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Scott Nathan, nominee to lead the International Development Finance Corporation, at a Senate Foreign Relations Committee hearing, December 1, 2021
The chief executive of a U.S. foreign-development agency spent two decades leading a hedge fund that previously controlled one of the largest holdings of Puerto Rican debt.
Scott Nathan, who was confirmed last Wednesday as the new top officer of the U.S. International Development Finance Corporation (DFC), was formerly a partner and chief risk officer at Baupost Group, a Boston-based hedge fund.
Run by the billionaire Seth Klarman, the firm is perhaps best known by the public for its holdings of nearly $1 billion in Puerto Rican debt, which it acquired through a shell company subsidiary and exited in 2019. As a so-called “vulture fund,” Baupost developed its strategy of buying defaulted bank debt in Iceland after the 2008 financial crash, and was also a major investor in Greek government debt following the eurozone crisis.
After being confirmed with bipartisan support last week, Nathan will now take the helm at the DFC, a new economic-development corporation providing loans to poorer countries.
The appointment of a Wall Street Democrat to the top job signals the direction of the little-noticed but geostrategically significant agency, which has become part of a broader debate over the role of the private sector in energy and infrastructure investments abroad. Private capital will play a role in the global energy transition, but many climate activists warn that investor priorities should not lead the way.
There is some irony to the pick of an executive from a firm that became notorious as a creditor to Puerto Rico, since development initiatives will be particularly focused on Latin America and the Caribbean. Part of the bank’s pitch is that it will rival China’s growing presence in the Western hemisphere, improving America’s image as a project lender with high labor standards and fair terms.
“The Newest, Freshest Tool”
Launched in 2019, the DFC combined and replaced several sleepy development institutions, including the Overseas Private Investment Corporation (OPIC). It doubles its predecessor OPIC’s investment cap from $29 billion to $60 billion, and its real impact is expected to be multiples of that amount, since it will be put toward leveraged deals attracting private capital.
Backed by the full faith and credit of the U.S. government, the DFC can make direct loans to poorer countries or sweeten private-sector deals, for example by providing “political insurance” coverage against threats like violence and currency inconvertibility.
Foreign-aid officials are enthusiastic about the enterprise.
“The enhanced capacity you all have given the DFC is, from my standpoint, the newest, freshest tool in the toolbox,” Samantha Power, administrator of United States Agency for International Development (USAID), said at a hearing with Chris Coons (D-DE), a key sponsor of the legislation, in July.
America’s development bank is a bipartisan effort. Former Secretary of State Mike Pompeo promoted the DFC on his Indo-Pacific tour as part of an effort to improve market access for U.S. businesses in the region. China hawks in both political parties stress the need to compete with Beijing’s Belt and Road Initiative, a global infrastructure-building project, and challenge its dominance in supply chains for green items like solar panels.
Climate activists have pushed for more financing for renewable energy in markets with constrained access to capital. A coalition of climate groups wrote in 2020 that ending fossil fuel subsidies should be a key criterion in selecting the DFC’s head.
Under the Biden administration, the DFC has appealed to those concerns, naming a “chief climate officer” and announcing in December that it would lend $500 million to build a solar panel factory in southern India.
That contrasts sharply with another recent deal, in which the DFC agreed to buy oil and infrastructure assets from Ecuador—on the condition that the country agrees to block Chinese 5G telecom. As of last June, the agency’s energy sector portfolio included more than a dozen projects in mining, quarrying, and oil and gas extraction. Some of those projects include drilling new oil wells in Colombia and developing a liquefied natural gas plant in Mozambique.
Nathan has already offered signals as to which direction he’ll take the agency.
“Most developing countries need fossil fuels to keep their economies going,” Sen. Bill Hagerty (R-TN) said at Nathan’s confirmation hearing. “If there’s a project that would enhance development, to help us compete with China, and it reduces emissions, but it does involve investment in fossil fuel energy, would you throw it aside just because it involves fossil fuel energy, and leave them stuck?”
