Asian Development Bank

Impact of investment funds on development

The Asian Infrastructure Fund

The Asian Infrastructure Fund (AIF) illustrates well the impact of ADB's investment funds on development. For a $20 million commitment by ADB, the fund mobilized $780 million, a leverage ratio of nearly 40:1. AIF has made 13 equity investments in telecommunications, power, ports, and toll roads, which:

• amounted to $6 billion in total investment, or 300 times ADB's equity stake
• have created an estimated 19,000 jobs in Asia.

The development impact of funds should be measured both by the success of the projects they invest in and by the way they help build institutions and markets.

Funds increase total market capitalization

Therefore they contribute to the successful development of bond and stock markets. They can provide liquidity at different stages of projects and companies, from initial seed equity to restructurings.

Funds stimulate growing companies to issue new debt securities and stock. Increasing liquidity permits markets to function more effectively, with benefits to economic growth.

This well-documented effect is clearly illustrated in Chile, which reformed its pension scheme from pay-as-you-go to a fully funded scheme with private participation in fund management. The change created about 14 large funds with long-term investment horizons, and Chile's stock market capitalization grew from 32 percent of gross domestic product in 1988 to 90 percent in 1993.

ADB's portfolio of funds undoubtedly has the same benefits, but they cannot easily be quantified because ADB's portfolio is spread over many countries and is smaller in relation to the economies of those countries than Chile's pension funds are to Chile's economy.

Funds increase market efficiency and stability

Fund managers provide a source of market knowledge and expertise in interpreting financial information and making investment decisions, which retail investors may lack.

Some investment funds provide an important source of long-term foreign capital, which is key for reestablishing growth in Asia. Many funds sponsored by ADB are in this category. Venture capital funds such as Pacven introduce to Asia investors who have subsequently sponsored new funds without further support from ADB. (Funds employing domestic capital play a complementary role. ADB has not been very active in this area to date.)

Funds have far-reaching impacts on market regulation and corporate governance. They employ long-term sophisticated investors with sufficient capital to influence the market environment.

An excellent example in the Private Sector Operations Department's portfolio is the Lombard Asian Partners Investment Fund (LAPIC). LAPIC takes a significant minority stake of between about 20-49 percent in investee companies, requiring 1-2 seats on the board, and working closely with the management to reform and modernize the companies. LAPIC recently invested in a securities dealing house on the verge of bankruptcy after the financial crisis. Advice from the foreign shareholder led to far-reaching reforms.