Debra Schwartz & Nadia Nikolova Talk Catalytic Capital – Part 1  

Blended finance is defined as a strategic use of impact finance and philanthropic funds to mobilise private capital flows to generate impact. What sets blended finance apart from other investments is the provision of catalytic capital, an essential layer that reduces the gap between perceived and actual risks in a deal. Part 1 highlights the roles of the organisations involved and the challenges in designing the SDG Loan Fund.  

Clara: In 2023, Allianz, FMO Investment Management, the investment arm of the Dutch Development Bank, FMO and MacArthur Foundation, launched one of the largest blended finance deals to date, successfully mobilising over 1 billion in private capital to advance the Sustainable Development Goals of the United Nations in emerging and frontier markets.   

Gianluca: Today, we have the great opportunity to bring together two of the three key parties who made this happen and learn how they made it possible. It is my pleasure to introduce Debra Schwartz and Nadia Nikolova. 

Debra leads MacArthur's impact investments program, which has committed more than seven 50 million to advanced equity, inclusion and sustainability.  

MacArthur Foundation is the initiator and the main supporter of the Catalytic Capital Consortium, a groundbreaking initiative aimed at enhancing the adoption of catalytic capital worldwide.  

Nadia is the lead Portfolio Manager for Allianz Global Investors (AGI), whose impact and development credit team currently manages over USD 3 billion of commitments. She has over 15 years of experience across various credit roles on both the advisory and buy side, and has been focused on expanding Allianz Global Investors’ presence in sustainable investments.  

Debra, Nadia, both of you have a long track record in mobilising more capital towards the most pressing social and environmental gaps to help the audience get to know you better. What inspired you to choose this career path and commit to scaling impact investing? 

Debra: It’s been a long path – MacArthur has just completed its 40th year making impact investments to extend the reach of our philanthropic work around the world, and I am closing in on 30 years at the foundation.  
 
I joined a team doing impact investing at the end of the 1990s when that was definitely not a term that existed. It wasn't coined until about 2007, but impact investing goes way, way back in some cases, and for me, it just really grows out of always having an interest in the public good, in solving hard problems, reducing poverty, oppression, of increasing quality and opportunity.  

I suppose what led me to that is my own family's experience coming to the United States as immigrants at the end of the 19th century, fleeing all the same challenges that are continuing to bring immigrants to our country. Somewhere along the way, I was thinking I would be a social worker, and I started to notice that the people with the money had a great deal of influence. So instead of pursuing a career in law or public policy, I went to business school, and I discovered public finance and capital markets. And then through a lot of good fortune, I discovered the MacArthur Foundation and what would become impact investing, but it was always this intersection of money and mission, and whether I was working in the nonprofit sector itself or working in the private sector to enable advancement in the nonprofit sector, it's always been that intersection that has driven me. 
 

Nadia: I guess it's always somehow personally rooted, right? I am Bulgarian. My early childhood memories are from the early ’90s and fighting for democracy there with my parents. 1997 was a year of hyperinflation in Bulgaria. I remember my mom trying to get to the black market before we completely lost the income she had earned. And then I saw the transitioning to the European Union, and how that really transformed the country. So somewhere in me, I had that dream of going to Georgetown and studying policy and politics. That really didn't materialise because my very practical dad said, ‘Maths and economics, my dear! You're Bulgarian, you're Eastern European, very unlikely you're going to go around the UN one day.'   

I did end up studying maths and economics. Then somehow, by great fortune, like Debra, I stumbled an opportunity to combine where my values really are aligned with my skills, which was finance.  

I think it’s times when you realize you're in the flow of things that you need to focus and double down on what you're doing at that point in time. When I did the first transaction with the first blended finance fund that I did with the IFC (International Finance Corporation), that I felt that I was able to work through the night. I was super excited: how do we get this across? And similarly, when we built the SDG loan funds, despite all the trials and tribulations, we were excited to be able to bring this product to market.  

It is that intersection for me as well. It comes from different background, but at the end of the day, it's exactly the same thematic. 

Clara: The SDG Loan Fund has set a benchmark in the impact investing sector, and there is certainly a lot of interest and attention about the impact that it will generate. Debra, what is the SDG loan fund, and what is it intended to do? 

