Blended Finance 101

Welcome to Convergence’s blended finance primer. The primer leverages Convergence’s proprietary, continuously updated data sets to generate unique insights about the blended finance market. Convergence’s data methodology can be viewed here.

Definition

Blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in developing countries and sustainable development
blended-finance-definition
Blended finance is a structuring approach that allows different types of capital (whether impact or commercial oriented), to invest alongside each other while each achieving their own objectives (whether financial, social, or a blend). Blended finance structures are observed across a broad range of transaction types – including funds, facilities, bonds, notes, projects, and companies. Blended finance aims to increase the amount of capital directed to sustainable development in developing countries.
Blended finance is not an investment approach, and is therefore different from impact investing. Impact investing is an investment approach, and impact investors often participate in blended finance structures.
Convergence focuses on blended finance to catalyze private investment. Other important stakeholders and initiatives, such as the Organization for Economic Co-operation and Development (OECD) and the DFI Working Group on Blended Concessional Finance for Private Sector Projects focus on a broader scope of blended finance that includes the use of development capital to mobilize commercial-development orientated public capital (e.g., capital from development finance institutions). Convergence works closely with the OECD, DFI Working Group, and others to coordinate blended finance activity.
Example transactions: The table below provides examples of different types of transactions, and whether they are included in Convergence's database of historical blended finance transactions:
TransactionExample
Transaction with concessional development fundingDevelopment agency invests concessional debt or junior equity into a fund, improving risk-adjusted return for private investors
Transaction with market rate public and private investmentPublic and private investors invest in a structure either pari passu or in different tiers, but at pricing fully reflecting seniority, tenor and other features
Grant-funded TA facility alongside transactionCommercial fund has associated grant-funded TA facility to build pipeline and support impact
Below market-rate risk mitigation provided by development fundersDevelopment funders provide guarantee to bond issuance to improve credit rating and attract private investment
Impact BondPrivate investors provide working capital for set of interventions and are repaid with a return by development funders if intervention achieves pre-agreed results
Advance Market CommitmentDevelopment funders guarantee a market for a product, incentivizing private investment
Project Finance FacilityFacility 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 launchDevelopment funders provide grant funding for vehicle design and launch

Importance

The Sustainable Development Goals (SDGs) are a set of 17 Global Goals set by the United Nations (UN) that aim to tackle a range of issues, from combating climate change to ending poverty and hunger. Not only do the SDGs aim to create a world that is more sustainable, they also offer real business opportunities.
To achieve the SDGs, a significant scale-up of investment is required today. The UN estimates that the total financing needed to achieve the SDGs is nearly $4 trillion annually. Current levels of development financing is not sufficient, with an estimated $2.5 trillion funding gap per annum to realize the SDGs.
Annual SDG Funding Gap by Sector (USD Billion)
Source: UNCTAD
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Blended finance is a critical approach to mobilize new sources of capital for the SDGs . UN member countries reached consensus on the importance of deploying public funds to attract private investment at the Third International Conference on Financing for Development in 2015 in Addis Ababa. Convergence, along with the Sustainable Development Investment Partnership (SDIP), were established out of the Addis Ababa Action Agenda to build the blended finance market.

Characteristics

Blended finance transactions should have three signature characteristics:
  1. Overall, the transaction expects to achieve a positive financial return. Different investors in a blended finance structure will have different return expecations, ranging from concessional to market-rate.
  2. The transaction contributes towards achieving the SDGs. However, not every participant needs to have that development objective. Private investors in a blended finance structure may simply be seeking a market-rate financial return.
  3. The public and/or philanthropic parties are catalytic. The participation from these parties improves the risk/return profile of the transaction in order to attract participation from the private sector.

Archetypes

Convergence identifies four common blended finance structures:
SDG Poster
Public or philanthropic investors are concessional within the capital structure (referred to as concessional capital in this primer)
SDG Poster
Public or philanthropic investors provide guarantees or insurance priced below market rates (referred to as guarantee / risk insurance in this primer)
SDG Poster
Transaction is associated with a grant-funded technical assistance facility (referred to as technical assistance funds in this primer)
SDG Poster
Transaction design or preparation is grant funded (referred to as design-stage grants in this primer)

Market Size

>$0B
Blended finance has mobilized over $104 billion in capital towards sustainable development in developing countries to-date. Convergence’s database captures over 2,500 financial commitments to over 310 historical blended finance transactions. The majority of these transactions launched after the year 2000.
Convergence maintains the largest and most detailed database of historical blended finance transactions in the market. While this database is not fully comprehensive, it does give a sense of the scale of blended finance. Convergence is conintiously building out this database, and this primer updates in real time.
While blended finance has gained increased attention in recent years, it is an approach that has been leveraged for some time, which is reflected in the number of transactions and aggregate deal size to-date. The blended finance market is substantial and growing, and is comparable to other important markets. According to the GIIN, impact investing assets under management in 2018 were around $230 billion, while, according to the OECD, official development assistance (ODA) to developing countries in 2017 was around $145 billion.

