MODEL 4: Development finance assets included in private platforms

Model 4 – Development finance assets are contributed to collateral pools, including private sector assets and managed by fully private securitisation platforms.

Model 4 rests on collaboration between development finance actors and the private sector. In this model, MDB or DFI assets are contributed to collateral pools managed by existing, fully private commercial securitisation platforms. The most efficient route to scaling capital flows into EMDEs could be transactions that build securitisation markets by setting standards, establishing benchmarks, and generating market information. The most practical constraint is the scalable investor appetite for MDB/DFI securitisations, as sustainable securitisation remains a somewhat specialised market.

Feasibility

A securitisation platform that combines development finance and private sector assets would require investors, rating agencies, and sponsors to consider the risk-return profile and contract terms of individual development finance assets on a case-by-case basis. This enhances feasibility. However, MDBs and DFIs would need to invest significant time and technical expertise to educate commercial platform sponsors and advisers about MDB/DFI assets. No private platform that specialises in these assets currently exists. However, the success of Bayfront’s IABS issuances – with at least one including MDB loans – suggests that commercial platforms can integrate MDB/DFI assets into larger, more diverse portfolios and programmes.

Commercial Viability

Blending MDB/DFI loans with private sector assets in a commercial platform offers the greatest potential for competitive pricing. Investors are familiar with standard collateralised loan obligations (CLOs), and the added diversification of both development and commercial assets can stabilise performance. For example, thanks to their more highly rated assets, Bayfront’s IABS pools have a lower weighted average spread than typical U.S. and European CLO portfolios. Bayfront’s experience shows that pricing improves as platforms establish a track record and demonstrate resilience. However, achieving a degree of comfort with MDB and DFI assets will require further market education and a proven track record established through pioneering transactions.

Additionality

Pooling development finance assets with private sector loans through commercial platforms can mobilise large pools of private capital that would not have engaged with development finance assets. By drawing on existing market infrastructure, the incremental capital freed can be substantial, yielding higher additionality. If MDBs reinvest proceeds in priority sectors that lack traditional financing, this channel becomes a potent lever for additional developmental impact. However, there is also a risk that private platforms could use development finance assets to enhance the perceived impact of other assets in the pool, lending credibility to projects that do not align with sustainable development and climate objectives.

Scale

Commercial platforms have greater potential for scale than those that pool only MDB/DFI assets. Pooling development finance with private sector assets enhances the volume and diversification of the assets that issuers can access, increasing the likelihood that feasible portfolios can be constructed on a scale and cadence required to maintain market presence. On the demand side, complying with market standards and transferring risk/assets through established private sector platforms increases access to large pools of liquidity. This scale advantage ultimately supports more stable pricing and better market access for asset pools that include development finance assets.

Replicability

Integrating MDB and DFI exposures into existing commercial CLO platforms is the easiest way to replicate securitising development finance assets. Replication is supported by standard formats that investors and analysts are already familiar with, as well as the global scale of commercial loan markets. As markets become familiar with MDB and DFI assets and recognise these institutions as originators, other commercial securitisation vehicles can emerge. Over time, this model can create a broad ecosystem of structured products that feature MDB and DFI assets without relying on them and normalise their presence in mainstream capital markets.

Transparency and standardisation in public markets mean that listed true-sale securitisations offer very promising opportunities for replication using Model 4. Using demonstration effects that mitigate investor misperceptions about EMDE assets to trigger replication may be the most scalable route to mobilising private capital of all.