Debra: The SDG Loan Fund, as you guys noted in the intro, is over USD 1.1 billion of capital. That capital, all but 100 million of it is coming from institutional investors, and the lead is Allianz. FMO, the Dutch Development Bank, is investing a first loss element. This is now getting into the blended finance world of layers of capital, and they've invested USD 100 million from FMO, the bank.  

There are some other moving parts, there is a fund manager, and Nadia leads the team at Allianz Global Investors that serves as the fund manager and FMO Investment Management, which is the asset management arm of FMO. They are serving as a sort of subcontracted portfolio manager and providing a way to populate the fund with participations in FMO originated loans, and we'll come back later to why that's an important feature.   

The loan fund is up and running, and there are loans that are populating the portfolio. It's focused on emerging and frontier markets, and it has three target sectors: financial inclusion, clean energy and agribusiness.  

And it is called the SDG loan fund because that investing activity lines up primarily with three key Sustainable Development Goals: number eight, decent work; 10, reducing inequality; and 13, climate action. There are, of course, many other aspects of the SDGs that will likely be touched by the many different loans that are going to be made by the time that the portfolio is fully constructed.  

MacArthur Foundation is engaging in the fund and partnering with Allianz and FMO by providing a guarantee. It's a USD 25 million unfunded guarantee to the fund. And I think this is one of the things that might be a bit unusual for blended finance. We turned out to be able to ensure that FMO could play the very important role that it's playing in. In the fund, and FMO’s role is, in turn, the key to facilitating the institutional investment.  

Nadia: At Allianz Global Investors, we started our blended finance experience nine years ago, dipping our toes in our first fund with International Finance Corporation. We built positive experience, and we wanted to build the business out of it.  

We looked to partner with likeminded development finance institutions that were looking to mobilise private capital into emerging markets for sustainable development. We were at a conference in Amsterdam when I heard FMO Investment Management saying that they have a dedicated asset management business within the development bank, therefore private capital mobilisation.  

My eyes must have become pancake-size, because after she finished her panel, I literally had to run after her, together with two of my colleagues from Allianz at the time, and we spent the rest of the afternoon in the in a cafe with a bunch of napkins, trying to sketch what is to become the SDG Loan Fund a few years down the line.  
 
It was really that alignment initially between the two institutions that then brought MacArthur into the conversation. So I'll hand it over to Debra, because it's an additional journey that we embarked on a little bit later. 

Debra: Over the years, 2016-18, my team and I were hard at work at lots of different impact investing activities, but we were seeing the field of impact investing evolve in some interesting ways, and people were really excited to see more mainstream players coming into the field.  

But, I was personally quite concerned that the narrative the field was becoming very skewed, and there were assertions that the only real impact investments were those that were fully risk-adjusted, alpha seeking finance, first investments, and that basically all of the work that MacArthur and others had done over the years didn't really count. Concessionary capital, what we would now call catalytic capital, was kind of ‘dumb money,’ you know? But the reality was, I had been doing blended finance since 2003 – I just didn't know that that was the name for it.  

When we started doing it, we had been making guarantees and June 1 loss pieces, the New York Housing Fund in 2005 mobilised $200 million through capital from 20 financial institutions and seven foundations. It's a blended finance transaction, and I realized that that kind of work was not going to be possible in an impact investment field that only cared about one type of capital.  

So we set about this Catalytic Capital Consortium Initiative in the hope that people would better understand that there's a spectrum of capital, and we have hard problems in this world, and different kinds of capital are needed, sometimes at different times, in sequence from early stage and startup and growth, and sometimes altogether in a single stack.  

In a blended finance deal in 2019, we invited over 100 proposals from around the world. We had spent several months talking with folks that we knew in our networks and fanning out and trying to identify exciting, powerful, potentially powerful demonstrations of catalytic capital, all markets, all sectors, very unusual again, for philanthropy to do that, but we wanted, on purpose, to have a really exciting, diverse portfolio of examples. And it was in that context that we connected with SDG Loan Fund, because at a conference many years before, like a decade before, I had met Yvonne Bakkum, the same person that Nadia chased down in probably about 2018 or 2019. 

So Yvonne was naturally on the list of people that I reached out to and said, ‘We're looking for really exciting examples of catalytic capital. Do you know any?’ And she brought it back to Nadia and other colleagues, and they decided to give us a proposal. 

