Download An Asian Investment Fund - Global Clearinghouse for Development

Financial Cooperation in Asia Pacific Region
June, 2005
An Asian Investment Fund:
What it will do and Why needed?
Yung Chul Park
Research Professor
And
Director
Center for International Commerce and Finance
Seoul National University
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I. Asian Investment Fund
Asia Investment Fund (AIF) is a multilateral financial
institution to be created for the promotion of
financial cooperation and financial market
integration in Asia
Objectives of AIF
- Development of SMEs in Asia
▪ Guarantee of SME bonds
▪ Lending
▪ Equity investment
▫ pooling SME assets for securitization
▫ creating a fund of private equity funds
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- Financing Physical infrastructure by
guaranteeing project bonds
▫ Required amount in Asia is estimated to be
US$ 20 – 30 trillion over the next ten years
- Other Guarantee Business
▫ ABS
▫ municipal bonds
These activities of AIF will help foster deep and
liquid regional bond markets in Asia
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II. Organizational Characteristics
▪ A market driven institution in terms of business
scope, pricing, and meeting the needs of its
clients
▪ A Regional Financial Institution with AAA Credit
Rating
▪ An organization independent from major
shareholders or the government of the country
where it will be located
▪ Professional management
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III. Shareholder Structure
▪ AIF could be structured as a multilateral
development institution supported by the
participating Asian countries as shareholders
▪ Alternatively, it could be organized as a public-
private partnership with multiple share holding.
▫ Ownership Structure of European Investment Fund
EIB (59.15%),
European commission (30%), and
other private financial institutions (10.85%)
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IV. Target Markets
▪ AIF is in principle expected to operate in all
member countries
▫ A fair and equitable allocation of its guarantees and
investment resources
▪ Different Geographical Focus
▫ guarantees in countries with developed domestic
bond markets
▫ loans and equity investment in other economies
▫ participating in reinsurance in other advanced
economies to reduce its geographical risk
concentration
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V. Capital Requirement
▪Securing enough capital to acquire AAA
ratings from both local and global rating
institutions
▫ A proposal for AIF’s authorized capital: US$ 3
to 5 billion*
▪ Ready and Timely injection of callable capital
during periods of high stress
* EIF’s authorized capital € 2 billion
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VI. Product Offering
Credit Enhancement and Guarantee Services
▪ Guarantees in both local and major
currencies
▪ Credit guarantees for securitization of
debts of SMEs and infrastructure projects
▫ A scheme for Two-Tier securitization for SME
financing (Figure 1)
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Figure. 1*
Country A
SME
Loans
Country B
Senior
SPC in
Country D
Junior
Senior
(Capital
Senior
Junior
Abundant
Country)
SME
Loans
Junior
Credit guarantee
Government
Senior
Agency (GA)
Country C
SME
Loans
Junior
*This figure draws on internal studies of Korea
Institute of Fixed Income Securities
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SME Loans
▪ AIF-Local Financial institution partnership
▫ Providing SME loans through local financial
institutions
▫ Establishing a local financial institution as a
subsidiary of AIF
▫ Providing loans to local financial institutions
for SME securitization
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Equity Investment
▪ Investing in selected private equity funds
with private investors providing 50 percent of
the capital
▫ A fund of funds structure
▫ private equity funds include venture capital,
corporate restructuring and corporate byout
funds
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▪Establishing Collateralized Fund Obligations
(CFOs) to securitize cash flows from
investment in private equity funds (Figure 2)
▪ Co-investment agreements with other
multilateral agencies
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Figure. 2*
Investment
Exit/Realisation
Fund of Funds
Drawdown
Distribution
Transaction Structure
Principal & Interest
(SPV)
Note Proceeds
Underlying
Underlying
Underlying
Partnership
Partnership
Partnership
Portfolio
Portfolio
Portfolio
Portfolio
Company
Company
Company
Company
CFO
Investor
*This figure draws on internal studies of Korea Institute of Fixed Income Securities
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Guarantees for Infrastructure projects
▪ project bonds
▪ bonds issued through securitization based on
the cash flows from the project
▪ guarantees in local currency
Advisory and Structuring services
▪ Regulatory improvements for bond market
development, securitization, and financial
guarantees, and venture capital funds
▪ Advisory, structuring and auxiliary financial
services for cross-border securitization