“No, I wouldn’t. The DFC is not restricted in terms of what kind of technology choice it makes for energy projects,” Nathan replied. He referred favorably to natural gas projects DFC funded in 2021 in Sierra Leone and Iraqi Kurdistan.
Private-Backed Energy Finance
Nathan joined Baupost in 1995, according to his LinkedIn profile. He left in 2014 to join the State Department as special representative for the Office of Commercial and Business Affairs, where he pressed to give U.S. investors more access to markets from Honduras to Egypt.
“I’m a competitive guy. I’m a deal guy. I like to win,” he said at a 2015 House Foreign Affairs Committee hearing, explaining that the “bread and butter” of his work was about scoring contracts for American businesses abroad.
Long seen as a highflier in party circles, Nathan previously chaired the board of the League of Conservation Voters, a centrist environmental organization, and served on the board of the Center for American Progress. CAP’s founder John Podesta, a prominent supporter of increased climate investment, praised his appointment in a statement.
Others are less thrilled. “It’s a slap in the face anytime the Biden administration adds a person that has been actively pursuing investments that have hurt Puerto Ricans,” Julio López Varona, an organizer at the Center for Popular Democracy, told the Prospect.
He added that Latino votes in Pennsylvania, a swing state that is home to some 400,000 Puerto Ricans, are a pivotal constituency for Biden. “If they [the Biden administration] want to continue being politically insensitive to the needs of Puerto Ricans, they may pay for that in the next elections.”
It’s not the first appointment of a controversial financier to a top post steering foreign investment.
Climate and immigrant rights activists opposed the hire last year of private equity heavyweight Mark Gallogly, the cofounder of Centerbridge Partners, a firm with its own history of investing in fossil fuels, mining and drilling, and even Puerto Rican debt. After an investigation revealed ethical conflicts, Gallogly left his post as an advisor to White House climate envoy John Kerry.
During Nathan’s tenure at Baupost, the hedge fund pursued a range of deals in industries exposed to significant financial risk of public criticism for environmental and social harms.
For example, when BP shares collapsed after a 2010 oil rig explosion in the Gulf of Mexico, Baupost picked up stock in the oil giant. At one point, according to the Huffington Post, the firm owned more than $700 million in BP.
As recently as the third quarter of last year, according to SEC filings, Baupost held stock valued at $59 million in Archaea Energy, Inc., one of the largest renewable natural gas producers in the U.S., and some $69 million in Pacific Gas and Electric Co., a California utility responsible for fatal wildfires.
Baupost has also invested heavily in infrastructure giant DigitalBridge, previously known as Colony Capital, which sets up cell towers, data centers, fiber, and other infrastructure in countries around the world.
Nathan and a DFC spokesperson did not respond to requests for comment, including on whether he retains a stake in Baupost.
Kerry, Biden’s special climate envoy, has stressed the role of private finance in funding renewables for the developing world. At a CNBC discussion last year, Kerry said, “I am in discussions right now with a number of our largest asset managers and major banking institutions with hopes that we can begin to understand where the capital could come from.”
That emphasis is unpopular with some development experts who say that money to “de-risk” renewable investment—making it more palatable to rich world investors—is a corporate subsidy that garners little in return.
“The overall U.S. government approach to finance is focused on supporting and enabling the private sector, often with the public interest as an afterthought,” Justin Guay, the director of global climate strategy at the Sunrise Project, told the Prospect. Asked about the pick of Nathan to lead DFC, Guay said, “It speaks volumes about your worldview, and your approach to finance and investment, if you cut your teeth fleecing developing countries.”
Power, who as USAID administrator is a key official for U.S. development strategy and serves as DFC’s vice chair, did not reply to requests for comment from the Prospect. But at the July hearing, she stressed the importance of public-private partnerships.
“Your continued message that this is a development finance institution is really important,” she said. “As the vice chair of the DFC, my impression is that that is very much the orientation of the leadership of DFC. To meet these needs in developing countries, recognizing that that is going to be profitable for everybody over time.”
