Private investors are lining up for a capital-relief deal designed to help channel more funds into development projects in Africa.

The African Development Bank (AfDB) is structuring a synthetic risk transfer on an underlying $2 billion portfolio of private sector loans, Nana Spio-Garbrah, client solutions manager at the AfDB, said in an interview. The transaction, which marks AfDB’s biggest to date, is expected to free up over $1 billion for new loans across Africa to help alleviate poverty and protect the environment, she said.

Buyers of the SRT, which is intended to reduce AfDB’s balance sheet risk, include Newmarket Capital, a Philadelphia-based alternative asset manager that specializes in structured credit. Academy Securities, a firm owned by US veterans, also has signed a letter of intent to explore an investment.

“Risk transfer has been a powerful tool for Newmarket to support multilateral development bank capacity amid an environment of reduced public sector appetite,” said Molly Whitehouse, managing director at Newmarket. The asset manager has led previous risk transfers for AfDB and the Inter-American Development Bank, and Whitehouse said the goal is to transform “a novel structure into a durable framework.”

Capital relief instruments are gaining traction among multilateral development banks, as they find themselves under increasing pressure to look for new sources of cash. Government support has been squeezed by growing deficits, while the need for development finance is only getting bigger due to the dual impacts of climate change and persistent poverty.

Spio-Garbrah said the risk transfer will help AfDB scale up the amount of development finance it can channel toward the so-called sustainable development goals, which are a set of 17 targets adopted by all United Nations member states in 2015. Progress on the SDGs is “not where it needs to be,” she said.

“Capital flows are tightening or going to other regions that are not where the momentum is required,” Spio-Garbrah said.

Such challenges have been compounded by President Donald Trump’s decision to halt US overseas climate finance, freeze funds for the US Agency for International Development and to review American membership in international organizations. That includes multilateral development banks, many of which count the US as their largest shareholder.

By using synthetic risk transfers, multilateral lenders can bring institutional investors into markets that would usually be difficult for them to navigate, Spio-Garbrah said.

“Most holders of private capital are not necessarily as familiar as multilateral development banks that are on the ground in countries,” she said. That means they are “relying on us to do that origination and to package those assets in a way where it’s de-risked for them.”

The African Development Bank was the first multilateral lender to move into the SRT market back in 2018, with a $1 billion deal that generated returns of about 11% for investors. Last October, the Inter-American Development Bank did its first risk transfer on a $1 billion portfolio of loans. The European Bank for Reconstruction and Development is also working on its first deal.

Such transactions add to record growth in the wider market for risk transfers, as commercial banks seek to churn out more loans without it impacting their capital buffers.

The African Development Bank is partnering with the Development Bank of South Africa on the deal, which is due to complete by the end of the year. About three-quarters of the $2 billion loan portfolio will be AfDB assets, with the remainder coming from DBSA.

The deal structure is part of AfDB’s “regional or continental approach” to the market, Spio-Garbrah said. “There’s going to be a lot more engagement between multilateral development banks and regional development finance institutions” going forward, she said.