“Brash newcomer” is not a description usually associated with stalwart, if stodgy, development financial institutions. The quasi-public investors of rich countries anchor many of the private equity, private debt and bank lenders in emerging markets but have been criticized for being slow, risk-averse and opaque.
Known in the trade as DFIs, many have started to shake off decades of risk-aversion, to carve out catalytic mandates and to learn to collaborate better with their peers to reduce the maddening compliance and reporting requirements that can exhaust and exclude many fund managers and other intermediaries trying to move capital to where it’s needed most.
Now comes FinDev Canada, a DFI newcomer, to show them how to move faster and more flexibly, and how to use operational efficiency as a catalytic tool.
“We had a chance to be quick and efficient and use all the lessons learned,” Paulo Martelli, who helped architect FinDev’s investment strategy from its inception in 2018, tells ImpactAlpha. “We need to have a degree of urgency about what we do.”
DFIs were being called on to do more with their capital even before the demise of USAID and declining budgets for other foreign aid donors multiplied the need, and the opportunity, for development finance institutions that can move capital quickly.
FinDev Canada has made more than 60 commitments since it launched in 2018. Last week, it committed $20 million to Locfund Next, a provider of local-currency financing to microfinance institutions in Latin America and the Caribbean. Locfund Next reaches more than 55 lenders serving the region’s small business owners who lack access to formal banking.
FinDev Canada manages about $1 billion in investments across emerging markets, a fraction the size of its peers’ portfolios. It’s now expanding in Asia after establishing a track record in Latin America and Africa.
Blank slate
The shortcomings of development finance are well documented. A recent report by the Global Alliance of Impact Lawyers found that “DFIs are too conservative and too slow – they will take senior debt rather than equity, they have unreasonable 200-page due diligence forms, and they limit their mandates to certain geographies leaving gaps in the market.”
The consequences are intensifying, with the reauthorization of the US’ DFI, the International Development Finance Corp., held up in Congress – partly over how tightly to maintain its focus on low- and middle-income countries. Meanwhile, overseas development assistance – more traditional foreign aid – is projected to fall up to 17% last year.
British International Investment, the Netherlands’ FMO, and other DFIs are moving to an “originate to share” model and deploying more catalytic capital.
Canada was the last G7 nation to establish its own development finance institution, launching FinDev decades after peers like BII (formerly CDC Group) and FMO. Instead of inheriting the outdated systems and rigid processes common across DFIs, FinDev started from scratch. The institution calls the entities it finances “clients,” a sign that the institution sees its role as a service provider.
“We wanted to take advantage of the fact that we had a blank slate,” says Martelli, who joined FinDev after years at the Inter-American Development Bank.
FinDev started in a Toronto WeWork with just 10 people and no dedicated office space. Early staff came from IDB, the International Finance Corp., and various other DFIs. They brought a deep understanding of — and often, frustration with — how development finance usually works.
Martelli’s first task was to build FinDev’s investment process while simultaneously underwriting the first deal.
Closing deals fast is an important feature of the strategy Martelli helped design. FinDev can complete transactions in weeks instead of months. In one recent deal, it disbursed funds in hours.
“We’ve had notices at 8am. By 10am, money is out the door. It’s unheard of in the DFI space,” Martelli says.
“For projects operating on tight timelines or waiting on other financing to close, that efficiency can determine whether a deal happens at all,” he says of the projects and companies FinDev backs.
Collaborative spirit
A key reason FinDev is able to move so quickly is because it trusts its peers’ due diligence and relies on it when joining on deals. If a partner institution has already done work on a deal, FinDev builds on it rather than duplicating efforts. It’s a departure from the rigid, checklist-based approach many DFIs are known for.
Earlier this year, for example, FinDev joined the IFC and the Japan International Cooperation Agency on a $150 million syndicated loan to Banco del Pais in Honduras. IFC led the deal.
For its expansion in Asia, Martelli says FinDev is partnering with “strong, established players who know what’s going on” in the region.
In Vietnam, FinDev joined JICA and Sumitomo Mitsui Banking Corp. on a financing facility for HD Bank to support lending to agribusinesses and women-owned businesses. This funding aimed to be catalytic for other investors by taking a junior, riskier position in the capital stack.
In Thailand, it contributed $59 million to a package led by the Asian Development Bank to expand Gulf Energy’s solar and battery storage portfolio.
Martelli says he has gotten feedback about FinDev’s efficiency. “Why would Canada set up another DFI [to] do the same thing as everyone else? There’s only so much we can do with the organization that we have, but we’re trying to be very effective with the tools that we have in place.”