Equity is a powerful tool to foster development. It can unlock significant value, as it enables capital-constrained companies to grow and become more efficient.
Equity can also be leveraged, allowing companies to raise additional debt funding. By providing long-term risk capital, offering managerial support and introducing best practices, equity investing can also help companies grow faster and become more productive, innovative and competitive.
Higher productivity at the company level translates into new or better employment and competitiveness for the economy, potentially through demonstration effects and reduced cost of inputs. Given the potential to boost development outcomes and make these investments more sustainable, development financial institutions play an active role in the equity market.
Ownership in a company, even a minority stake, amounts to a seat at the table. Through an equity investment, a multilateral development bank like IDB Invest can contribute technical and market expertise, improve financial management, strengthen environmental, social and governance standards and crowd in additional investors.
IDB Invest’s responsibilities to our own shareholders require us to be prudent and selective in deploying equity resources. Projects must be in line with IDB Invest’s strategic priorities and risk tolerance and have a reasonable potential to generate good returns. We also need to ensure that our involvement would add value to the company in question and that the investment would enhance sustainable development.
Here are some of IDB Invest’s key objectives in considering equity investments:
- To provide growth capital to financial institutions that serve micro, small and medium-sized enterprises; social and accessible infrastructure; expansion-driven corporates; and regional funds focused on reaching small countries.
- To serve as an anchor investor in infrastructure projects (such as public-private partnerships, clean energy, transport or social infrastructure), providing equity to complement debt financing.
- To support early-stage projects that have the potential for rapid growth but have a hard time finding capital, such as those involving new platforms for financial technologies (fintech).
As a strategic lender in the region, we use our loans to open up new possibilities for companies to add value, take risks and test new business models.
Mezzanine financing, which falls on the spectrum between debt and equity, offers financial solutions that senior, secured lenders may be unwilling to provide.