Investors are looking to developing markets as a way to secure both competitive returns and positive social impact. However, the actual and perceived risks associated with investing in these geographies can make it difficult to realise these opportunities.
The report aims to raise awareness of the potential investment opportunities created in frontier markets by the UK Government’s deployment of catalytic development capital.
The report fills the current information gap around these opportunities, by examining, among others, how much capital the UK Government has invested, how it is deployed to different markets and sectors, and the ways in which investors are working with development capital to generate impact and profit.
The UK Government is increasingly using its overseas aid budget to deploy capital in ways that reduce risk for investors looking to operate in developing countries. The Government’s ambition is twofold: to deliver on its development mission of promoting sustainable, inclusive economic growth in poorer countries, and to cement the UK’s position as a global leader in developing market finance.
The mobilisation of private sector capital is often seen as crucial to reach the Sustainable Development Goals (SDGs) in developing countries. Three key actions needed to increase capital flows into developing countries: establishing a pipeline of investable deals, developing the right products to mobilise the money, and responding to savers’ demands.
The scale of UK development capital is significant and growing. We analysed 12 leading UK development capital vehicles - fund structures, programmes or financial instruments that use UK Government investment to increase, or ‘leverage’, private sector investment to create positive impact in developing countries. Together, these vehicles are likely to have an overall portfolio size of at least £15.6 bn and are budgeted to receive a total of £7.9 bn UK Government funding 2010-2026, demonstrating the significant opportunity available for investors to leverage this funding to access investment opportunities in Africa, the Middle East and Asia.
In certain sectors and geographies, investors have moved more quickly to capitalise on the opportunity created by this catalytic development capital. We analysed publicly available data from four of the largest UK-funded1 development capital vehicles - CDC, PIDG, AgDevCo and GIF - to identify these sectors and geographies. Together these four vehicles have invested at least £17.8 bn since 2003.2 Energy & mining, telecommunications and transport have seen the most significant capital deployment to date, with first-movers taking advantage of the commercial opportunities available. The markets that have received the highest amounts of investment - approximately £5 bn of investment from the four leading vehicles since 2003 - are India and Nigeria. We find, consistent with other recent analysis,3 that this investment remains concentrated in a relatively limited number of geographies.
Development capital vehicles are starting to report on the amount of private sector capital they mobilise, indicating their success in creating new opportunities for investors. Based on the data available, the UK government’s use of development capital is unlocking large amounts of private sector capital, creating attractive and impactful investment opportunities for the private sector. However, there is still more that can be done and greater standardisation, comparability and transparency in reporting would improve the visibility amongst private sector investors of the nature and performance of UK development capital investments.
1. PIDG, AgDevCo and GIF are also funded by other governments.
2. The earliest date for which data is available for any of the institutions
3. Attridge, S. & Engen, L. (2019) Blended finance in the poorest countries, Overseas Development Institute, April 2019, https://www.odi.org/sites/odi.org.uk/files/resource-documents/12666.pdf