With €3.8bn of investments that includes equities and loans in over 1,000 projects in emerging markets, Natalia Svejgaard, investment director from IFU based in Copenhagen, said the “dividend” paid by the fund fully repaid the initial investment by the government. “You could say that it has to be a good business for the government.” said. The translation of IFU in English is “investment fund for developing countries.”
Svejgaard was speaking at a conference organised by the International Climate Finance Accelerator and International Social Finance Accelerator on Tuesday.
According to her slides, IFU was established in 1967 as an independent government-owned fund in Denmark. Anecdotally, she remarked that the abolishment of a tax on coffee after one of the WTO rounds resulted in a pool of money transferred into the IFU fund.
Investment in four areas
She explained that IFU provides funding to green energy and infrastructure, financial services (investments in funds, micro financing and banking), healthcare and sustainable food systems, which includes forestry.
“We either invest in the poorest countries in the world or in countries where we can see that we can deploy considerable capital in green investments, especially in green infrastructure and green waters,” commented Svejgaard. On a slide, Paperjam observed that the focus of IFU is overwhelmingly in the Global South. Interestingly, IFU provides a small rolling facility to Ukraine.
Investment approach and roles
Svejgaard explained that IFU is deploying its own capital and manages five funds with the funding coming from the public and the private sector. IFU is “preferably” a minority investor but she stressed that “we want to be a significant minority” investor, with the sweet spot in terms of investment tickets standing at around €30m. Africa is an exception, where IFU will normally lower the ticket size.
Svejgaard specified that IFU does not interfere in the day-to-day management of a project. Yet she considers IFU as an active investor as it makes “value creation plans” involving the management and “other board members.”
Key learnings when investing in renewables
“Regulatory instability is the key risk,” argued Svejgaard. She complained that it may sometimes take up to 12 years in Europe for a project to come to an actual investment decision on the back of “constantly moving timelines, new taxes, new permissions and so on.” A firm such as IFU can adapt to a new geography if it sees a stable regulatory framework as it reduces cost and time before a project comes to fruition.
It is also critical for IFU to partner with developers which have “skin in the game.” She mentioned that the alignment of interest has a high importance in their investment decision process.
IFU expects the best-in-class equipment for its various projects, but transparency is also important, and the developer should have tight control over the supply chain and be able to trace back where the various parts are coming from.
Confirmation of renewable resources
“We are also in the low wind era,” remarked Svejgaard. Presenting a graph measuring the historical wind speed against its actual velocity in Brazil, she observed a decline of the latter over the last 16 years. Consequently, revenue projections may not materialise as initially expected. She therefore suggested to account for these metrics when making investment decisions.
“We have always viewed that ESG is one of the risk mitigation elements as any other,” claimed Svejgaard. She stressed the importance of engaging with the many ethnic groups that claim a say in the use of resources to lower the discussion’s temperature, sometimes on the back of prior conflicts.
Engineering, procurement and construction contracts (EPC)
Svejgaard noted that it is an industry standard to get a “fully wrapped EPC” for a solar project, for instance, “there will be markets where it’s not possible.” It is therefore a dilemma for investors willing to push for an impact project based on renewable resources at the risk of being exposed to “interface problem.”