A Q&A with DFC investment chief Conor Coleman

The U.S. International Development Finance Corporation has made it through a year of transition and a lengthy reauthorization push. It now has its eyes set on larger, more strategic transactions aligned with foreign policy. The agency will look different, due to both the expanded remit Congress has granted it and because new leadership in the Trump administration is ready to chart a new course. The strategy is driven internally by CEO Ben Black and Conor Coleman, head of investments, who have worked together for years in the private sector. Now they’re turning that private sector mindset to the DFC, forging a more commercial side of operations, mobilizing more private capital, and even pursuing creative new ways to get the private sector involved, including securitization. Devex sat down with Conor Coleman to discuss DFC’s past year and its direction going forward. This interview has been lightly edited for length and clarity. I know it was a slower year for DFC in terms of investment, with a lot of disruption and change. How would you describe the work of DFC in the past year? I would say this past year was kind of like a transition year. Obviously, it's a change of administration, which just naturally leads to a change in investment thesis, a change of priorities overall. So I would really say it was kind of getting our ducks in a row as an agency to really go effectuate on the president's mission and agenda of driving U.S. foreign policy through economic growth, through an agency like this. … Ben and I have worked together for the past six years in the private sector. I knew the sector. I knew the vision that he wanted after his conversations directly with the president, and where he wanted to take this agency. So, it was more do we have the right processes in place? Do we have the right kind of investment themes and pipeline in place? Obviously, we had to get our reauthorization done. So it was really like, let's lay the foundation for it. I think it was really important for this agency to do something like this. … Ben was the fastest DFC CEO to be confirmed in a seat, and this is the first time this agency will have clear, direct leadership over a four-year time. … I think there was some cleanup that needed to be done, but this agency is very ripe for kind of growth to effectuating the president's mission, after the events of last year. You mentioned making sure the right processes, investment themes, and pipelines are in place. What sort of changes have you made internally? In terms of how Ben and I view the world, I think there's two kinds of major themes. Ben and I want to bring our private sector relationships and our experience on Wall Street down to DFC and really help bridge the gap between the U.S. government and the private sector overall, in a real, meaningful way. I think a lot of noise has been around the DFC and all U.S. government economic agencies kind of moving a little bit slower than the private sector. So we really took a look at our internal processes and what is statutorily mandated by the BUILD Act, and then what are maybe some old internal policies and procedures that have been with this organization for the past 25, 30 years that haven't been revamped, that have been slowing us down. So that process has kind of transpired over the last year. We're going to be rolling out some new investment processes of how do we get from point A to B faster to meet the private sector's needs. I think secondarily, we opened up offices in New York City, as you saw, because that will help us attract better operational knowledge, underwriting skill set, legal skill set, because that's where the talent of the private sector is. We've been seeing immense reception to that, too. We probably have a batch of 150 plus resumes from underwriting professionals who are interested in coming to work at the DFC. Secondarily, a big initiative we are doing is we're putting U.S. foreign policy as the umbrella that drives our dual mandate investment thesis of development investment and strategic investment. I think historically, maybe this agency has looked through the lens of trying to just deploy capital to reach certain volume numbers; we're going to be much more strategic with our investment standpoint. We're not deploying dollars just for the sake of deploying capital. We're really deploying capital to drive the president's foreign policy objectives, promote economic growth in the host countries that we are investing in, all while delivering a return for the U.S. taxpayer. So that's kind of our approach, and we're putting our policy division as the umbrella that drives our investment thesis of our dual-mandated strategy. What do you mean when you say you're going to deploy capital more strategically? What does that mean in terms of the type of deals, deal size, and the places that you're going to target? You're going to see us be more flexible capital providers. Ben and mine's experience is more so on the structuring side of investment. So how can we invest in senior, secured debt, mezzanine debt, structured equity, common equity, maybe different insurance and guaranteed products as well, all with the lens of how do you bring U.S. and U.S.