes with it, while the nature of JPMorgan’s business means it will not have access to the proprietary information required to carry out effective monitoring.
This is also one of the main criticisms of JPMorgan initiative: how can they ensure the development objectives of projects they finance can be met?
“A legitimate criticism of JPM’s DFI is that we are not yet in a position to apply ex-post analysis to the transactions we are currently originating to assess their ultimate development impact,” says Daniel Zelikow, JPMorgan’s global head of public sector.
“Many existing development institutions struggle with this challenge too, and maybe we, or investors who enter into these transactions, will figure out an effective way to do ex-post evaluation.”
As a form of quality control, JPMorgan will monitor the impact of a selection of its transactions, once the capex is invested, but it does not have the resources to do so for all deals – nor the intent. The bank is in discussions with third-party commercial providers to see if they could work together.
“I think everyone would be better if there were third parties, firms like rating agencies, who could look at what the ex-ante expectations were and say whether or not these objectives were achieved or not,” says Zelikow.
