Development finance institutions (DFIs) were not part of the early success of Malaysia-based private equity firm Creador, despite their mandate to de-risk unproven opportunities and the Malaysia-based GP’s emerging markets strategy. They began to trickle in by Fund III. In Fund VI, which closed on USD 930m earlier this year, they represented 25%.

Germany’s DEG, Asian Development Bank (ADB), FinDev Canada, and the International Finance Corporation (IFC) all participated, attracted by a string of impact-themed co-investments and exploratory planning around expansions into the Philippines and Vietnam. Of these, only ADB appeared in the Fund III LP roster. DEG joined Fund IV, but declined to re-up for Fund V.

Creador’s sixth fund is an outlier example of DFIs stretching the boundaries of their mission statements, yet a valid case-study in how emerging Asia’s primary source of catalytic capital is becoming more conservative. This is widely seen as an existential threat to the next generation of private equity firms in frontier markets.

These investors are not abandoning the region. Indeed, Creador VI features the debut Asia commitment from FinDev, which set up a Singapore office in February. But, overall, their appetite for first-time funds has been dampened by two decades of generally poor returns.

“DFIs used to back Fund I and II, maybe Fund III, and then if the GP was successful, they would be reduced. Now it’s sometimes the other way around. They’re looking for more mature GPs, more risk averse, less experimental,” said one investment manager with a DFI that backed Creador.

“Emerging markets performance has been disappointing. There’s a huge gap between what we expected and what was delivered. What all DFIs have in common is a significant tail-end portfolio that is difficult to exit.”

The investment manager added that he is now contemplating a commitment to a more than 10-year-old global private equity firm targeting USD 2bn for its next fund.

Mixed mandate?

IFC, the most active DFI in Asia in the past 10 years, reflects the growing interest in experienced GPs. Between 2015 and 2019, 83% of fund commitments in South and Southeast Asia were Fund Is and Fund IIs, according to AVCJ Research. For the five years through 2024, it was 34%.

Others have seen a range of declines. Over the same two periods, DEG’s pre-Fund III commitments fell from 77% to 22%. British International Investment (BII) went from 77% to 62%.

The effect is partially attributable to the idea that DFIs have always wanted to back experienced managers but needed to wait for ecosystems to mature. Meanwhile, as GPs have proliferated, the DFI universe has remained almost unchanged, leading to a diluted presence in Asian first-time funds.

One of the main points of friction is the phenomenon of DFIs participating in oversubscribed funds. In some cases, incoming LPs must curb their exposure to accommodate an existing DFI backer.

The complaint is that these LPs are supposed to crowd in capital, not crowd it out, and as such, they’ve manifestly overstayed their usefulness in oversubscribed funds. The counterpoint is that DFIs provide more reliable capital and larger cheques than many of their peers, thus providing the GP with a more easily managed LP base.

Still, there is little evidence that the likes of Creador and Jungle Ventures could not solve these issues without continuing to take DFI money in later vintages.

Jungle’s fifth fund, currently in the market with a target of USD 500m, featured IFC and Switzerland’s SIFEM in the first close last November. Fund IV surpassed an initial target of USD 350m to close on USD 600m in 2022 with backing from IFC, DEG, and FMO of the Netherlands.

“We shouldn’t forget that people who work at DFIs are still incentivised on a personal level to invest in the best funds. That’s how they make their money and year-end bonus,” said Niklas Amundsson, a managing partner at Asia-focused placement agent New Peak Partners. “They’re highly incentivised to generate returns just like any LP.”

Jungle’s latest fund is noteworthy in the sense that while it represents a relatively conservative emerging markets investment, it is a somewhat experimental move for SIFEM, which is underweight in venture. IFC has backed every Jungle vintage since Fund II. When Ralph Keitel, IFC’s then-head of emerging markets funds, moved to SIFEM in 2022, he brought the client with him.

The Swiss DFI was willing to do more venture but wary of taking on a Fund I. Keitel, now head of fund investments for SIFEM’s management entity ResponsAbility, got his new investment committee comfortable via a relationship-driven Fund V exposure.

“DFIs are still doing first-time funds but they’re more selective, and they’re staying longer with established managers simply because they still need to establish proof-of-concept for private equity in emerging Asia,” Keitel said.

“In the past there was a mentality of, ‘Let’s just get these managers seeded, and the private sector will come.’ Now, there’s a recognition that private money still may not be ready to come into Fund II or even Fund III. So, we can’t just drop out at Fund III and say our job is done – we need to stay with the winners longer to demonstrate the asset class actually works.”

Picking winners

Only the sturdiest Fund I pitches have attracted DFI investment in the past few years. The most widely hailed example is the debut from Growtheum Capital Partners, a firm established by the former head of GIC’s direct private equity group in Southeast Asia. It closed on USD 567m in 2023 with support from ADB and IFC.

