Private Equity Funds – MFI-like or MFI-lite?

Financial intermediaries, such as Private Equity Funds, have become some of the largest investment portfolio segments of multilateral financial institutions (MFIs), such as the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC). Are we watching a kissed frog turn into a prince - or is there a disconnect between expectation and reality? - Shortlink: http://wp.me/p27qSt-KW

PEFs - a new theme at IAIA15

MFIs tout Private Equity Funds to be key to providing quicker and broader access to responsible finance to entrepreneurs in emerging markets, while others worry about MFIs diluting their environmental and social standards to push money more quickly out of the door.

The recent IAIA15 conference, which was held in Florence (and was co-sponsored by Prizma), provided an opportunity to learn about the environmental and social dimension of Private Equity Funds. Moderated by Debra Zanewich (MIGA) and Diane Brown (OPIC), an impressive and candid panel – listed below - highlighted the business and development case of dealing with environmental and social issues of Private Equity Funds and their investments.

  • Edwin Doeg, SilverStreet Capital (an investment management firm focusing on investing in Africa and the Agricultural Sector),
  • Christoph Scaife (Phatisa, a private equity fund manager that invests throughout sub-Saharan Africa),
  • Phil Case (PwC, focuses on audit and assurance, tax and consulting services);
  • Shahila Perumalpillai (ERM, a leading sustainability consulting firm and one of the main sponsors of IAIA15);
  • Anne Maria Cronin (EBRD),
  • Jeremy Ansell (IFC), and
  • Maria da Cunha (IADB).

Step into MFIs' shoes

HSBC Pleasure Pain

One of the MFI panelist described how they expect Private Equity Funds to “step into our [MFI] shoes”. By that, the speaker was referring to the expectation that PEFs conduct environmental and social (E&S) due diligence, ensure adequacy of impacts assessment studies and management plans, support performance improvements, and conduct monitoring that is largely similar to that performed by MFIs.

At the same time, the audience was reminded that Private Equity Funds do not necessarily share the same developmental mandate, their internal institutional capacity is limited, and their time horizons does not always dovetail with those more characteristic of MFIs. Also, the  advanced disclosure practices and grievance mechanisms present at MFIs are generally absent at PEFs and their investments.

Putting the pedal to the metal

Given the size and sensitivity of their sectors and regions, many – if not all – Private Equity Funds and other similar structures involving MFIs, sign up to an “MFI-like” approach in terms of environmental and social requirements that apply to their investments. Sometimes, such E&S commitments are made by PEFs - and others - without fully understanding what such requirements entail. In turn, this can lead to inadequate institutional response and resourcing by PEFs required to operationalize their E&S commitments (not to mention frictions between MFIs, PEFs and their investees).

At the same time, the desired multiplier effect pursued by MFIs through investing in dynamic PEFs can overwhelm the internal resources of MFIs to ensure appropriate monitoring and compliance that needs to go beyond a ‘tick box exercise' in order to add real value. The perceived dilution of MFIs’ E&S requirements– or tolerating an “MFI-lite” approach in some cases – has been criticized in the CAO Compliance Audit of IFC's Financial Sector Investments.

However, most MFIs have been adjusting their internal resources, including by hiring an army of staff and short-term consultants, and mobilizing a series of technical assistance-funded training programs in support of their growing portfolios of PEFs and other financial intermediaries. And the topic and lessons learned are being discussed at events such as IAIA15.

Challenges ahead

Similar to criticism that Equator Banks are not doing enough in terms of disclosure, there appears to be a growing pressure for PEFs - and other FIs - to disclose their (high risk) projects. This approach is being supported by the EBRD while the IFC – and others – appear to remain resistant to such request for change.

Will more advanced disclosure create opportunities for more - and more constructive - stakeholder engagement and accountability at the PEF and their investee levels, or will some groups continue to seek leverage by taking the short cut to MFIs’ compliance and grievance mechanisms?

What was your take away from the PEF session at IAIA15?

 

About the author: Mehrdad Nazari (LinkedIn Profile) is an ESIA & Sustainability Advisor with over 20 years of experience (including 10 at the EBRD). Mehrdad and his team support developers and investors with a variety of environmental and social reviews and studies, ESIA gap filling, and sustainability reporting services. You can learn more about Prizma’s experiences and services here.  You may also be interested in these blog entries:


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