An Asian Investment Fund: What it will do and Why needed?

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

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

- 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

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

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%)

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

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

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)

Figure. 1* Country A SME Loans Senior SPC in Country D (Capital Abundant Country) Senior Junior Junior Senior Country B SME Loans Junior Credit guarantee Government Agency (GA) Senior Country C SME Loans Junior *This figure draws on internal studies of Korea Institute of Fixed Income Securities

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

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

▪Establishing Collateralized Fund Obligations (CFOs) to securitize cash flows from investment in private equity funds (Figure 2) ▪ Co-investment agreements with other multilateral agencies

Figure. 2* Transaction Structure Principal & Interest Fund of Funds (SPV) CFO Investor Distribution Note Proceeds Drawdown Underlying Partnership Underlying Partnership Underlying Partnership Exit/Realisation Portfolio Company Portfolio Company Portfolio Company Portfolio Company Investment *This figure draws on internal studies of Korea Institute of Fixed Income Securities

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

An Asian Investment Fund: What it will do and Why needed?