The State of Blended Finance 2021

Time to scale

“This is the 5th edition of Convergence’s flagship report. In some respects, we’ve come a long way since we started reporting on the state of blended finance in 2017. In the last few years, blended finance has grown from a niche field to a central topic at major conferences and boardrooms around the world. As it becomes more mainstream, we also hear more voices talking about blended finance at ever higher levels of sophistication.”

JOAN M. LARREA, CHIEF EXECUTIVE OFFICER, CONVERGENCE

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Blended Finance Definition

Blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in developing countries to realize the Sustainable Development Goals.

The State of Blended Finance 2021 report draws its findings from:

closed blended
finance transactions

+

financial
commitments

unique
investors

$B

in financing

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Setting the Scene

The COVID-19 pandemic and its impact on the economies of developing countries has been devastating. The Organisation for Economic Co-operation and Development (OECD) projects that developing countries could face an additional shortfall of $1.7 trillion in financing, increasing the annual SDG funding gap from $2.5 trillion to $4.2 trillion.


That’s why this year’s report focuses on achieving scale in the blended finance market. By ‘scale’ we mean the crowding-in of significant volumes of financing towards the SDGs, particularly private sector financing. Specifically, there is a need for more transactions that are at least $100 million in size. To delve deeper into how to achieve scale, this report will include perspectives from prominent stakeholders in the blended finance market, including development agencies, MDBs and DFIs, think tanks, and private investors.

Overall Market

Like the rest of the global financial system, the blended finance market was impacted by the unprecedented effects of the COVID-19 pandemic. Although the number of transactions closed in 2020 follows annual market trends, blended finance flows were significantly lower compared to historical financing trends (~$4.5 billion in 2020, 50% less compared to 2019).


Convergence is currently tracking 71 deals in our fundraising deal pipeline, representing over $8 billion in aggregate blended capital. Of the 55 fundraising deals captured in last year’s report, 21% successfully closed in 2020 (30% of which targeted Latin America and the Caribbean). If this fundraising trajectory continues, Convergence expects to capture only ~33 deals in 2021, a marked drop from the annual average of ~55 transactions.

Overall blended finance market
(2010 to September 2021)
in USD billions

Annual Deal Count
Fundraising Deals
Annual Financing

Overall blended finance market
(2010-2020)

IN USD billions

The State of Blended Finance is Convergence’s annual report on blended finance trends, opportunities, and challenges.

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Deal Sizes and Types

Convergence collects data on six common transaction types: bonds / notes; companies, facilities, funds, impact bonds (including development impact bonds and social impact incentive bonds), and projects.

Proportion of closed transactions
by vehicle type

Bond
Fund
Company
Impact Bond
Facility
Project

Proportion of blended
finance vehicles

Share:

Regions and Countries

Proportion of closed transactions by regions

2020
2019
2018
2015-2017

Proportion of closed transactions by regions

17%
61%
6%
4%
19%
17%
6%
Latin American &
the Caribbean Sub-Saharan
Africa Middle East &
North Africa Europe &
Central Asia South
Asia East Asia
& Pacific Global
Focus

Proportion of transactions
currently fundraising
by region

Proportion of transactions
currently fundraising
by region

Share:

Top countries for blended finance
by number of commitments

Top countries for blended finance
by number of commitments

Kenya32
India18
Uganda18
Nigeria16
Ghana15
Tanzania13
Indonesia11
South Africa11
Ethiopia9
Vietnam10
Myanmar8

Proportion of closed transactions
by recipient country income level

Proportion (2018-2020)
Proportion (2015-2017)

Proportion of closed transactions
by recipient country income level

Lower-middle income countries continue to receive the bulk of blended capital flows in recent years; 62% between 2018-20. Convergence advocates for small allocations of ODA to be deployed to blended finance transactions, only where there are opportunities for Least Developed Countries to attract private investment.

Sectors

Proportion of closed transactions
by sector

2020
2019
2018
2015-2017

Distribution of blended finance
transactions across sectors

Share:

(i) public and/or philanthropic investors providing capital on below-market terms into a transaction’s capital stack, thereby enhancing its credit profile or adding loss protection to the benefit of more senior investors (typically called “concessional debt or equity”, or grant funding)

(ii) project design, preparation and structuring activities being grant-funded to ensure and accelerate transaction launch (i.e. “design-stage grants”)

(iii) public and/or philanthropic investors extending partial or full guarantees or insurance instruments on below-market terms to enhance the credit profile of a transaction and/or mitigate specific risks (i.e. currency risk, political risk)

(iv) a transaction being linked with a grant-funded technical assistance facility, used to finance pre-investment (business design), post-investment (personnel training) and cost-of-investment (legal structuring fees) activities to improve the bankability of a transaction.

Blending Approaches

Convergence categorizes blended finance transactions into four commonly used archetypes: (i) concessional capital, (ii) design-stage grant, (iii) guarantee/risk insurance, and (iv) technical assistance.

Proportion of closed transactions by blending approach

2020
2019
2018
2015-2017

Proportion of blended finance transactions across blending archetypes

Direct beneficiaries are the institutions and/or individuals who are the direct recipients of the financing, goods, and/or services supported by the blended finance transaction.