- aligned private sector capital to these emerging markets alongside of us? So I think that is one of the key things we're going to try to promote. I think, secondarily, a fundamental belief of Ben and I is 25% of the work when investing is actually deploying the capital, 75% is portfolio management, and making sure the impact you underwrote, the investment is actually effectuated over the life of the investment. So we're really taking a stance of like, how can we be more proactive partners to make sure we're driving the impact in these emerging market economies and building markets the way we think we are? So I think those are the two main differences. In order to effectuate that, I think you have to probably tailor back the number of deals you do in a year. So I think you're going to see us be much more strategic with our deal selection. You'll probably see larger check sizes from us, too, but that's all in the mold of being more effective partners over the life of the investment. That begs a question about investments in low-income or lower-middle-income countries. Certainly, in higher-income countries, you can do big ticket sizes, but in some small, low-income countries, that is going to be really hard. Will you do less in those places? How do you balance a desire to do larger deals with the realities of investing in smaller and lower-income places? I think it depends on the sector, really, the size of the investment, even in lower-income countries. Because take a look at the Lobito infrastructure project within Angola. That was a $500 million loan, and there was more capital, like from the South African bank we partnered with, that also went into it. So for these large infrastructure, critical minerals, and energy, which this administration kind of is putting at the forefront, the capital needs are still immense when it comes to the lower-income emerging market countries. Also, another example is the recent deal that was announced between Orion CMC and Glencore — that valuation was $9 billion, so these are large numbers that you're talking about in the lower-income markets. However, for sectors such as agriculture, health care, or the financial institutions, those historically have been smaller check sizes. We are absolutely going to still be playing in those sectors and looking at those check sizes, but we view those as a package investment overall strategy of how you can pair the larger, strategic priority projects with the higher, maybe developmental projects as well, to create a full ecosystem and market for the emerging economies. You talked about having more intention in bringing more private capital into investments with you. Some have argued DFC hasn’t done enough of that in the past. How do you better mobilize capital, but also ensure that you are not disrupting or distorting markets? Let me go back to the definition of private capital mobilization, because you raise a very good point. Everyone has a different definition of what this is. I would say for us at the DFC, under this administration, our view of private capital mobilization is, how can every dollar we put in be a multiplier effect for private capital coming in alongside of us. We want to be seeing two to three to four times-plus coming in for every dollar we invest. How do you effectively do that is the next question. I think that inherently means we are taking more of the subordinated risk and giving up the senior, secured lending position to the private sector. At the end of the day, you have to realize what the private sector needs to achieve. They have a fiduciary responsibility to their [limited partners] to make a certain rate of return. It is our job to realize that, help protect them so they make the rate of return, and that is best done by having the U.S. government behind them in the capital structure, because that gives them comfort that the U.S. government and an institution like the DFC is there in a real, meaningful way. They're committed to the project, and they're active portfolio managers that are going to help address the issues that arise. Because inherently investing in emerging markets, issues are always going to arise no matter what. So that is the strategy we take. That is the kind of structuring mindset that we put in. I think another really interesting tool is for large-scale private infrastructure. Can we start syndicating deals, too? Can we start taking down large tranches and syndicating off the back end? Can we start securitizing our portfolio, too? To the private sector? I think there's a lot of creative financial tools we have not utilized previously in this agency that we're going to. When we invest in the high-income countries, it is really going to be for a targeted, strategic reason of how you connect the dots between kind of the developing world to the high-income world and secure these critical supply chains. I think the best example you're seeing where investment sometimes is needed from an institution like ourselves, where private capital might not go by themselves in high income [countries] is the processing for critical minerals. You're seeing a lot of those opportunities come about in places like Canada or Australia, where oftentimes it's a mine in the emerging economy that's feeding the processing that is done in a high-income country. So that's kind of the lens of where we're going to look at those and how can we connect the dots between emerging market investments to the high-income investments, and really target the sectors where there are intricacies that are not allowing private capital to flow freely without support from institutions like ourselves. So it'd be a very targeted approach, is what I'm saying when it comes to high-income country investing. You and Ben Black talk about DFC as the investment arm of the U.S. government. I know some people are concerned about the agency retaining its development mission and mandate. Is it still the development finance institution? Is it the investment arm? Is development still part of how you evaluate deals? Why can't it be both? When you look at sophisticated financial institutions, alternative asset managers, they have multiple different strategies, and when you look back at the BUILD Act, it's really clearly defined. This institution is supposed to have a dual mandate, both kind of development investing and strategic investing overall. So we absolutely still have the IQ score, we still have a very development catalytic portfolio that we're going to be focusing on. But at the same time, we're also going to move towards creating a little bit more commercial-oriented model as well, which will help drive private capital mobilization, and stop some of that crowding out of the private sector that you talked about amongst the DFIs. So my answer to the question is, we're going to do both because we have the capabilities and the skill set to do so. It is definitely a little bit away from just a solely development finance