Development Finance through Public Markets: Originate-to-Demonstrate

A large and persistent financing gap means that EMDEs cannot come close to meeting the SDGs without attracting much greater private-sector investment. While this need is larger than ever before, private sector capital flows into EMDEs are stalling. MOBILIST hopes to demonstrate how official sector actors and market participants can use public markets to reignite private capital mobilisation.

This MOBILIST research paper discusses how, by investing and exiting through public markets, official sector actors can attract large-scale institutional co-investors, accelerate capital velocity, generate demonstration effects, and have systemic impact by triggering domestic capital market development.

Public markets offer unparalleled scale, but their potential value goes much further. Public markets provide perpetual scrutiny, transparency, and liquidity, leading to more frequent and accurate price discovery than is typical in private markets. MOBILIST has identified at least four routes to the mobilisation of private capital through public markets:

• Route 1 – Exit Mobilisation: Development finance actors can share assets and risk with private holders through public markets, mobilising institutional capital and recycling scarce development finance for new EMDE investments.
• Route 2 – Co-investment: Development finance actors can co-invest before, during, and after IPO, increasing liquidity and valuations to support listing and scaling to attract sizeable institutional asset allocators.
• Route 3 – Demonstration: Development finance actors can trigger follow-on investments and correct allocators’ misperceptions through pioneering ‘demonstration transactions’ that increase the flow of information relating to new asset classes, sectors, markets, and investment strategies.
• Route 4 – Policy and Regulation: Development finance actors can expand their technical support for capital market development, including by ensuring that EMDEs participate fully in the design of global regulatory standards that affect their access to capital.

Drawing from case studies and insights across the development finance sector, this paper discusses the advantages of public markets in the context of EMDE funding needs. It also considers the risks associated with public market mobilisation and how official sector actors can mobilise more private capital through public markets while mitigating these risks. It concludes with recommendations for official MDBs, development finance institutions (DFIs), and their shareholders.