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Fund managers lament potential shuttering of OPIC

  • Budget request calls for winding down OPIC
  • $22 bln portfolio will take time to unwind
  • OPIC important LP to managers in frontier markets

At the IFC/EMPEA Global Private Equity conference in May, participants lamented the possibility that Overseas Private Investment Corp could be shuttered by President Donald Trump.

OPIC provides funding for U.S. businesses, including fund managers, to invest in emerging economies. OPIC is an important limited partner to U.S. managers investing money in developing economies.

“It’s ridiculous I’m dealing with the idea that OPIC might not be here tomorrow,” said Jeffrey Liebert, chief executive of Gazelle Finance, which makes mezzanine and equity investments in small-to-medium enterprises in Eurasia, including Georgia and Armenia. “We might not be able to project ourselves into these countries.” Liebert was speaking on a panel at the conference.

Budget calls for closing

Trump’s budget request, submitted May 23, calls for gradually winding down OPIC’s $22 billion portfolio by a small staff, and no new activity in 2018.

The budget is far from a sure thing. The plan is now in the hands of Congress, which must decide on its final form.

“The budget is obviously a setback, but we’ll see how Capitol Hill responds,” said Todd Moss, a senior fellow at the Center for Global Development, who focuses his research on Africa relations, energy policy and private investment. “This is far from settled, even within the West Wing.”

OPIC was established as a government agency in 1971 by the administration of President Richard Nixon, OPIC said in its 2016 annual report. It provides loans and loan guarantees and risk insurance against losses from political disruption, and it capitalizes investment funds, according to the Heritage Foundation.

Heritage quotes the economist Milton Friedman in its recommendation to cut OPIC: “I cannot see any redeeming aspect in the existence of OPIC. It is special-interest legislation of the worst kind, legislation that makes the problem it is intended to deal with worse rather than better. … OPIC has no business existing.”

The budget’s view on OPIC is unambiguously negative.

“Development Finance Institutions like OPIC can at times displace the private sector, particularly in emerging and developing markets that have active international finance firms or domestic financial institutions capable of providing similar financing,” according to a supplement to the budget.

“While the administration wants U.S. businesses to invest in emerging markets to grow their businesses and create American jobs, private sector financing is often available.”

OPIC’s $22 billion portfolio will take time to wind down because of the long-term nature of its investments, the budget document said.

Supporters say the administration’s rationale for winding down OPIC is flawed, in part because OPIC does not cost taxpayers anything. “For 37 years in a row, OPIC has paid money into the U.S. Treasury. In fact, shutting down the agency will result in costs and lost revenue of $2.2 billion over the next 10 years,” wrote Moss and Joseph O’Keefe, a former senior adviser to the president of OPIC, in a blog post Wednesday.

Those numbers are sourced from OPIC, which says it generated $2.6 billion toward deficit reduction since 2008. In 2016, OPIC’s investments generated $239 million, according to OPIC’s annual report.

Moss and O’Keefe also argued OPIC does not distort free markets because of the markets it targets: emerging economies where private capital may not be readily available.

“Frontier markets are volatile and risky,” Moss and O’Keefe wrote. “Investors face problems from currency volatility to lousy infrastructure to the threats of military coups or expropriation. That’s why having an institution like OPIC is so important to opening up new markets and crowding in capital to these risky environments — like Jordan, Kenya, Iraq, or Cambodia.

“When markets mature and risks diminish, other players like commercial banks step in and OPIC exits,” they wrote.

Activity

An example of an OPIC investment last year was an $87 million commitment to U.S. not-for-profit Global Communities, for its Al Tamweel Al Saree project to expand microfinance operations in Iraq. Global Communities operates the largest microfinance facility in Iraq, Vitas Iraq.

OPIC, citing the World Bank, said only 4.2 percent of Iraqis borrowed from a financial institution in 2014. The project was expected to help increase financial inclusion in the country through the project’s lending.

“Access to finance is especially challenging for microenterprises; the microfinance sector in Iraq has thus far only served 100,000 entrepreneurs,” OPIC said. “Global Communities anticipates expanding its … portfolio to support an estimated 52,000 borrowers over five years.”

Last year, OPIC made total commitments of $3.69 billion across project financing, investment funds and insurance. The agency has active projects in nearly 100 countries.

Action Item: More about OPIC: www.opic.gov/media-events/annual-reports

IMF Managing Director Christine Lagarde speaks during an emerging-markets conference in Islamabad, Pakistan, on October 24,  2016. Photo courtesy Reuters/Caren Firouz