Trend 3: The rise of philanthropic capital

Even before the pandemic, governments around the world were struggling to fund all the infrastructure they needed. The fiscal supports and economic impacts of the pandemic have made the task nearly impossible. As evidenced by the revised future development plans HS2 (a high speed rail line) in the UK,⁷ even the most developed markets may struggle to find the fiscal space to deliver on all their stated objectives.

As the world approaches the 2030 energy transition milestone (global greenhouse gas emissions need to be cut 43 percent by 2030, compared to 2019 levels, to limit global warming to 1.5°C), it is becoming increasingly clear that exponentially more investment will be needed. Yet governments simply do not have the budgets to make this a reality.

In the emerging markets, it often falls on the Multilateral Development Banks (MDB) and big national development agencies to bridge the gap. In part, this is about helping markets and their regulators to improve governance, enhance project preparation capabilities and prioritize pipelines into programs of work that might attract private investors.

MDB funding can only go so far and, at best, can act as a catalyst for mobilizing more capital. And many of the MDBs are limited in how much they can spend. Their capital increases are dictated by shareholder countries who are also struggling  to meet their own domestic budget shortfalls. Despite their critical role in closing infrastructure gaps in emerging markets, it is unlikely that more capital will flow from shareholders into the MDBs any time soon.

Can philanthropic capital fill the gap? According to KPMG professionals analysis, the quantum of philanthropic capital being allocated to infrastructure development is rising. Part of the increased flow is coming from global philanthropic organizations that have always been focused on catalyzing positive outcomes for society. And KPMG member firms are also seeing increased allocations coming from family offices and ultra-high-net-worth individuals seeking to make an impact.

Working in partnership with MDBs and development agencies, these philanthropic investors are using their financial strength and different return expectations to help MDBs crowd more private sector capital into projects using forms of ‘blended finance’ (a topic high on the agenda at COP28)⁸ where development and philanthropic funds are used to reduce the risk for private capital, thereby making projects more bankable and attractive.

A good example is the recent US$1.1 billion SDG Loan Fund developed by AllianzGI and Dutch Development Bank FMO.⁹  The Fund benefits from multiple layers of risk protection including a $111 million first-loss investment from FMO, which is credit- enhanced with a $25 million unfunded philanthropic guarantee provided by the John D. and Catherine T. MacArthur Foundation (MacArthur Foundation). MacArthur Foundation’s triple A rated guarantee enabled FMO’s first loss investment by resolving key risk and technical factors.

Over the coming year, many MDBs and other multi laterals are expected to place a greater focus on crowding in philanthropic capital as a way to better drive private capital flows. Should they be successful, a greater volume of projects should start to come to market — particularly in the emerging markets.