CEO of BlueOrchard Finance makes a strong case for impact investing in infrastructure

Some $2.5trn of the UN development goals has yet to be invested and “75% of that gap is made up of critical infrastructure projects in the developing world,” says Philipp Mueller, chief executive officer of BlueOrchard Finance.

Philipp Mueller, CEO of BlueOrchard Finance, strongly believes “emerging markets infrastructure is not as risky as you would think – in my opinion, that is backward-looking.” BlueOrchard Finance

CV

Managing Director, then Chief Executive Officer, BlueOrchard Finance, 2018-present
Senior Vice-President, Partners Group, 2008-18
Analyst, 47 Degrees North Capital Management, 2006-7
MBA, ETH Zurich 2014-16
Masters, Law, University of Zurich 2001-7

BlueOrchard has an unusual story. It was originally set up in 2001, as a result of the ‘UN Millennium Development Goals’ initiative. One project around microcredits had demonstrated the need for an independent asset manager in this field.

BlueOrchard was the result, and since then it has invested $8 billion in over 90 emerging markets across Asia, Eastern Europe, Latin America, and Africa.

BlueOrchard’s charismatic CEO Patrick Scheurle moved on last year, and was succeeded by Philipp Mueller, previously Head of Investment Solutions. Mueller says it’s a great time to take over given “the shift in the perception of investors. There is a noticeable, increased enthusiasm for impact investing.”

This is an important time for BlueOrchard, as the benefits of its acquisition by Schroders begin to feed through. Schroders is a prestigious blue-chip London investment house now managing some £700bn (€816bn) of assets.

It has big ambitions in the impact investing field, with its chief executive, Peter Harrison, recently declaring it was on a “journey towards being a global leader in this space.”

Member of The Schroders Group

Discussing the relationship Mueller says, “we are not necessarily managing all of their impact funds, but we are like their ‘impact hub’, involved in the methodology and in sharing our extensive know-how in this area.”

This will typically be at the design stage “as well as looking at any results of their quantitative analysis – possibly challenging assessments where necessary.”

The two partners recently launched the Schroder ISF BlueOrchard Emerging Markets Climate Bond fund, offering investors a “scalable and liquid impact investing strategy, purchasing primarily emerging markets issued climate bonds.”

In terms of considering future investment priorities, Mueller says: “Some ideas are scalable, some not. With education in Africa it would be really difficult to invest billions. Whereas in infrastructure and energy transition, the potential investment ideas are increasing dramatically, and there is likely to be a lot more demand for these kinds of strategies from clients.”

Investing for impact in infrastructure

There certainly has been growing client interest in sustainably themed infrastructure funds. Earlier this year German investment giant DWS cited this factor when it launched its EIDF (ESG Infrastructure Debt Fund), and Hamish Mackenzie, Head of Infrastructure at DWS says “there is very strong potential for other ESG or sustainability-related strategies.”

BlueOrchard points out “the UN is particularly highlighting the need for significant investment in infrastructure in the developing world” in order to achieve their ambitious Sustainable Development Goals (SDGs).

“There exists currently an annual investment gap of approximately $2.5trn in developing countries, which needs to be bridged to reach these goals by the target date of 2030. Around 75% of that gap is made up of critical infrastructure projects in the developing world.”

Mueller strongly believes this, and he also asserts “emerging markets infrastructure is not as risky as you would think – in my opinion, that is backward-looking.” To support this argument, he refers to project finance default and recovery rates research conducted by US rating agency Moody’s and US asset management firm Mercer.

This shows that many US projects are in fact higher risk than those in emerging markets. “In infrastructure of course there are many risks, but there is much you can also do to mitigate risks,” he says.

The BlueOrchard Sustainable Asset Fund (BOSAF) aims to address unmet needs in the market for sustainable infrastructure. “In terms of the areas of infrastructure investment that are interesting, it will be energy infra, energy efficiency, river transportation and data infrastructure,” Mueller says.

For example, in this last area, “we are involved in talks on a solar-powered telecom towers project in sub-Saharan Africa,” Mueller says, adding that the emerging markets infra projects are usually those “which are too large to be locally financed.”

Other investment themes

Apart from infrastructure, “the most important themes I believe going forward will be alleviating inequality and financial inclusion, and climate change adaptation/ mitigation,” Mueller says. “For example, we've been looking at how smaller businesses can insure themselves against climate risk.”

Since 2015 BlueOrchard has managed the InsuResilience Investment Fund (IIF), which works “to build the climate resilience of poor and climate-vulnerable households.” IIF is an initiative set up by Germany’s development finance institution (DFI) KfW.

Given the origins of BlueOrchard, it is perhaps not surprising that they remain particularly close to several DFIs. BlueOrchard recently worked with several leading DFIs, including KfW and the CDC in the UK, on the launch of a Covid support fund that aims at ensuring employment security in the most affected countries.

Another element that is in BlueOrchard’s DNA is its leadership in microfinance. The BlueOrchard Microfinance Fund (BOMF) claims to have been “the first private and fully commercial microfinance investment fund in the world.”

It is a pure fixed-income fund, investing in microfinance institutions in emerging and frontier markets, with systematic currency hedging. It has become the largest commercial microfinance fund, with some $2.5bn of investments.

“This fund is currently ‘soft closed’ for investors,” says Mueller “We have been witnessing a steady increase in investor demand. While this development reflects the fund’s performance and our investment process, the investments are often complex and require a certain lead time.”

In terms of future funds, Mueller says the world “cannot continue on as we are doing particularly in the areas of biodiversity and climate change” and that “there is a lot we can do from the investment side to finance projects in these two areas.”

Measuring impact

BlueOrchard has its own proprietary impact measurement system called B.Impact. “We continue to refine this as we collect more data, to ensure that it remains in line with the very best standards across the industry,” Mueller says. “We believe that our impact measurement methodology is at the forefront of best industry practice.” External verification is undertaken “for several of our funds.”

Mueller tells Impact Investor he has strong views on greenwashing. “I think it is very important that the market doesn't suffer from over-enthusiastic marketing which can lead to greenwashing. To avoid this, we need to insist on external verification, and work together as an industry to develop standards.”

He is proud of the impact BlueOrchard can claim. In its recent Impact Report, the company boasts it has helped 224 million people and financed 29 million small businesses, creating or maintaining 157 million jobs across numerous emerging and frontier markets.

“We can really alleviate many people’s suffering and we can lift them out of poverty. This is what drives me personally and makes BlueOrchard a great place to work.”