Listed Product Structures for Sustainable Development in Emerging and Frontier Economies
The UK Government’s flagship programme to mobilise institutional capital through listed product structures, MOBILIST, aims to harness public markets for the sustainable development of emerging and frontier economies.1 The programme sources, selects and supports pioneering issuers looking to list on public markets, offering technical assistance through the listing process and anchor equity into first-of-their-kind capital raises.
The research presented in this report showcases the commercially viable listed product structures that MOBILIST has identified to date, which hold promise for allocators in accessing the emerging and frontier markets. While the research is primarily focussed on product structures, to offer a full analysis of each structure’s potential we situate these structures in the context of proposed investment thesis and strategy.
Our analysis demonstrates the breadth of compelling structures through which allocators can access emerging and frontier markets and their sustainable development. Figure E1 shows that the majority of products proposed to MOBILIST by the time of writing were listed or unlisted investment companies. The listed investment company was designed during the 19th Century to provide permanent capital for long-term, illiquid investments in emerging markets. While at the time the preeminent emerging market was the United States of America, a recent resurgence of renewable energy investment companies shows that the structure remains well-suited to financing sustainable development today.
Market participants also proposed a diverse range of platform companies; primary lending vehicles; innovative credit risk transfer products, including guarantees and securitisations; listed corporates; special purpose acquisition companies (SPACs); funds-of-funds; equity in a multilateral development bank; a legal recovery fund; and thematic bonds. It is also important to note that several listed product structures were notably absent from our sample, but may offer potential to mobilise capital for sustainable development in emerging and frontier markets going forward. For example, in this report we consider exchange traded funds (ETFs), real estate investment trusts (REITs), and long-term asset funds (LTAFs) – none of which has yet reached MOBILIST’s pipeline.
Just as the investment propositions in our sample varied in terms of structure, sponsors pitched varied investment strategies, including in terms of geographic exposure, sector, and the underlying assets into which they proposed to invest.
On geographic strategy, Figure E2 shows that MOBILIST has so far identified a set of strategies with a tilt to Africa, and more broadly demonstrates the novel geographic diversification offered by products in our sample. This is striking and contrasts with the wider emerging and frontier markets universe. An equal-weight portfolio across these products would align capital much more closely with the need for development finance than, for example, a portfolio tracking the MSCI EFM (which offers a 3.8% Africa weighting) or even MSCI FM (offering a 24.4% Africa weighting).
In terms of sector, two-thirds of products in our sample envisioned some renewable energy exposure, a weighting more than ten-times the entire energy sector in the MSCI EFM index (5.3% energy) and the MSCI ACWI (5.2% energy).
If they are to mobilise transformative private capital flows for sustainable development in emerging and frontier markets, the listed structures discussed in this report must attract major institutional investors. Section 4 analyses our sample in terms of feasibility, commercial viability, scalability, replicability, and additionality. Feasibility requires a compelling combination of structure, strategy and leadership team with credible track record. We assess that to maximise listing feasibility in the near-term, allocators should only be required to back innovation in at most one of these dimensions.
Commercial viability is predominantly a matter of strategy, with most structures in the market proving viable in diverse contexts. One important exception is the SPAC, which is facing macroeconomic and regulatory headwinds that may undermine its competitive advantage over a regular corporate initial public offering (IPO). Listed investment companies that rely on a yield advantage may also face competition as we emerge from an extended period of low yields in the fixed-income space.
Ensuring that listed products scale and are replicated is vital if millions of dollars in anchor capital are to unlock billions or trillions of dollars for sustainable development. Perhaps the most important constraint on scale in the context of the structures and strategies in our sample is liquidity. Illiquidity in smaller emerging and frontier markets is a constraint across structures, but is particularly acute for the open-ended ETF. As successful products scale, they will likely attract copycats in the market; though a key exception is contexts in which there is clear first-mover advantage.
Opportunities for additionality go beyond individual raises to affecting systemic change in the way sustainable development in emerging and frontier markets is financed altogether.
A key innovation with such systemic potential offered by several proposals in our sample was the move by development finance actors to exit investments in their portfolio through listed products. Other proposals offered additionality by increasing the share of emerging and frontier market capital flows that is dedicated to their sustainable development.
Overall, it is striking that the offer of support and investment from the UK Government is indeed leading to the surfacing of original investment strategies through listed product structures that are aligned with developing country needs. We conclude with the following observations:
- A pipeline exists and is actively seeking capital. MOBILIST has received 44 proposals from varied commercial sponsors to date. Proposals identified substantial investment pipelines and saw their solution as scalable. This demonstrates potential for allocators to access emerging and frontier market assets aligned with Sustainable Development Goals (SDGs) and international climate commitments.
- Different structures can address similar problems. Comparable underlying assets can be accessed through diverse structures. Listed and unlisted investment companies can offer permanent capital to match extended project development durations; while securitisations, guarantees and insurance all reallocate risk across actors. Private funds and credit protection structures can help incubate earlier-stage assets; while listed investment companies and securitisations are more appropriate for operational, cash generative assets.
- Capital recycling should be the norm for development finance institutions (DFIs) just as it is for private equity (PE), and public markets offer unparalleled depth and scale for exit mobilisation. Such exits allow DFIs and PE to focus on higher-risk, higher-return earlier-stage assets, and can be achieved through diverse listed structures.
- PO is a milestone, not an end. To move from millions to billions to trillions, the market needs listed product structures that prove commercial viability, can scale efficiently and be replicated easily. Strategies in our sample varied in terms of risk-adjusted returns, and certain structures are facing stronger market and regulatory headwinds than others.
- Complexity need not be a constraint. MOBILIST has unearthed varied high potential structures. The most familiar structures offering access to new markets and assets may be swiftest to market. However, while more complex structures may require market education and technical support, they may also be the most transformational over time.