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.
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 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.
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:
|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 features|
|Grant-funded TA facility alongside transaction||Commercial fund has associated grant-funded TA facility to build pipeline and support impact|
|Below market-rate risk mitigation provided by development funders||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 pre-agreed results|
|Advance Market Commitment||Development funders guarantee a market for a product, incentivizing private investment|
|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 launch|
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)
Blended finance transactions should have three signature characteristics:
- 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.
- 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.
- 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.
Convergence identifies four common blended finance structures:
Public or philanthropic investors are concessional within the capital structure (referred to as concessional capital in this primer)
Public or philanthropic investors provide guarantees or insurance priced below market rates (referred to as guarantee / risk insurance in this primer)
Transaction is associated with a grant-funded technical assistance facility (referred to as technical assistance funds in this primer)
Transaction design or preparation is grant funded (referred to as design-stage grants in this primer)
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
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.
In the database, funds comprise more than half of blended finance transactions.
Average deal size by type
Projects and facilities are often larger in total size compared to funds, companies, and bonds / notes.
Technical assistance funds and concessional capital are the most common blending structures in the database. Design-stage grants and guarantees/risk insurance are less common.
Number of archetypes per deal
Around 30% of blended finance transactions include more than one archetype. Concessional capital and technical assistance funds are most frequently observed together, most often within funds.
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
More than 50% of blended finance transactions target more than one sub-region.
Kenya, India, Uganda, and Tanzania are the most frequently targeted countries in blended finance transactions.
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
Most blended finance transactions have one sector focus, with a small number targeting more than one sector.
Microfinance / retail banking is the most frequently targeted sub-sector in blended finance transactions, followed by reneweable energy.
SDGs and Impact
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.
Nearly all transactions have more than one SDG as a focus area, with just under half targeting more than five SDGs.
In the database, over 780 different investors have participated in blended finance transactions.
investors with 1,2, or 3+ deals
~20% investors have participated in three or more blended finance transactions. The majority of investors have only participated in one blended finance transaction.
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.
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 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
The average investment size for private investors varies greatly by institution type.
Top public investors with a development mandate
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
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.
The average investment size for public investors is between $10-$20M.
Top philanthropic investors
The most active philanthropic investors in blended finance include Calvert, Gates, Omidyar, and Shell Foundation.
The average investment size for philanthropic investors is smaller than other segments.
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