End beneficiaries are the main sectors of the population that a development programme or project aims to reach in order to address their needs based on gender considerations or socio-economic characteristics.

Beneficiaries

Since 2015, project developers and corporates have been the most common direct beneficiary of blended capital. In 2018-20, they were the direct beneficiary of 61% of transactions. Blended finance transactions most often target base-of-the-pyramid (BoP) populations as end beneficiaries.

Proportion of closed transactions

Direct Beneficiary
End Beneficiary
Proportion (2015-2017)
Proportion (2018-2020)

Proportion of closed transactions

Blended Finance & the Sustainable
Development Goals

Blended finance is best suited to the achievement of SDGs that can generate commercial revenues. For example, there is strong alignment with Goal 8 (Decent Work) and Goal 9 (Industry, Innovation and Infrastructure).

SDG alignment, proportion of closed transactions by SDG (2018-2020)

Blended Finance Transactions
Commited Capital (USD, Billions)

SDG alignment, proportion of closed transactions by SDG (2018-2020)

The Blended Finance – Gender Nexus

The blended finance – gender nexus is yet to achieve scale. Tracking data on a gender-disaggregated basis is a first step towards establishing investing norms that promote gender-equity.

Gender Nexus

2018-2020
2015-2017

Gender Nexus

Share:

Sources of total commitments to blended finance transactions, by proportion

2018-2020
2015-2017
2012-2014

Sources of total commitments to blended finance transactions, by proportion

Sources of concessional commitments to blended finance transactions, by proportion

2018-2020
2015-2017
2012-2014

Sources of concessional commitments to blended finance transactions, by proportion

Commercial Investors

The goal of blended finance is to mobilize private capital. So, every blended transaction that Convergence measures mobilizes capital from at least one private sector investor.

Financial commitments from commercial investors to blended finance transactions, by organization type

2018-2020
2015-2017
2012-2014

Financial commitments from commercial investors to blended finance transactions, by organization type

01

Challenge

Lack of a Private Sector Mobilization Strategy
and Action Plan

Donors are the main source of the catalytic funding to mobilize private investment, but they have not prioritized and budgeted for private sector mobilization.

Donors should make private sector mobilization an essential pillar of their strategy. In addition, MDBs and DFIs must put in place strategies to engage with institutional investors on a radically different scale.

02

Challenge

Low Levels of Coordinated Participation from
Developing Country Governments and Untapped
Domestic Resources

Representation from developing country governments and expertise from regional development banks and institutional investors is crucial to scaling blended finance.

Host country governments can create an enabling environment for blended finance by using regional and national MDBs/DFIs and focusing on blended finance projects that are appropriately structured for local investors.

03

Challenge

Lack of Transparency on Blended Finance Activity

Concessional capital providers do not publicly disclose financial terms or ex-post development outcomes, limiting the evidence base for blended finance as a development tool, while private investors do not disclose data on financial performance due to confidentiality concerns.

All practitioners, but particularly donors, should publicly disclose blended finance data.

04

Challenge

The Ecosystem for Blended Finance is Underdeveloped

There is a lack of financial intermediation in the blended finance market. On the one hand, donors and investors are looking to channel large amounts of capital towards market opportunities aligned with the SDGs. Yet SDG projects are often small, and there are limited intermediaries in the market equipped to channel these flows.

Practitioners should support scale by focusing on proven and replicable blended finance structures. Convergence advocates for innovation that is additional to the market yet familiar and replicable to investors.

The 2021 State of Blended Finance is Convergence’s annual report on blended finance trends, opportunities, and challenges.

Download Full Report

Letter from the CEO

This is the 5th edition of Convergence’s flagship report. In some respects, we’ve come a long way since we started reporting on the state of blended finance in 2017. In the last few years, blended finance has grown from a niche field to a central topic at major conferences and boardrooms around the world. As it becomes more mainstream, we also hear more voices talking about blended finance at ever higher levels of sophistication.

What we are not seeing is the requisite leap into action. Over the past five years, blended finance flows have averaged around $9 billion per year – steady growth, but not close to the exponential growth needed. Then in this year’s report, we saw a significant decrease in flows (~$4.5 billion in 2020, 50% less than in 2019). This decrease, at a moment where blended finance is on everyone’s lips and when it is needed more than ever, is alarming.

As we wrote this report, the effects of climate change raged unabated as floods ravaged Western Europe, catastrophic tropical cyclones and extreme heat appeared across Africa, and Turkey experienced its worst-ever wildfire season, all while the ongoing pandemic exposed our world’s vast inequalities, with developing countries bearing the economic brunt of the disease and finding themselves last in line for vaccines.

That’s why this year’s report is focused on scale. It’s time for blended finance to reach its full potential and meet its promise of attracting private capital into emerging markets at volumes never seen before.

There are of course some points of light. A few actors stimulated the field in the last year, and we’ve given some of them a voice in this report. However, what we need are a thousand sparks. It will take many more of us to go out and be bold for radical change to happen and to overcome the sense that it can’t be done.

The time to scale is now. We’re into the last decade of the 2030 agenda and we are nowhere near the trillions we will need to achieve it. Blended finance isn’t a silver bullet, it’s a tool, and it’s time we started using it.

JOAN M. LARREA CHIEF EXECUTIVE OFFICER, CONVERGENCE

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