Swiss DFI focused on job creation, but struggling to mobilize private capital

WASHINGTON — Since its founding in 2005, the Swiss Investment Fund for Emerging Markets has been working to create good jobs in emerging markets, but fulfilling the other part of its mandate — mobilizing private capital — has proven to be more difficult, according to Jörg Frieden, the organization’s chairman. While a few large Swiss banks have established funds that have invested alongside the Swiss development finance institution only about 10% of its portfolio goes to mobilize private capital. “We need to induce, nudge more risk from private investors.” --— Jörg Frieden, chairman, Swiss Investment Fund for Emerging Markets “It’s really peanuts if you put it in the context of the very large financial market [in Switzerland],” Frieden said in an interview, adding that he would like to see the proportion of SIFEM’s portfolio working to mobilize capital double in the next five years. There should be a strong case for investment — Swiss government bonds currently have negative interest rates so logic should push more capital to some emerging markets. But Frieden is concerned because the interest from private investors in Africa seems to be weakening, he said. “We are aware that at our size what we can do directly is not a response to the challenge faced by partner countries, especially in Africa. We need to induce, nudge more risk from private investors,” Frieden said. Frieden has also tried to engage Swiss pension funds but said that he hasn’t been able to get much traction there either. SIFEM needs to prove to them that it can generate responsible sustainable returns so that they might invest at least a small amount, he said. SIFEM’s total amount of investment is between $750 and $800 million, with about 60% going to equity investments aimed at supporting medium-sized businesses, often those that produce goods for local markets, that will create jobs. The agency focuses on those businesses because they have the potential to change the economic environment in which they operate and an increase in independent enterprises helps fight poverty and promote open participation for citizens, Frieden said. SIFEM is also increasingly focusing on climate and the environment, an area of emphasis that is expected to grow as civil society and politics push the organization in that direction. In order to convince the private sector to invest, SIFEM needs to be able to demonstrate consistent positive results over time and in the past, its funds have not always been stable, with some years better than others, Frieden said. More than half of its portfolio is equity investments, but is trying to increase the number of loans it does in order to stabilize revenues and find a balance between the riskier, higher impact equity investments and loans, he said. Unlike some DFIs, SIFEM does not offer any concessional finance or provide blended capital on its own. As a result, it has to manage risk by diversifying its investments and so invests across sectors and typically across multiple countries in a single fund, Frieden said. SIFEM is in discussions with Swiss authorities about what new tools, including access to some concessional capital, it might have in the future, particularly as it is urged to invest in more difficult regions of countries or in countries that are more difficult to invest in, he said. The agency is also participating in a number of initiatives that bring the private sector together with development finance institutions to try to work on mobilization. It is also working to try to develop a mechanism that will allow smaller investors to make equity investments and be a part of SIFEM funds. The idea is that the smaller investors will be drawn to the mission and that the money is less tightly controlled by intermediaries than the large pools of capital. One of the challenges that Frieden has faced at SIFEM, and has seen other countries grapple with, is DFIs being disconnected from the work of development agencies, he said. Frieden has been trying to build relationships where it’s possible and capitalize on areas where the Swiss Agency for Development and Cooperation has supported potential future customers. SIFEM has also worked with other European DFIs on creating common standards and Frieden is now chairing a group working to harmonize environmental and social standards. Those common standards improve efficiency and offer an opportunity to learn from the experience of other DFIs, he said.