APG moves into SDG-focused private credit as interest in development finance grows

Dutch pension provider APG is investing $750 million in a new fund managed by ILX Management which will invest jointly with development finance institutions to provide loans for SDG-focused companies and projects in emerging markets.

Dutch pension provider APG is the latest major financial institution to embrace investments promoting sustainable development goals (SDGs), via $750 million (€660 million) of funding for a new emerging market private credit fund launched by Amsterdam-based ILX.

APG is making the investment on behalf of pension fund clients ABP and bpfBOUW. 

The ILX fund will invest jointly with development finance institutions (DFIs) to provide loans for SDG-focused companies and projects in emerging markets. ILX aims to build up its portfolio over the next three years and is hoping that APG’s investment will leverage further investments in the fund, which has a target size of $1 billion.

The focus will be on medium and long-term loans in four SDG-related areas: energy access and clean energy, sustainable industry and infrastructure, inclusive finance, and food security. Examples could be investments in port facilities, solar farms, sustainable agriculture, and loans to local financial institutions.

Potential partners include the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the International Finance Corporation and FMO, among others.

Better targeting of SDGs

Sjacco Schouten, head of emerging markets debt at APG, told Impact Investor that by investing in a fund that can pick and choose where to make its private sector loans, the asset manager could target SDG-oriented projects more accurately than through more broad-brush investments such as emerging market sovereign bonds, or bonds issued by DFIs intended to support all their work regardless of its aims. 

“With the solution ILX has offered us, we have found a good mix between an attractive risk return profile and the contribution to sustainable development in developing countries,” he says. “We are not an impact investor, but this shows we can contribute to the SDGs if it comes at an attractive return.”

ILX was co-founded by Cardano Development and Manfred Schepers. Grants from Germany’s KfW, and the foreign ministries of the Netherlands and the UK helped finance its early-stage development. 

“We are not an impact investor, but this shows we can contribute to the SDGs if it comes at an attractive return.”

The fund will spread risk through a diverse portfolio, both in terms of sectors and geographical regions, and will build on the experience, local knowledge, and relationships of the DFIs involved to help minimise investment risk. 

Schouten says the fund provides an attractive risk return profile, with similar default probabilities as emerging market corporates, but with the prospect of much higher debt recovery rates, due to the participation of DFIs.

Private credit investments also help spread risk for institutions, as they have relatively low volatility and little correlation with highly liquid credit investments on public markets.

Blueprint for pension funds?

Manfred Schepers, ILX’s chief executive – and former vice president and CFO of the European Bank for Reconstruction and Development (EBRD) – hopes the fund will encourage others to follow suit. 

“We anticipate that other pension fund investors will increasingly look into this development finance asset class as a means to directly support their SDGs and their climate commitments with strong SDI [sustainable development investment] alignment,” he said at the fund’s launch. 

APG’s Schouten said he was also optimistic that this type of private credit fund investment could complement direct investments in emerging market corporates.    

“We are looking to expand exposure for our clients in corporate bonds – that’s definitely another source of potential SDI for our portfolios. But I think with the ILX approach, we have a whole asset class that also meets that criterion,” he said.

“I also think it could be a growing asset class. It’s not new – there are a number of similar projects. But to do this on a global scale in a well-diversified way via different DFIs and MDBs is something more innovative,” he adds.

Schouten says the fund’s lending approach will likely be fairly conservative initially.

“The range of yields for these loans vary from LIBOR plus 150 [basis points] to LIBOR plus 800, but they will probably be nearer the middle of that range to start with. Then going forward, we can always see if we have an ambition for higher returns and have room for more risk in this asset class,” he said. 

APG may also seek to develop something similar to the ILX fund internally, but not yet. “It’s quite an operational challenge to get started, which is why we have chosen an external manager to get started. It’s good to learn,” says Schouten.

Cleaning up

APG’s investment in the SDG-focused ILX Fund follows on from the announcement – shortly before last November’s COP26 climate change meeting – that its parent ABP would sell all of its fossil fuel investments, worth some €15 billion, with a pledge to divest the majority of them by early 2023. 

ABP, a long-time major investor in Shell and other fossil fuel companies, has faced criticism from environmental groups saying it was helping to prop up companies with inadequate policies to cut carbon emissions and meet other environmental goals.

Both the fossil fuel divestment and the ILX fund investment are relatively small-scale compared to APG’s total invested capital of more than €600 billion. However, they are indicative of the direction of travel in an industry under pressure to pay more than just lip service to its support for sustainable development goals.