Presented by Aniket Bhushan, Principal Investigator at the Canadian International Development Platform (CIDP). For more information, visit our website: www.cidpnsi.ca

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www.cidpnsi.ca @CIDPNSI
Financial Engineering for
Development
Aniket Bhushan
Principal, Canadian International Development Platform

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The Platform
Policy Research
Policy analysis and deep
dives into Canada’s
development levers,
focusing on foreign aid,
trade, investment,
migration and
remittances.
Data Analytics
Leveraging open data and
big data from a
development
perspective.
Community
Engaging policy makers,
civil society, academia,
and private industry
through targeted events
and workshops.

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Dissonance
• Big global agenda’s with big price tags
• ODA at a historic high, is the most stretched (and stagnant)
• Future profile: very small number of highly ODA dependant
LDCs & fragile, plus more expensive emergencies
• Donor money (ODA) can only shrink (relative terms; >70% of
financial flows in 25 poorest LDC/LIC, 13% in LMIC, 6% in UMIC)
• Urgently (re)discover logic of investment
• SDG price tag looks daunting ($2.5 to $3trillion), but only in
isolation
• No shortage of investable capital, or returns (double, triple
bottom line)
• What’s the problem?

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Return of Capital vs Return on Capital
• SDG agenda is a question of scale and scale-up (billions to
trillions)
• Understanding investors: “Scale” …… “Catalytic”
• Who are scale investors? What does she need (doesn’t have,
wouldn’t bother to develop)?
• Institutional investor – e.g. pension fund assets $38 trillion!
• Needs – some semblance of market structure; some
depth/layers; visibility to see ways in and out
• Higher the risk, the more Return of Capital > Return on
Capital

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Risk (standard dev)
Return
High
Low
HighLow
Efficient frontier

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Standard vs. Multidimensional Portfolio Choice
Standard
• Higher risk, higher return (up to point)
• Lower risk, without sacrificing return (up to point)
• Challenges: imperfect info; friction (transaction cost);
efficiency (spreads); liquidity

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Risk
Financial Return
High
Low
High
Low
Developmen
t
Outcomes
Lo
w
High

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Standard vs. Multidimensional Portfolio Choice
Multidimensional
• Higher financial risk + low return; but, high ‘development
additionality or outcome’ (up to a point)
• Low financial risk + low return; but, high dev add/outcome (up to
a point)
• Low financial risk + high return; but, low/no dev add/outcome
• Challenge: highly imperfect info; huge friction; inefficient, illiquid
by definition
• Time-horizon: dev vs. investment delta; investment in “ground
game”; idiosyncratic (non-economic, political) risks; benchmarks

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Two Major Barriers Prevent Capital Flowing to
Returns in Frontier/EM/Developing Markets
• Instrument(s):
– mismatches between the types of investment products available and the investment
requirements of various investors. One of the key factors that limits capital flows to poor
countries and riskier markets is that the largest institutional investors are governed by
strict rules as to what they can and cannot invest in and how. In most cases, credible
financial instruments and products to facilitate investment in poor/risky markets
simply do not exist at scale to move the needle for big investors.
• Partner(s):
– perhaps the most important constraint of all, is that poor countries lack the local
capacity to promote investment and package bankable deals. This role is played by
the local financial community, i.e. those that combine a deep understanding of the
local context with finance. The fact that this sector barely exists across many of the
poorest countries is one of the biggest constraint to investment promotion.

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Opportunity for Catalytic Investor and
Reimagining Role Of ODA
• Who are the catalysts?
– Governments, CSOs, philanthropists, HNI, retail, impact
– DFIs (2002-2014 growth 10x ODA)
– Local PE, venture, some FIs, other early movers
• Catalysts are platforms; network effects supersede scale
• Signalling effect can be hugely important and catalytic
• Old and New modalities:
• Blended finance, SIBs DIBs, green bonds, blue bonds, hybrid
instruments; loan guarantees, FoF, equity
• Risk: shiny object syndrome, innovation for sake of innovation

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Development outcome/return
Financial return
High
LowNA (e.g. pure grant)/negative
High
Negative/NA

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Standard capital
structure
Senior debt
Subordinate
debt
Hybrid
(convertibles)
Preferred
equity
Common
equity/stock
Series C
Series B
Series A
Venture/angel
Seed
Low risk
High priority in
liquidation
High risk
Low priority in
liquidation
Very high risk
First loss
Guarantee
Super senior layer
Grant funded technical
assistance (TA); ESG
Equity/venture
Scale-up

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Contact
Aniket Bhushan
Principal Investigator and Lead Analyst
aniket@cidpnsi.ca
+1 (613) 520-2600, ext. 6198