Germany’s Evangelische Bank has targeted $200m (€174m) for a new loans fund investing in small and medium-sized companies (SMEs) in emerging markets.
The €4bn asset manager for German protestant churches and their pension funds will seek to raise the money over the next two years, it announced earlier this month.
Together with the German development bank DEG, the protestant churches will be investing in local banks in emerging markets, which then offer loans to local SMEs under certain conditions linked to environmental, social and corporate governance (ESG) criteria.
The fund will also be open for for investment by other German and Austrian institutions, with the minimum investment set at €250,000.
“We expect the first closing in November and further closings until 2020,” explained Bernhard Graeber, head of infrastructure at the Evangelische Bank, during a presentation in Munich.
He said that the fund would make investments into local banks in emerging markets alongside DEG, which would help select new investments for the portfolio.
“But we also have our own adviser and will be checking each investment against the fund’s targets,” Graeber added.
These include adherence to sustainability criteria defined by the protestant churches in Germany, as well as limits on credit risk, country exposure, and lender exposure.
The portfolio has a net return target of 6% after fees annualised by 2030, in US dollar terms, or 4% when hedged to euros.
DEG noted at the presentation that many of its local investments had few non-performing loans, meaning the credit risk could be considered much better than the average rating for the country overall.
Additionally, DEG will advise the emerging market banks on new strategies, ESG issues and lending policies to promote more sustainable financial markets in each of the countries.
“We have developed our own rating tool based on the UN’s sustainable development goals (SDG) to assess the progress of banks we have invested in,” said Marina Dietz, director and vice president of DEG.
“This tool is now also used by other development finance banks,” she added.
The bank loans are granted to private institutions only and are mostly issued in dollars.
“These investments have a lower risk factor than single micro loans and they help to fill the financing gap for SMEs, which often exists in emerging markets,” Dietz said.
German Hauck & Aufhäuser will be serving as custodian for the Luxembourg-based vehicle.
The Evangelische Bank has been working with DEG on an emerging market renewable energy fund since 2014.
The next solo project for the Evangelische Bank will be a renewable energy fund with investments in continental Europe mainly targeting churches again.
“In this fund we have mainly churches as investors but for the SMEs fund we have seen a lot of interest from pension funds and insurers,” Graeber said.