We had over 120 proposals and we ended up choosing 11 transactions that we would pursue. We actually called them ‘field partnerships.’ And I think that really honors the kind of work that we are talking about. These are not easy, plug and play types of transactions, and the SDG was, I think in some ways, the best example of that. It embodied something that I think I first said at that conference when I met Yvonne such a long time ago. I had done the New York Housing Fund work that I described, and it had led me to realise that sometimes the greatest impact investments really have to be made. They are not lying around waiting to be found. If they were smart, investors would be making them all day long. This is an act of not only intention but design; we have to create these transactions and overcome the barriers that keep capital from flowing. SDG Loan Fund was the pinnacle, in a lot of ways, of the portfolio that we had been started building at the beginning of 2019. 

Gianluca: Could you briefly explain what was the role of your organization in the success of this initiative?  

Nadia: I sit at the asset manager, and Allianz Global Investors has over 500 billion assets under management. My role is to create the plumbing between the investments or the investment opportunity for the clients and institutional investors. In this fund, my role was to connect the institutional investors together with FMO and cater for the different risks and concerns that every group involved had.  

I will expand beyond just my Allianz role into what FMO and FMO Investment Management does. FMO is a Dutch development bank, a bilateral development bank – all they do is investment loans into emerging and frontier markets across the three Sustainable Development Goals that Debra mentioned. They have a key performance indicator (KPI) around private capital mobilisation, because the realisation is there isn't sufficient donor, public and development bank capital in order to fulfill Sustainable Development Goals. So many development banks have KPIs all the way from the board in order to mobilise private capital; FMO, uniquely, set up an asset management business that is there really for private capital mobilisation. It translates the requirements of some of the institutional investors in the market into the FMO system, and vice versa. It translates FMO to institutional investors and asset managers like myself; we worked very closely with FMO to design a structure that essentially mitigated the key risk the institutional investors find when investing in emerging and frontier markets that starts with credit risk, essentially transforming individual single B's and double B loans into investment grade. This is done through the provision of first-loss capital, which is provided, and cash funded by FMO, that's a first-loss investor in the fund. It includes all the complexities around investing in emerging markets. We worked with FMO to explain to investors the preferred creditor statuses that were applicable to development finance institutions. We worked with FMO to translate the historic track record: this was absolutely paramount, the historic track record of decades that FMO had built investing in this market into institutional investors. We worked on the design – the structure of the fund. How much first loss do we need to bring this fund to a place where it can be distributed? All in order to make a final product that is indeed compelling for the institutional community. 

Debra: There's a capital gap, which is that the emerging and frontier markets are not getting access to the capital they need for us as a world to realise the sustainable development goals. And it's not just perceived risk that is the obstacle.  Maybe it's controversial in the blended finance world, but to me, it's essential to understand that there is both perceived risk that can be inappropriate or misguided or maybe just uninformed, but there are lots of real risks and complexities. And again, the capital gap we are talking about is mobilising private institutional capital at scale to reach emerging and frontier markets in appropriate ways and forms.  

That is a really hard problem, and part of why it's hard is we have regulations and policies that do limit financial institutions and insurance companies in what they can do in terms of taking risk. That is not, on its face, a bad thing. It's actually a good idea to have some regulation around those institutions, especially if the issue here is to safeguard other investors’ capital. But the problem is, when you have regulations that are set up for one purpose, they may get in the way of realizing this other public purpose.  

Sometimes what you have are competing sets of stakeholders and public goods that can be hard to disentangle. The other thing that is very challenging about a transaction like this is we had multiple jurisdictions. Each of our institutions was based in a different country, and so we had lots of different jurisdictional issues to untangle, and that's really where Allianz Global Investments and Nadia's persistence and creativity and thoughtfulness came through, because we had to get it to so that it not only worked for the institutional investors – that was the core  to make it an investable proposition that worked on all those dimensions you just heard about – but also to make sure that it worked for everybody who was engaged in a significant way within their own regulatory context.  

This is another one of my blazingly obvious impact investment observations. First of all, a lot of time you have to make things happen. You can't just wait to go find them. And the second is, that hard things can be hard to solve, and people get aggravated that there's complexity and so forth, but that's the world that we live in. The beauty is when you can boil it down and get to the solution that while it's complex, is really honed in on the most essential elements, really getting sharp about what is it that the institutional investors need. What does the development finance institution need? What does that asset manager need? What does this foundation need? And then figure out how to make all those things come together. 

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Read part 2 of the conversation here