Otherwise DFIs are claiming to back first-time funds in the form of new strategies by established managers. This was the case with the debut credit fund from veteran Southeast Asian buyout firm Navis Capital Partners. The fund, which has a target of USD 350m and reached a first close at the end of last year, counts SIFEM and BII as LPs.

BII has proven one of the more consistent DFIs in terms of taking Asia risk, but even as it has expanded its footprint from India to Southeast Asia, there has been significant caution.

As with Navis, BII’s Southeast Asia push in terms of fund commitments has generally been defined by new strategies from established managers – it has also backed the debut impact fund from Singapore’s Wavemaker Partners.

BII’s head of Asia, Srini Nagarajan, who recently moved from India to Singapore to lead the expansion, is focusing the effort exclusively on climate. This is in keeping with BII’s broader agenda to move away from generalist funds.

“In the area of climate and infrastructure, these are capital-intensive deals with higher predictability of cash flows and business model replicability between markets. Hence, it allows us to bring in more external commercial investors, which fulfils our own development objectives,” Nagarajan said.

“As a DFI, we would prefer to remain very focused on mobilising third-party capital and achieving our development impact. And that comes more through sector-specific funds and impact funds, rather than generalist funds.”

Differentiation through specialisation will not be enough to get DFI backing for first-time managers, however. Fund Is will therefore be smaller across the board, including in areas that are considered developmental priorities.

Singapore cleantech investor Clime Capital raised USD 10m for its maiden fund – falling short of a USD 50m target – in 2020 with no support from DFIs, according to AVCJ Research. Fund II closed on USD 175m last April, featuring ADB, BII, FMO, IFC, Norway’s Norfund, France’s Proparco, and Sweden’s Swedfund.

“Some DFIs are narrowing their focus to climate or gender because that’s the objective of Europe,” said one frontier market-focused GP with a history of DFI backing for generalist funds.

“That has made it harder for generalist or single-country funds in Asia. It’s hard enough to get six to eight good deals in a fund, but when you have to overlay climate or gender, the markets in Southeast Asia are not big enough.”

Singapore-based Sweef Capital, a gender-lens investor that spun out from US impact private equity firm SEAF in 2021, closed its debut fund in late 2023 on about USD 45m, missing the USD 100m target. Asian Infrastructure Investment Bank (AIIB) represented the only DFI support.

“DFIs’ mandates move around all the time depending on government policies. Exposure to a fund like Sweef is actually more relevant to European development goals in Africa than Asia because it’s linked to immigration flows and mitigating those social issues,” said one investor involved in the fundraise.

Playing politics

The politics of DFI money is increasingly recognised as part of the shift to a more conservative posture. This point was punctuated dramatically by the dismantling of the United States Agency for International Development (USAID) earlier this year by President Donald Trump’s administration.

Singapore’s Circulate Capital, a VC firm focused on plastic recycling and related circular economy themes, teamed up with USAID in 2019 to launch a USD 35m lending platform targeting South and Southeast Asia. The programme was transferred from USAID to DFC, the US DFI launched later that year.

Like many investors, Rob Kaplan, founder and CEO of Circulate, is philosophical about the fate of DFC, observing that it is unlikely to be shut down. The prevailing expectation is that it will transition into a more sovereign wealth fund-style entity. There are echoes of this zeitgeist globally.

“We’ve seen a lot of European DFIs shift their focus toward looking for a stronger European benefit story or rationale for how they’re investing. We’ve also seen increased interest in Africa [relative to Asia],” Kaplan said.

Keitel of ResponsAbility and SIFEM observed that political headwinds were a constant discussion point within his firm. The feeling is that the agenda typified by America First is set to be replicated by other countries with DFI programmes.

“Fiscal budgets are constrained. A lot of money is going to Ukraine. Public coffers are depleted,” he said. “Across many countries, there’s a shift to the political right, where funding for emerging markets has to also support a domestic agenda.”

The most hopeful outlooks for reinvigorating DFI risk-taking are more about financial solutions than politics.

BII is attempting to introduce liquidity into the DFI space by stimulating an untapped secondaries market for long-held fund positions. Last February, it completed its first secondary transaction with partial stake sales from its three strongest performing funds across Africa and Asia to Switzerland-based Blue Earth Capital.

BII will retain the largest positions in all three funds and continue to sit on their LP advisory committees. This includes vehicles managed by India’s Aavishkaar Capital and Africa-focused Novastar Ventures and Adenia Partners.

It is positioned as a pilot to support broader secondaries activity among DFIs and to bring new investors into emerging markets. Quinton Soper, an investment director at BII who led the transaction, described it as scalable, commercially viable, and repeatable with no terms that are DFI-specific, off-market or non-standard.

