The Role of Institutional Investors in Development
Economy, Opinion, Strategy

Article is an extract from Afsaneh Beschloss’s video for the Unlocking Investment and Finance in Emerging Markets and Developing Economies (EMDEs)

The world of the private sector in overall finances changed hugely if we looked today at the size of the public sector versus the private sector in the private sector nowadays you have almost in excess of seventeen trillion in equity markets you have in excess of fourteen trillion in bond markets you have the private equity which is more like thirty five to forty billion depending on what numbers you use. The multilaterals and at the World Bank obviously is the largest the World Bank in terms of the IBRD and I doubt together in terms of commitments or landing depending on what numbers we look at a given year may be more in the forties at a relatively high level in the billions versus the trillions.

So when we look at those kinds of numbers the relationship of the private sector versus the public sector becomes much more clear to us as one that has become increasingly important. The growth of the private sector has been phenomenal in the last fifteen years obviously we had two thousand eight where the relative shares of public and private sector changed a little bit but if you look at the numbers the private sector took off right away after two thousand eight by quite a large number. The interesting thing in terms of the last fifteen years is really a little bit of the raw rebel fill and that relative importance of the private sector having taken off across many areas and not just in Asia I would say and not just in Latin America but if you look at Africa the role of the private sector has become incredibly interesting and you see private sector investing in Africa in infrastructure in private equity across the board in real estate also in health and education.

The large institutional investors this includes large pension funds it includes large sovereign finds it includes very large university endowments and foundations globally were really generally initially investors in their home countries a lot of fun have a huge interest in emerging markets while they interested in emerging markets because they have a need to have a return which is in the six percent to ten percent range and they’re finding that in their home markets they don’t always get those returns where is in emerging markets given the relative growth is higher and inefficiencies are larger there is a lot more potential to have highly profitable and high margin investments.

Institutional investors are looking for returns and they’re looking for a number of other things when they look at emerging markets. One thing they look at when they look at emerging markets is diversification so when they look at investing in emerging markets they’re were interested in finding something which is not correlated with their other investments what does that mean if they’re investing in US equities or then investing US bonds they want to invest in an asset class that went US investments are not doing too well or European investments are not doing too well they will do well in this other asset class that is what it means not to be highly correlated. So emerging market sometimes moves along with other equity markets and sometimes it doesn’t move along.

Obviously having a transparent economy and an economy where are the rule of law is fairly well established is really important an economy where their opportunities and that whether you are a foreign investor or your local investor you feel that you are treated relatively on par not maybe perfectly because even in in the developed countries you don’t get always treated on par but closer to each other things that are really important obviously is return and risk management can you understand the political risk of investing in this country the economic and social risks of investing in this country and those are things that a large global investors don’t worry about when they invest in the developed world if you look at countries that have kind of jumped over the hoop to the developed like Singapore and then you start going behind them on a countries like Korea and then you go further back you are look into let’s say Africa and look at the Kenya all in very different places in terms of the economic development very different places in terms of transparency and in terms of governance of their companies but what you will see that is in common is the fact that their governments have tried to create a climate that provides more transparency a climate that provides more rule of law relative to what they had before and within their own regions we’re investing a lot in a number of African countries the twirl ten years ago or fifteen years ago where total no knows in terms of corporate governance in terms of transparency in terms of corruption.

Now we’re finding in countries like Tanzania that we can invest across the world whether it’s a sort of mind that is creating salt for local consumption what their roads what their power sector with it is the gas pipeline they’re just so many interesting opportunities. Infrastructure has a really important attributes which is that it needs investments that are long term and the returns are long term there are quite a few ways to help leverage the resources of MDBs are with private sector funds to finance infrastructure projects what has been really classically used is one dollar let’s say of an MDB investment in an infrastructure project has often attracted another six or seven from the private equity group or from an infrastructure fund.

And that has allowed very large projects to get financed if you look at UN project in Uganda what was interesting was the role of the bank to both provide some of its tools but also help create better energy regulation in Uganda but then allowed to a private equity firm like act is to come in and invest in a very highly leveraged way and provided a lot of resources to the electricity sector in Uganda. One of the area which is really just starting to happen to finance this large infrastructure needs in emerging markets is creating projects where for example just like in the developed markets in Europe for US you have toll roads where the investors are paid by the users of these are roads or other transportation means was starting to see some of those developed and emerging markets.

I think while the interest has been in infrastructure let’s not forget private education and private health sector obviously what we’ve seen in emerging markets is particularly I would say in the last five years in Africa in Latin America Eastern Europe and Asia huge increase in consumer sector that’s an area where because of the poverty in many of these developing countries and infant countries you didn’t see much growth and that has been a drastic change I would say as you’ve seen the patterns of consumption in emerging markets have changed and whether you’re in a large city but even if you go into agriculture areas you see people using telecommunications and they have their mobile phones because that’s the source of any kind of economic activity in addition to whatever their main job is and what you see people spending next on is the education of their children and their health and as we well know in these countries the countries are starting with a fairly low base for the masses in terms of education and health and you starting to see private sector solutions and the private public coming together to come up with solutions to the education and health problems and coming up with projects that have also very good rate of return what will shock you probably this last year emerging markets in two thousand fifteen has been down depending on which region you look at more than ten percent but actually the health sector returns in emerging markets is up for the year.

So that tells you that there is a lot of potential in India we just had a seminar recently and there were quite a few players from academics and policy makers all the way to large investors and what you realize is that with that Mr. Modi’s reform and his great energy to get investors across the globe interested in India there are a number of opportunities we’re looking at right now these range from power projects turning some of the coal power plants into natural gas power plants they include power of plants all across India they also include looking at providing low cost housing for the people who were living in slums right now and they’re actually quite a few very interesting investments there that provide the same rate of return as other areas and can ensure that the poorest of the poor in India get housing going to Africa you see some incredible opportunities.

For example there are no emergency health services in some African countries so even in the African countries other producing and relatively better off with a smaller population if someone hits gets hit by a car or has an accident either unfortunately you are left to die or your sent by air add to Kenya or to Europe which is a hugely expensive venture no ambulances or emergency care their private sector groups that are looking in providing emergency care and in some of these African countries and you can see that there is even ability to pay and it’s going to reduce the cost of a dealing with emergencies and provide interesting rate of return.

What is not very important for the MDBs and in particular the World Bank is to take its resources and knowledge to turn some of these goals into real projects how do you do that you take climate change or you take poverty and you come up with actual projects that the bank has on its list and you provide those to the private sector investors were looking and you helped to fit those into the asset classes that there are large institutional investors are investing in large institutional investors have equity Bacchus that bond buckets that private equity and for the World Bank if it could help to come up both with an actual project and see how it fits into the categories and buckets that invent institutional investors use it would be so much easier to get these goals achieved.

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