Yerik Aubakirov, serial entrepreneur and CEO of EA Group Holding Ltd.
Private equity funds hunting for alpha in emerging markets face a dilemma: The highest returns often come with the highest risks. To solve this puzzle, some are partnering with development finance institutions (DFIs).
The trend is accelerating. In 2024 alone, the European Bank for Reconstruction and Development (EBRD) deployed a record €2.26 billion in Central Asia—nearly double its 2023 investment. For the private funds co-investing alongside it, this can represent something rare: higher returns with lower risk.
But capturing this “DFI advantage” requires understanding both the opportunities and the pitfalls.
Profit Through Partnership
Fund managers must navigate three major risks: political instability, regulatory uncertainty and currency volatility. I’ve found that deal sourcing alone can cost around 2% to 10% of transaction value, and many announced deals stall at the regulatory approval stage. Political risk insurance might cost 1% to 3% per year, and currency hedging can consume a significant portion of returns.
These costs explain why independent funds invested in emerging markets often aim for returns of 35% to 40%. They build in a premium for volatility—aiming for higher IRR so that, even after inevitable drawdowns, results remain attractive to investors.
How DFIs Change The Equation
Partnering with DFIs comes with the potential to enhance returns through three key multipliers:
1. Higher Risk-Adjusted Returns
DFIs can make deals more predictable and secure, so investors are willing to accept slightly lower returns in exchange for reduced risk. My organization’s research examining data from primary sources (such as regulatory filings, company announcements, government statistics and DFI reports) and secondary sources (such as industry reports, news media and expert interviews) found infrastructure and DFI-co-invested deals generally target IRRs of 25% to 30%, while profit volatility is lower than in deals executed independently.
For example, for Air Astana’s IPO in February 2024, the EBRD took a 5% anchor stake, which they noted would provide additional confidence to institutional and private investors. The IPO saw strong investor demand with three times oversubscription, and the offering was upsized by about 23%.
2. Exclusive Early Access to Deals
DFIs often gain access to deals 12-18 months before official releases, allowing them to select the best assets when competition is minimal. They also have more time for risk assessment and the chance to purchase assets at lower valuations.
3. Maximizing Exit Value and Premiums
DFI participation enables investors to sell stakes at higher valuations. I’ve seen exit premiums reaching 15% to 25%. Partnerships with DFIs can also facilitate faster international expansion. Companies that complete ESG transformations under DFI guidance can often capture exit valuation uplifts.
DFI investments often include corporate governance requirements such as independent directors, audit committees and enhanced reporting standards. As companies develop more robust governance practices under DFI guidance, they may become better positioned for international listings.
Investor Playbook
I’ve found the optimal strategy combines the benefits of DFI involvement (financial, reputational and institutional support) with the private fund retaining operational control.
A typical structure might look like this:
• DFI: Ensures governance oversight and concessional financing
• PE Fund: Retains control and generates added value
• Local Partner: Provides market expertise and regulatory navigation
Due diligence costs are also shared proportionally. An effective approach assigns DFIs environmental and social assessments, while PE funds focus on commercial and financial analysis. Regulatory and political processes require joint effort: DFI presence facilitates ministry-level access and reduces administrative barriers, while fund managers focus on legal protections for investors.
I’ve noticed that the most promising sectors for DFI partnerships are those where their involvement guarantees added value—renewable energy, transportation and digital infrastructure. In these industries, DFIs provide not just financing but also state guarantees, policy alignment and long-term collaboration.
Still, DFIs cannot eliminate all risks—political instability, currency devaluation and liquidity crises remain possible. Thorough due diligence, active risk management and portfolio diversification remain essential regardless of partnership structure.
Three Common Pitfalls That Undermine DFI Cooperation
1. Mission Drift
The first pitfall occurs when projects focus primarily on social or environmental outcomes rather than profitability. For example, a profitable agribusiness investment could transform into a rural development program with 50% lower returns because the DFI insists on adding farmer training centers, health clinics and water infrastructure that benefit communities but drain project economics.
2. Process Paralysis
Excessive bureaucracy and slow decision making can cause challenges. DFIs often require multiple layers of approval involving environmental specialists, social teams, governance committees and board reviews—turning 30-day decisions into 6-month ordeals. I saw one infrastructure fund that needed 47 different signatures for a routine capital call, during which time construction costs increased and the opportunity window closed.
3. Exit Misalignment
This pitfall occurs when DFIs hold investments longer than commercial timelines allow. DFIs often prefer longer investment horizons to demonstrate long-term development impact, while PE funds need exits within five to seven years to satisfy LP expectations.
This becomes especially problematic when DFIs block sales to buyers they consider “inappropriate,” even when these buyers offer the best valuations.
My Recommendation: The key is addressing these issues before signing, not during implementation. Agree from the outset on clear financial KPIs (with specific IRR floors and cash-on-cash multiples), parallel decision-making processes (with defined swim lanes and approval matrices) and multiple exit mechanisms, including put/call options in the deal structure. You may want to consider hiring advisors who have specific DFI negotiation experience—the extra legal fees can save companies from delayed decisions and blocked exits.
Opportunities And Risks
Multilateral development banks and DFIs now mobilize over $220 billion in private finance annually across all countries, including around $88 billion in developing countries, and this figure continues to grow. By 2026, African companies alone are set to receive $40 billion in trade financing from Afreximbank. And for U.S. and European limited partners holding significant dry powder, such opportunities cannot be ignored.
Astana International Exchange turnover tripled in 2023, reaching $582 million—driven largely by DFI-linked listings that attracted international capital. Conditions for investing in emerging markets are becoming more favorable: predictable environments, transparent regulations and improving technological infrastructure.
With record levels of unallocated capital and shrinking yields in developed markets, I think the DFI multiplier effect remains a sustainable opportunity for stable, long-term profit.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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