The new Fund Location Act facilitates investments in developing countries. Now the financial sector must take up the legislator’s challenge – in its own interest.
It sounds like a case for legal gourmets: with the Fund Location Act, which came into force on 1 July, the German government has established a new legal framework for impact investment funds – the so-called development funds. Those who set them up enjoy a high degree of flexibility, for example when it comes to investment policy.
For example, the new EF funds are allowed to grant loans, take on guarantees or use derivatives for hedging. What sounds technical creates leeway that is important in practice – and thus new opportunities and incentives to mobilise private capital for investments in developing and emerging countries.
German Development Minister Gerd Müller and his team have high hopes for the model – and want to get involved as an anchor investor via KfW. According to BMZ State Secretary Martin Jäger, “one tax euro […] could leverage three private sector euros”. The target group for the fund is institutional and professional, but also semi-professional investors who invest at least 200,000 euros.
Initiative comes at the right time
Critics, however, raise doubts about the high leverage and point to studies according to which in comparable fund concepts less than 20 percent of the capital comes from the private sector. But beware: the figures come from a time when reservations about investing in poor countries – especially in Africa – were much greater.
For some time now, however, a change in thinking has been observed, especially among professional investors: Thanks to books like “Factfulness”, which dispel prejudices, interest in Africa is growing. Other drivers of this development are the high stock and real estate valuations in the industrialised countries as well as the G7 plan for an infrastructure initiative for poorer countries.
EF funds are not CSR, but client focus
The legislator’s initiative therefore comes at exactly the right time – and is likely to meet with interest beyond the public development banks. So far, this area has been the clear domain of KfW: according to information on its website, the bank is currently involved in 39 “development funds”. One of these is the Africa Agriculture and Trade Investment Fund (AATIF), which provides loans to farmers in Africa. However, it was set up in Luxembourg because of strict German regulations.
The recently enacted Fund Location Act is now a good opportunity to try it in Germany. Fund providers should take advantage of it – not out of “corporate social responsibility” considerations, but primarily in their own and their clients’ interest. After all, Africa offers high potential for value creation and diversification as well as the opportunity to establish valuable contacts in the growth markets of the future.