What is Blended Finance?
Blended finance is the term used when public or philanthropic funds are used to catalyze private capital investment (particularly in frontier markets). It has been envisioned as a way to help bridge the funding gap to achieve the UN Sustainable Development Goals, leveraging public and philanthropic capital to bring more private capital to the development finance table. Typically, the public or philanthropic entities provide a type of concessionary and catalytic capital that lowers the risk profile of a particular investment for the commercial or private entity. This allows the entities to invest together while allowing different parties to define their measure of success.
Blended finance is not limited to a specific transaction type, but instead is a structuring approach with three key characteristics:
- Impact, particularly in regards to the SDGs, is a motivating factor in the transaction
- Financial returns are expected, although different parties may have different return expectations
- Public or philanthropic capital is leveraged to act as a catalyst for the addition of private capital.
How are blended finance deals structured?
- Grants – public/philanthropic partner gives money to support the project that has no expectation of being repaid. These funds can be used to support non-income generating activities or early stage preparations.
- Guarantees – public/philanthropic partner offers protection (often in the form of insurance) from capital loss. (lowers the risk or increases the credit rating)
- Technical Assistance – public/philanthropic partner offers direct support to an entrepreneur, typically through a technical assistance facility or an incubator.
- Junior Equity – public/philanthropic partner buys ownership in the investment, but accepts a subordinate position in the structure, effectively accepting higher risk for lower returns. This structure is also sometimes referred to as concessional or first-loss capital.
- Flexible Debt – similar to junior equity, the public/philanthropic partner can accept subordinate terms to the debt structure, allowing for more favorable terms than the market offers.
All of these strategies act to reduce the riskiness of an investment for private investors, thus leveraging the public or philanthropic funds provided to accomplish certain SDG goals.
Chart from WEF/OECD
What are some examples of Blended Finance structures?
Convergence is a global network that was launched in 2016 to focus on blended finance. The organization maintains a database of blended finance transactions, including the following types, outlined in the table below:
|Transaction with concessional development funding||Development agency invests concessional debt or junior equity into a fund, improving risk-adjusted return for private investors|
|Transaction with market rate public and private investment||Public and private investors invest in a structure either pari passu or in |
different tiers, but at pricing fully reflecting seniority, tenor and other
|Grant-funded TA facility |
|Commercial fund has associated grant-funded Technical Assistance |
facility to build pipeline and support impact
|Below market-rate risk miti- gation provided by |
|Development funders provide guarantee to bond issuance to improve |
credit rating and attract private investment
|Impact Bond||Private investors provide working capital for set of interventions and are repaid with a return by development funders if intervention achieves |
|Advance Market |
|Development funders guarantee a market for a product, incentivizing |
|Project Finance Facility||Facility that only provides grant funding to infrastructure projects to reach bankability with the ultimate goal to attract private capital to projects; |
underlying transactions considered blended
|Transaction with grant funding for design and launch||Development funders provide grant funding for vehicle design and |
Who is doing blended finance?
According to Convergence and their data: “The most frequent private investors are asset/wealth managers and private equity/venture capital firms. The most frequent public investors are development finance institutions, governments, and multilateral groups. The most frequent philanthropic investors are private foundations.”
The GIIN’s Blended Finance Working group has published a helpful resource with key considerations and questions for stakeholders of blended finance deals: https://thegiin.org/assets/upload/Blended%20Finance%20Resource%20-%20GIIN.pdf
More information about blended finance can be found at the following websites:
- Convergence: https://www.convergence.finance/
- OECD: http://www.oecd.org/development/financing-sustainable-development/development-finance-topics/blended-finance.htm
- IFC: https://www.ifc.org/wps/wcm/connect/CORP_EXT_Content/IFC_External_Corporate_Site/Solutions/Products+and+Services/Blended-Finance
- Blended Finance Taskforce: https://www.blendedfinance.earth/working-papers