institution, which DFC has historically been, to a more middle ground of having not only kind of our transformational portfolio, but also a commercial portfolio as well, all with the lens of making a development or strategic impact at the end of the day, all with the lens of, on a portfolio basis, making sure we're making a return for the U.S. taxpayer. When you say making a return, what do you mean? Do you have specific targets? Absolutely. That’s my bread and butter. We are very much in the process of setting that with our board of directors kind of reevaluating a more fulsome capital allocation strategy, where we're really thinking about return thresholds overall. Because return can be in a bunch of different ways. There's obviously the financial return, which is one lens, but it's also what I call the impact return, both from a strategic standpoint and from a development standpoint. And how do those intersect and interact within our portfolio? You talked about having a more developmental catalytic portfolio and a more commercial portfolio. Will those deals be assessed the same way, or will you have slightly different investment processes behind them? For example, will you use the Impact Quotient impact management and scoring system? Yeah. For every deal, like, we're evaluating the IQ score, it's a factor that goes into everything. The investment processes are going to be the same, and every investment professional is going to look at both portfolio allocation, like the transformational and like the commercial portfolio, based on guidelines that Ben [Black] kind of sets out overall. USAID used to play a role in helping identify potential investments in countries. How is DFC looking to source deals, and will it try to be more proactive than in the past? I think about it in three different aspects. The theme over all three is how we are going to be more proactive sourcing for our investment strategy. I think our new foreign policy team that we're building internally here is going to be very, very important, because that's the connective tissue between Treasury, State, Commerce, the White House, of how we're getting, funneling the inbounds of the interagency, I think something you're going to see us be much more proactive in terms of what are the private sector partners we want to be active, and for these large infrastructure projects are globally how do we bring in the right private sector partners to this and inform the capital structure, instead of being responsive to the capital structure after the concessions are awarded. So I think that's one example — interagency. Secondarily, it's the connectivity with the New York office and our business development unit. How do you expand our private sector relationships? How do we build connective tissue to the investment banks, the sovereign wealth funds, the alternative asset managers, the development finance institutions, and have the business development group we're building really be that lens and funneling deals to the right teams within our building? And then the third is what I call strategic partnerships. You saw us announce one with IHC, which is the largest holding company of operating companies within the UAE. I think that's a really, really important project. One, because the UAE is such an important ally to the United States. But two, IHC has across a number of different sectors, best-in-class operators. They know how to get the job done in these emerging markets. We can provide the capital and the U.S. flag to help facilitate it. So it's a very strategic partnership, because we don't have the operating know-how and knowledge. IHC does. So I think you're going to see more strategic partnerships like that identified with a very specific purpose. I'm not big for announcing things with no actual tangible outcome. I’m not a big fan of MOUs or anything like that. I want to see actual tangible wins. And I know everyone in this agency feels the same way, so that's kind of the mold we're going to be driving towards. Just to follow up, what about sourcing in countries, particularly in lower-income countries? Ben and I are very big believers that business is done face to face. Business is done with having boots on the ground. Business is done with building that trust between you and your partner. At the end of the day, we've been opening up offices overseas for the DFC in our embassies. So you just saw one in Kenya, as well as Indonesia. I think you're going to see us open up more under Ben's leadership. We are in active conversations with the State Department of how and where we should be doing those. And then additionally, it comes from our private sector partners, too, with boots on the ground. So it's like the relationships with IHC, for example, who have a presence in all of these countries, and actual operating companies. It's those are, those are other ways we're going to augment as we build out our own internal capabilities to make sure we're still receiving information from boots on the ground sources on a daily basis, because that's vital to our success. DFC was reauthorized at the end of the year. Where do things stand on the implementation of DFC’s new authorities and expanded mandate? When it comes to implementing our reauthorization, I'm so fortunate. And like, I think Ben and I both think we, we found ourselves in like, the best job in D.C., because we have a building of amazing professionals, across the board, that are so talented, that already have been hard at work. As soon as our reauthorization was passed, my legal team was already putting together the list of all the steps we need to do in place. We have a couple of board meetings that are coming up that are going to kind of implement the policies and procedures of how we're going to go about the reauthorization. So it's actually going quite smoothly across the board on this one, because this building is so amazing and they are already so on top of it, so excited we're reauthorized. The administration just put so much immense faith back into this organization. Now it's time to go implement those new authorities overall.