Portfolio choice in a DFI context Aniket Bhushan

Portfolio choice in a DFI context Aniket Bhushan

Portfolio choice in a DFI context Aniket Bhushan Canadian International Development Platform www.cidpnsi.ca Complex, multidimensional portfolio choice in finance + development context Standard, modern portfolio theory (MPT) and efficient frontier (Markowitz, Fama..) Guide to diversification, risk mgmt., portfolio construction Bivariate framework risk, return

Fairly good (complete) info assumption (return above risk-free rate, risk as std. deviation) In a development finance context quickly breaks down Development outcomes add a significant layer of complexity High Efficient frontier Return Low

Low Risk (std dev) High High Development Outcomes High Low

Low Financial Return Low Risk High Complex, multidimensional portfolio choice in finance + development context Standard MPT

Higher risk, higher return (up to point) Lower risk, without sacrificing return (up to point) Increase risk, for higher return (up to a point) Already complex, imperfect info Complex MPT, dev outcomes Higher risk, low return; but, high development additionality or

outcome (up to a point) Low risk, negative return; but, high dev add/outcome (up to a point) Low risk, high return; but, no or negative dev add/outcome (no go) Other (potential) problems with development outcomes Is there enough information Is it of quality Is there relevant quantifiable/model-able information Do timeframes of outcomes (development delta) match investment timeframes

Are the outcomes verifiable, traceable (within the modeling and timehorizon constraints) Need better tools/frameworks/models Additional considerations, CdnDFI Diversification (geography) Diversification (sector) Depth of engagement in country(s), market(s), therefore investment in ground game / localization Capital structure and good (enough) pricing/risk info Liquidity (or rather illiquidity) Non-economic, political, idiosyncratic risk factors Generating awareness about itself amidst crowded field of more established players

Deep engagement in a small number of countries Diversified across a range of markets Number of countries/geographic profile Very long term patient capital Near term income stream Time horizons

Lead (go where others arent) Co-invest (partner with a handful) How to get involved Follow (go where the big ones already are) Low risk High priority in liquidation Senior debt

Subordinate debt Hybrid (convertibles) Preferred equity Capital structure High risk Low priority in liquidation Common equity/ stock

Very high risk Series C Series B Series A Venture/angel Seed Bring it together Financial return and viability Risk (individual investment to portfolio VaR) Capital structure considerations

Time horizon expectations Development outcomes (additionality) Localization depth (networks, experience, insight, edge) Lead, co-invest, follow

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