“There are definitely a number of suitable buyers out there because there’s clearly appetite for secondaries. After announcing the Blue Earth transaction, we’ve had a huge amount of positive engagement with the market. The wheels are turning,” Soper said.

“We’re hopeful that this will mobilise more third-party capital – which is even more critical in the current economic environment – and that other DFIs will follow the lead by assessing the viability of secondaries.”

Liquidity needs

It will be interesting to see how this initiative develops given the significant resistance among DFIs to participate in secondaries historically.

The DFI investment manager that backed Creador’s latest fund said it was common for portfolios featuring struggling GPs to see valuations dwindle after the expiration of fund life. But secondary sales still remain unpalatable because buyers typically approach with discounts of more than 50%.

This view was endorsed by Eric Marchand, a managing partner at Singapore-based fund-of-funds Collyer Capital and formerly an Asia investment director at BII. “I think that’s mainly because they’re reluctant to accept a discount but also because some of them still have quite a lot of capital to deploy, so they don’t necessarily need it.”

2nd Aries Capital, a Netherlands-based secondaries investor that targets legacy DFI portfolios, hopes to overcome this reluctance by offering upfront cash in combination with strong earn-out rights. Similar to an anti-embarrassment clause, this approach should allow DFIs to get some liquidity without giving up on upside if it materialises.

Jorrit Dingemans, formerly the private equity funds lead at FMO, co-founded 2nd Aries last year to demonstrate the feasibility of unlocking an estimated USD 2bn-USD 4bn of capital stuck in legacy emerging markets portfolios. Only high-quality assets are on the menu, no distress. Dingemans’ experience is mostly in Asia, but China will not be part of the initial mandate.

Fundraising for such a plan is seen as prohibitively difficult. Instead, the European Commission is set to guarantee a line of credit that will be used for a demonstration portfolio. 2nd Aries wants to get about USD 200m, the first component of which is expected to be in place by September.

During 17 years at FMO, Dingemans witnessed some of the cultural changes that have fed into reduced DFI risk appetite. Importantly, this gradual institutionalisation process was underlined by the acquisition of a banking license, which led to pressure from the Dutch central bank to pursue less volatile investments.

“The way DFIs evaluate their own performance is always in the form of deployment of new capital. So, they technically cannot claim an extension on a fund past the 10-year mark as new impact creative,” he explained.

“They’re taking a less risky approach because they burned their fingers on a lot of fund investments. It’s safer to deploy money into Fund IV or Fund V because you can still claim that you’re having impact, and the chance of the capital coming back is higher.”

It highlights the concern that even if DFIs are able to recycle stuck capital by embracing the secondaries market, they may still be hesitant to reinvest that capital into emerging Asia’s next generation of first-time funds. So, the question remains, who will?

Replacement capital

Most investors contacted for this story suggested that a rise in family office and quasi-sovereign capital targeting private markets would be helpful if not a comprehensive solution.

Strategic investors are another option – for some. New Peak’s Amundsson observed that North Asian corporates and banks are known to flock to markets such as Vietnam and Thailand but that these are precision entries that require being in the right place at the right time.

There is evidence to suggest that India has fared better than ASEAN in terms of DFI substitutes entering the market. Annual average PE and VC fundraising across South and Southeast Asia for the five years through 2024 was USD 22.3bn, according to AVCJ Research, up 25.3% on the prior five-year period. Strip out South Asia and the increase in this same timeframe was only 2.4%.

The most prominent name offering hope is Temasek Holdings. The Singapore government investor is perceived as effectively creating a permission structure for impact investment via its Ecosperity platform and tentacles such as ABC Impact and Fullerton Capital Management.

Temasek’s most dramatic activity in this vein is arguably a USD 500m investment for a minority stake in impact firm LeapFrog Investments and its various growth equity funds in 2022.

“I sat down with [Temasek CEO] Dilhan Pillay [Sandrasegara], and he said, ‘Are you looking for a 10-year relationship or a 100-year partnership?’” LeapFrog founder and CEO Andrew Kuper told AVCJ following the investment. “The long-term thinking, depth of relationship, clarity upfront, and commitment to these markets over time is just incredible.”

There is less optimism that the hole left in the market by DFI caution can be filled by family office, corporate, or sovereign investors in terms of environment, social, governance (ESG) guidance.

LPs targeting emerging managers take a DFI’s presence as a reliable signal that the fund is properly organised and that its accounts are in order, even in complex areas like carbon reporting. Other investors, even esteemed heavyweights such as Temasek, offer much less comfort in this area.

“DFIs have fulfilled an amazing role in putting forward ESG and institutional standards in GPs at an early stage. No one else is doing that,” said Collyer’s Marchand.

“In the rare cases we are an LP without a DFI, we’ll take the DFI toolkit, side-letter it, and have it implemented. They have a blueprint for supporting first-time managers, but I think they’re starting to lose track of their mission.”