By Toby McIntosh
The European Investment Bank in 2019 tweeted enthusiastically about “a milestone” that would “mobilise private institutional capital” for international development.
The tweet heralded an unusual contract between the EIB and a Dutch investment company, ILX Management.
The story of the contract has relevance today, although its substance remains somewhat mysterious. EYE obtained a copy of contract, minus key portions that EIB deleted.
What excited the EIB in 2019 was selling ILX access to a large database of information about lending risks in developing countries. The Global Emerging Markets Risk Database (GEMs) was created by a consortium of 24 development finance institutions (DFIs). GEMs is administered by the EIB and is currently nonpublic, used only by the DFIs to manage their own credit portfolios.
ILX, however, was able to use the GEMs data for several years to inform its investment fund decisions. No other private companies got access to GEMS data. In response to an EYE question, the EIB said, “… the agreement with ILX was put in place as a pilot initiative.” The EIB said, “There are no such contracts in place.” And further, “The agreement with ILX was a one-off agreement, meaning that only one set of statistics was shared in January 2020, following which the agreement expired.”
Private sector interest in seeing the GEMs data has grown in recent years. A business coalition has pushed for GEMs transparency, and may be on the verge of getting it. The EIB is developing plans for more transparency of GEMs as the development banks look for new ways to stimulate private finance in emerging markets. (See March 30, 2023, EYE article.) Unconfirmed rumors circulating among those following the issue say an announcement may come in several months.
The EIB told EYE, “With an increasing demand for GEMs analytics, the GEMs Consortium sees it necessary to formalise a business model to facilitate information-sharing in a more standardised manner.”
For the moment, however, the database remains nonpublic, except for the release of some very general data.
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ILX CEO Calls Data Valuable
The window of access enjoyed by ILX provides some practical evidence of the commercial value of GEMs.
“The GEMs data has demonstrated to be a more reliable, useable and comprehensive data set,” according to Manfred Schepers, founder and CEO of ILX Management.
ILX received “high-level default data categorized by regions and sectors, and recovery rate statistics,” which is used in conjunction with other data, he explained. “The analysis ILX performed to derive meaningful insights from the high-level GEMs data was part of the analysis of the Development Finance asset class for investors,” Schepers said in written answers to questions from EYE. From 2006-2016 Schepers was Vice President and Chief Financial Officer at the European Bank for Reconstruction and Development (EBRD) and led the Bank’s Institutional Investment Partnership program.
“The syndicated Development Finance Loan market has been active for several decades,” he said, adding, “Our analysis has included historical information on the syndicated Development Finance Loan market based on the publicly available financial data of the DFIs as well as the GEMs data provided to ILX. The analysis has accommodated ILX in its outreach to institutional investors.”
Schepers elaborated, “The GEMs data has reconfirmed the general understanding of the credit performance of Development Finance loans, as can be inferred, albeit with less granularity, from the annual financial accounts and other reports of DFIs. The GEMs data has demonstrated to be a more reliable, useable and comprehensive data set.”
“The analysis conducted by ILX involved a comprehensive approach that incorporated various data sources, including the GEMs data,” Schepers said, continuing, “This analysis was further enriched through extensive engagement with DFIs and other market participants.”
Schepers Advocates More GEMs Transparency
Wider access to GEMs data “could play a vital role in promoting transparency by providing statistical data on the aggregated credit default and loss performance of development finance loans, enabling banks, insurance companies and other institutional investors to make more informed capital allocation and credit allocation decisions,” Schepers said.
“It fosters transparency in the development finance assets class for emerging market development finance lending by reducing information asymmetry and thereby bridging the gap between risk perception and actual risk,” he wrote.
Described what’s most useful about GEMs, Schepers said:
“The most valuable information in GEMs is the comprehensive aggregate sector and regional statistical data on the credit performance of development finance loans across emerging markets. This data provides insights into the historical aggregate default rates, recovery rates and rating migrations. In our opinion, the overall recovery rates are the most valuable information in the GEMs database. Development finance loans have historically demonstrated higher recovery rates compared to emerging market and other sub-investment grade bond markets, making this data particularly important for assessing relative credit performance.”
The recovery rate refers to the amount recovered when a loan defaults.
Data released by GEMs “have not yet provided insight into the recovery data,” Schepers commented.
The GEMs public disclosures have concerned default statistics in sovereign and sovereign-guaranteed lending from 1998 to 2020, as well as in private and sub-sovereign lending from 1994 to 2020. “However, these publications focus on default-related data and have not yet provided insight into the recovery data,” he said.
“In our opinion, it will be valuable to also disclose recovery statistics to obtain a comprehensive understanding of the development finance asset class credit performance,” Schepers said.
EIB Blacks Out Portions of Contract With ILX
The EIB’s 2019 deal with ILX says can use the GEMs data “to develop outputs for Licensee’s proposed investment strategy,” according to a copy of the agreement obtained by EYE through a request using the EIB transparency policy.
However, the rest of the sentence about how ILX could use GEMS was not disclosed by EIB (after consulting with ILX). Also blacked out in the copy of the agreement provided to EYE is a description of the “Approved Product.”
The contract, for an undisclosed price, lasted for under two years, and is no longer operational.
EYE requested the contract through the EIB’s access to information process. The EIB said the redactions were made so as not to “undermine the commercial interests of the parties concerned” and to protect the privacy of individuals. EYE is preparing to file an appeal.
Searches on the EIB website did not reveal any other such contracts.
To manage the database, the EIB has contracted with outside organizations, but the contracts contain nondisclosure clauses.
In 2016, a contract for almost 400,000 euros was awarded to Capgemini Belgium for “external validation both in data quality and methodology, as well as regarding the calibration exercise.” In 2017, GEMs outsourced data management to Moody’s Analytics Knowledge Services (UK) for 1.1 million euros. And in 2021, the data management contract went to a German company, d-fine GmbH, for 1,439,000 euros.
