Debra Schwartz & Nadia Nikolova Talk Catalytic Capital – Part 2 

In part 2, Debra and Nadia discuss the lessons learnt from the creation of the SDG Loan Fund, which mobilised over a USD 1 billion for the Sustainable Development Goals. Key insights include the importance of top management support, patience, and genuine partnerships. The conversation also highlights the innovative approach of leveraging existing capacities and the significant impact on inspiring further capital mobilisation efforts. 

Clara: Debra from MacArthur Foundation and Nadia from Allianz Global Investors shared with us how the SDG Loan Fund came about its main goal and the challenges behind the scenes to design the largest blended finance to date. Today, we will hear more about the lessons learned, potential replication and the additional impact the fund is expected to generate. What lessons can others learn from you for potential replication?  

Nadia: Make sure you have the right people on the board – top management support, leadership – very early on, because you don't know how long it's going to take to get it through, and you do not know what resources it will require. Having top management buy-in is absolutely paramount, including fundraising.   

From an asset manager perspective, the investors that are most keen to participate have a very strong sustainability agenda, often driven top-down. It is difficult for an asset allocator that's never done blended finance to start participating overnight in a fund like ours. It takes time to educate. So, arm yourself with patience and kindness and willingness to listen, because the assumptions you have probably made when you're engaged in a conversation, 80% of the time are going to be wrong. What are the other person's assumptions? What is really a dealbreaker? There is a zone of common agreement, but it requires dedication to understand the constraints of the other parties (not assuming that you know). 

Debra: I would underscore the point about people, and just say that partnership is everything in these types of transactions. It has to be a real partnership, which can only be possible if each organisation, as Nadia said, is committed, maybe not exactly at the same level at all times, but if each institution isn't fundamentally committed, the partnership won't work. You have to be able to understand each other over time. That takes time. You have to trust each other – that takes a lot of time, and the patience piece that's part of being a good partner and to say, ‘Oh, this person over here, this institution now has an issue.’ We have to all work and flex and figure out a solution to that, and then come over here, and it turns out somebody else has an issue.  

You have to have that problem solving mindset. As Nadia said, you have to be a good listener, a good patient partner and a problem solver for that all to really happen.  

I really like the point about listening and not assuming. One thing that can sometimes happen in impact investment is we see one thing and we generalise. As investors, we're always looking for patterns, but we have to be careful, because we shouldn't assume that something is just somebody's misguided understanding; maybe there's a real problem that's sitting underneath it. Hard capital gaps, big ones, are really hard, and it takes that type of listening that Nadia is talking about to be able to unpack them and figure out what's really at work.  

The partnership and people are a huge lesson this transaction illuminates in a lot of ways. This transaction also reminds us that innovation is both critically important and is not equal to this idea of everything is new. In fact, it's a little bit the opposite.  

This transaction took three institutions that all had deep track records doing something. FMO with the investment management arm, doing loan participations in order to mobilise private capital, and managing that process. A portfolio manager had never made these kinds of loans before. We would have never mobilised a billion dollars without that tangible, deep track record in history. They needed to see an institution-grade asset manager. It couldn't be just somebody who showed up and said, ‘We'd like to manage your billion dollars, please.’ It had to be a recognised, proven player, and that's what Allianz Global Investors brought to the table 

You needed a guarantee. We had already done seven or eight guarantees, including a USD 20 million guarantee with an insurance company in the wake of the financial crisis. So, it wasn't our first rodeo either.  

So, there wasn't innovation in the sense of, doing a guarantee or being a portfolio manager. The innovation was knitting those together. It was what happened on that day Nadia described where she sat down with the FMO folks and their napkins, and started to imagine what would happen if you took these two existing capacities and knit them together in a new way. That is the innovation. 

And so it builds on things, it harnesses things that already exist and takes them to new places. I think we have to be excited about innovation and open to it and recognise that we need new approaches to keep you know, trying to work on the problems in this world, but not to think that that only means ‘from scratch.’ It also means building from the ground up with folks like FMO and Allianz.  

Gianluca: Could you elaborate a bit on what's the additional impact we expect from the SDG Loan Funds? What are the expected outcomes, and how can we believe that these additional outcomes really wouldn't have happened if these investments were directed somewhere else? 

Nadia: When we announced the fund, the estimation was around 60,000 jobs supported, and about 450,000 tons of CO2-equivalent of greenhouse gases avoided, per annum. And these are just numbers, in a way, I didn't realise the impact the fund per se would have. That's where I want to focus.  

Of course, the capital, where it goes, is absolutely paramount. The people are indeed getting jobs, the renewable energy capacity is going on the ground. But what struck me more is the number of extremely high senior level conversations I have had since we announced the fund. Large financial institutions, large asset managers, multilateral and bilateral development banks, they were scratching their heads and asking, ‘How is a small Dutch development bank with an eight and a half or 9 billion balance sheet mobilizsing a billion dollar of capital for the SDGs? How do we do more?’  

And I think for me, this is the unexpected impact of the transaction. It raises questions of, how do we do more for each dollar of capital in an environment where donors and governments are running out of K8 capital or development capital. Philanthropic capital is not finite, and we need to see more capital mobilisation. How are we getting more impact for our buck?  

It's been inspiring to see the conversations. I would like to be able to quantify this as an impact investor. I can't, but I can tell you, I'm excited. 

Debra: Looking back on the SDG loan fund and many of the other investments that we selected in our Catalytic Capital Consortium portfolio back at the beginning of 2019, we had no idea what was to come a year later, with the pandemic, the racial reckoning and so many other challenges that everyone faced. But as we now take stock at this moment in 2024 we are also, I don't want to say surprised, because we this was the whole point. We were looking for transactions that would be powerful demonstrations. And we said from the beginning, each one has to have a really meaningful, tangible set of impacts on the ground that it's aiming for. Obviously, that's the first order of business. But we were picking based on the idea that each one also could have this inspirational spark – giving people the ‘aha!’ How did that work? Where did that come from? We were looking for investments that had that extra quality.  

I think that is why, when Yvonne and Nadia and others brought the SDG Loan Fund into our orbit with the proposal process that year, I think everybody around the table saw that if this could happen – we didn't know exactly how it would happen, didn't know all the contours and what it would look like, but we knew enough about the sort of marketplace that Nadia is describing to realise that it would be an eye opener, that it would give people a moment to pause and say, Wait a second. How did those partners pull that off?  

Looking back six months since we launched, that that is exactly what's happened. It is really gratifying, and this is a real tribute to Nadia and her colleagues at FMO, the level of engagement, the level of interest, the sparks that are sparking.  

Again, I don't want to say that it surprises me. It's why we picked these guys as partners, because we thought it could be an amazing result. But these are tough times, and to have people pay this much attention to a single transaction is actually that is surprising. It is a remarkable thing, and we're really proud to have done our part.