Deal Sizes and Types

Deal sizes
Source: Convergence
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The majority of blended finance transactions are between $10M-$250 million in total size. The most frequent size ranges are $10M-25 million, $50-100 million and $100-$250 million.
Deal Types
Source: Convergence
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In the database, funds comprise more than half of blended finance transactions.
Average deal size by type
Source: Convergence
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Projects and facilities are often larger in total size compared to funds, companies, and bonds / notes.

Regions

Region Frequency
Source: Convergence
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Sub-Saharan Africa is the most frequently targeted region in blended finance transactions, with other regions relevatively evenly distributed. Within Sub-Saharan Africa, East Africa is the most targeted sub-region.
Number of regions per deal
Source: Convergence
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More than 50% of blended finance transactions target more than one sub-region.
Countries
Source: Convergence
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Kenya, India, Uganda, and Tanzania are the most frequently targeted countries in blended finance transactions.

Sectors

Sector Frequency
Source: Convergence
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Financial services is the most frequently targeted sector in blended finance transactions, followed by energy and infrastructure. Generalist structures targeting multiple segments are also common.
Number of sectors per deal
Source: Convergence
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Most blended finance transactions have one sector focus, with a small number targeting more than one sector.
Sub-Sector Frequency
Source: Convergence
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Microfinance / retail banking is the most frequently targeted sub-sector in blended finance transactions, followed by reneweable energy.

SDGs and Impact

SDG Frequency
Source: Convergence
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SDG 17 (Partnerships for the Goals), 1 (No Poverty), 9 (Industry, Innovation and Infrastructure), and 8 (Decent Work and Economic Growth) are the most frequent SDG targets in blended finance transactions.
Number of SDGs per deal
Source: Convergence
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Nearly all transactions have more than one SDG as a focus area, with just under half targeting more than five SDGs.

Investors

0 investors
In the database, over 780 different investors have participated in blended finance transactions.
investors with 1,2, or 3+ deals
Source: Convergence
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~20% investors have participated in three or more blended finance transactions. The majority of investors have only participated in one blended finance transaction.
Investor sectors
Source: Convergence
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Over 50% of investors are private, with public and philanthropic evenly split at around 25% each. Around half of private investors have an explicit impact mandate.
Investor types
Source: Convergence
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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.

Private Investors

Top private investors
Source: Convergence
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The most active private investors in blended finance include Deutsche Bank, responsAbility, Standard Chartered, Calvert, and AXA. Many of the top private investors have an explicit impact-mandate.
Average investment size by type
Source: Convergence
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The average investment size for private investors varies greatly by institution type.

Public Investors

Top public investors with a development mandate
Source: Convergence
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The most active public investors with a development mandate in blended finance include USAID, DFID, and MIF.
Top public investors with a commercial-development mandate
Source: Convergence
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The most active public investors with a commercial-development mandate in blended finance include development finance institutions and development such as IFC, FMO, OPIC, and KFW.
Average investment size
Source: Convergence
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The average investment size for public investors is between $10-$20M.

Philanthropic Investors

Top philanthropic investors
Source: Convergence
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The most active philanthropic investors in blended finance include Calvert, Gates, Omidyar, and Shell Foundation.
Average investment size
Source: Convergence
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The average investment size for philanthropic investors is smaller than other segments.

Learn More

Convergence members have access to:
  • Detailed information for each blended finance transactions in the database
  • Detailed information on active investors in blended finance and their investment trends
  • Additional insights and analysis for specific investors, blending archetypes, SDGs, sectors, and regions
  • In-depth case studies for select transactions, describing the design process, structure, impact to-date, and summary learnings
  • Trend briefs and other research on the blended finance market
  • A range of additional products and services
Learn more about Convergence membership here.