Q&A: BII’s Holger Rothenbusch

British International Investment (BII), the UK's development finance institution (DFI) has teamed up with Amsterdam-based emerging markets investor ILX Management to co-finance USD 500m of debt transactions for climate projects across Asia, Africa, and the Caribbean. BII has been active in Asia since the 1990s and active in credit for about 10 years. ILX aims to tap this experience, having recently raised USD 1bn from Dutch pension funds.

Q: What is the thinking behind this initiative?

A: This partnership is very much reflective of our strategic focus on mobilising private capital for climate. Through ILX, we now have the ability to churn our portfolio and bring them alongside us in co-investments. ILX is unique in that they have raised money to co-invest alongside DFIs, getting access to an asset class that is interesting on a risk-return basis for their commercial expectations rather than being impact-first which is what we are doing. The problem of climate change is in the trillions of dollars, but the size of this fund is meaningful. It indicates this is important to us and we want to do it at scale. ILX is an interesting partner, and we’re working with others.

Q: Why deploy credit rather than equity in this push?

A: Credit is interesting from the perspective of investors like ILX. Interest rates have come up, which does put pressure on some of the borrowers. It’s the same for us, given our balance sheet is entirely unlevered, so we benefit from that uplift. Emerging markets are risk-off. There’s a flight to quality, a flight to more established markets, and that hits harder on equity than debt. From the European pension fund side, I perceive there is stronger interest in credit. We had several conversations with UK pension funds we also want to bring to these markets, and those are primarily credit conversations.

Q: What’s the danger of putting a lot of debt into developing markets when their growth rates are slowing?

A: Risks are going up – there’s no two ways about it. Companies servicing debt at a higher cost point might now struggle, and when the going gets tough, we just don’t get paid. You must restructure your loans, and we are seeing this now in some countries. Even for power infrastructure assets, sometimes it is difficult for governments or off-takers to make payments. Macro stress, high levels of indebtedness, and weak currencies are pervasive in Africa, but when I look at our Asia portfolio and pipeline, I’m quite positive right now. With a few exceptions like Pakistan and Bangladesh, return profiles are going up. India, Vietnam, Indonesia, and the Philippines are reasonably robust markets and the companies we’re looking at there are reasonably resilient.

Q: So, this pool of credit is more about growth than survival?

A: In the majority of cases, we are really looking for capex for growth. We have a number of deals in so-called commercial industrial energy providers – rooftop solar and ground-mounted solar that is wheeled across the country. Those businesses are coming up very rapidly, and they need capital for growth. There’s demand for that across the capital structure. We’re looking at electric vehicle charging infrastructure in India, which is early days on the subcontinent, so that’s a mezzanine product. We’re also looking at senior debt for C&I [commercial and industrial solar] installations on the back of long-term offtake agreements with blue chips like Coca-Cola.

Q: How do you expect to allocate across geographies?

A: We haven’t made any plans with ILX about using it more in Africa or Asia. I think it will come down to where we find the right opportunities regarding new projects and the risk appetite or interest of the funds. In India, we’re very much focused on climate and inclusion themes, renewable energy, circular economy, e-mobility, and, less relevant to purely commercial investors, gender-based investments or lower-income reach. In Southeast Asia, we’re entirely focused on climate, but that’s not to say we aren’t also doing inclusions. In the Philippines for example, we’re looking at a mini-grid project that will improve access to affordable and reliable clean energy. It’s a climate project, but it does have a strong inclusions and development impact element.

Q: How do you handle potential conflicts between climate commitments and broader developmental goals in Asia?

A: That’s one of the topics that was discussed at the World Bank annual meetings last week in Marrakech. There might be concerns in particular from some countries in Africa that are still putting in the plumbing and not able to do something more sophisticated. From my perspective, there is a lot of overlap such as the mini-grid in the Philippines. It doesn’t have to be outright climate-positive, but it must not have a climate-negative effect, and when there is opportunity, combine the two.

Q: What about investors who are more constrained by capital and have to make difficult choices?

A: If you have to choose, then it’s a question of what themes do you want to support. For many commercial investors, a hardcore impact thesis will not be as relevant. In many situations, you can’t optimise for everything at the same time, but on balance, there’s a huge area of overlap. It’s not like there’s a bright red line that says, ‘This is green and this is the rest.’ There’s a big middle and so one can straddle the two perfectly comfortably.

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• Topics
• Southeast Asia
• South Asia
• Credit
• private debt
• British International Investment (BII)