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Strategically Speaking: FMO Investment Management

Yvonne Bakkum, managing director of FMO Investment Management (FMO IM), is an evangelist for the UN’s sustainable development goals (SDGs) – and even wears a lapel brooch representing them. Likewise, commuters passing FMO’s office will see the SDGs’ colourful icons displayed in the Dutch development bank’s windows.

Yet visibility and FMO’s presence in the Dutch market has not necessarily translated into ‘crowding in’ of local pension capital – despite growing interest in ‘goals based’ or impact investment. Indeed, the lead investor  in the NN-FMO Emerging Market Loan fund was Alecta, the Swedish pension institution. Dutch pension funds were conspicuous by their absence.

This may have been due to 2017’s negative headlines following FMO’s withdrawal from the Agua Zarca hydro-electric project in Honduras and the death of Berta Cáceres, an environmental activist.

For the EM loan fund, FMO IM’s fourth impact fund, FMO already started to underwrite transactions last year, including loans to financial institutions, renewable energy projects and agribusiness firms. The fund exceeded its $200m (€171m) target at the first capital raising last April, with the IMAS foundation – a sister entity to INGKA, which owns IKEA – as lead investor alongside Alecta, which made a $125m initial commitment.

Bakkum praises Alecta’s speed and efficiency. “I have been amazed at their speed,” she says. “They committed to the fund within six months from our initial conversations, which is something we haven’t seen before. They were thorough and were not willing to compromise on their normal risk-return conditions, but they liked the proposition from the start and they didn’t require us to change anything fundamental.” Alecta’s CEO, Magnus Billing, is also a strong enthusiast for ESG investment.

Anton van Nunen, a member of FMO IM’s three-person advisory council since 2016, shares Bakkum’s disappointment that the fund has not resonated with Dutch institutions, even with NN Investment Partners as a formal distribution partner. “I guess that within the next six months, we’ll have one or two of the bigger Dutch pension funds say yes,” he adds, however. 

FMO IM hopes that Dutch institutions will show positive interest given the current interest in the SDGs and impact investing. “Impact investing is what FMO has done from day one and what it will do as long as it is necessary,” continues van Nunen.

As a development bank and parent entity, FMO dates back to 1970. It is 51% owned by the Dutch government, with the remainder split between banks, trade unions and others. In 2017, it made commitments of €3.1bn against a total committed portfolio of €9.2bn.

yvonne bakkum

FMO started to underwrite transactions for the EM loan fund in 2017, ahead of the scheduled close in the first half of 2018. As of June, 17 loans had been transferred to the fund, according to Bakkum, out of a target of 40-50, with $75m contracted and $60m disbursed. Broadly, FMO sources transactions and manages credit risk while FMO IM optimises the fund portfolio.

The underlying loans in the EM loan fund are well diversified across FMO’s target areas – financial institutions, renewable energy and agribusiness – according to Bakkum. “In one of these cases it is a specific facility for young entrepreneurs. That’s something we see more and more, FMO directing its loans to financial institutions for specific purposes. We’ve also seen credit lines for women entrepreneurs, or energy efficiency projects, for instance.”

Loans are also well diversified across countries and regions, says Bakkum, who initially worked for FMO as an investment officer in Latin America. “Obviously the fund applies limits so there’s no over-concentration and good diversification. So, for now, the fund will only take $5m tickets in these loans.”

FMO IM also seeks to optimise the fund’s impact through portfolio construction, and the EM loans fund, like the three others, an independent governance structure. “When looking at FMO’s deal flow, obviously all these deals have impact, but we are looking at it in a way so that we optimise the impact, risk, and return composition of the portfolio.

“We looked at banks in Armenia, and at one point we had three. So we discussed whether it is wise to have three banks in one country, and in one sector. Those are the sort of discussions we have. We don’t follow FMO in everything they do.”

FMO IM was established as a separate unit in 2012 with the aim of attracting commercial investors. Van Nunen sees his role as an ambassadorial one, bridging the gap between FMO and the pension fund world. “I know how decision processes work. That’s the reason why I sit on the advisory council and I hope to bring some expertise.”

Aside from NNIP, FMO IM also partners with the impact investment managers Actiam and Privium Fund Management. 

The €153m Actiam-FMO SME Finance fund, with a net asset value of €165m as of June 2018, invests in FMO’s loans to financial institutions, and will run until 2025. Investors are mainly Dutch mid-sized pension funds and insurers. The FMO Privium Impact fund, marketed to retail investors, has made 49 loan participations across FMO’s stated focus areas, with ABN Amro Mees Pierson as initial distribution partner. It is now available through other private banks, and its current NAV stands at $112.5m. 

FMO IM also acts as investment adviser to ASN Groenprojectenfonds, with 10% of the €400m funds assets to be invested in FMO’s renewable energy transactions.

Back in 2012, FMO IM intended to reach €500m in assets under advisory by 2016, although this was ultimately achieved in 2018. The next target is to exceed €1bn. “I have not put a very specific time horizon to that target, but I hope we can build on the momentum of this first close to scale up this particular loan fund, because that would then be a very steady basis for us,” says Bakkum.

A planned private equity programme has been delayed, according to Bakkum. “We were keen to raise an African fund, a fund plus co-investment vehicle, but in 2015 we decided to put it on hold and focus on our debt funds because the markets didn’t seem ready for it [due to] this combination of private equity as a high-risk product and then these perceived high-risk markets. But of course it’s still on our longer-term agenda.”

Despite the risk of negative headlines, a development bank can produce compelling narratives aligned to institutional investors non-financial impact targets. A recent FMO IM case study involves ECOM, a Nigerian agricultural trader and supply chain manager, and there have been study trips for investors in the SME Finance fund. 

“There’s nothing as inspiring as being in the midst of smallholder farmer rice fields in Cambodia, and seeing a rice mill that is there thanks in part, to FMO’s funding,” Bakkum concludes.

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