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26 Sep 19

The State of Blended Finance 2019: Reflections from the CEO

The State of Blended Finance 2019: Reflections from the CEO

This week we launched the 3rd edition of our keystone report: The State of Blended Finance 2019, which builds on our previous reports from 2017 and 2018.

The report looks at more than 3,700 financial commitments to over 500 blended finance transactions, with aggregate financing of around $140 billion. Leveraging Convergence data and insights, the report provides an updated analysis of the blended finance market, including intended impact, blending approaches, focus sectors, and target regions. It also highlights the most active organizations in the space, provides an overview of emerging trends and themes in blended finance, and reflects on progress towards ‘better blending’.

What we are seeing is that more organizations than ever before are executing blended finance deals at higher levels of sophistication. Approximately 20% of organizations involved in blended finance are considered ‘active’, because they’ve participated in three or more transactions. Of course, about one-third of these ‘active’ organizations primarily deploy concessional funding and so, by nature, will use blended finance approaches over and over. However, we continue to see a lot of new faces to blended finance, especially from the private sector.

There are more purely commercial participants in blended finance transactions. Over the last five years, impact investors have played a relatively smaller role in blended finance compared to more commercially oriented investors. In 2010, impact investors accounted for 51% of the financial commitments to blended finance transactions from the private sector and now account for only 26% of financial commitments from the private sector (with commercially oriented investors accounting for the other 74%). This suggests that blended finance is indeed creating structures that offer “investable” tiers. Impact investors are still vital, but we can’t expect them to be the whole field or scale is unachievable.

In terms of impact focus, we are seeing more blended finance solutions in areas where the SDG funding gap is largest, such as in infrastructure and climate change. It’s also heartening to see the growing buzz around conservation and sustainable agriculture. For example, we have seen a growing community of practice for blended finance in the agriculture sector, led by SAFIN and OECD. Still, too little is happening in health and education, even when compared to the baseline of private sector investment in these areas, which was low to begin with.

Finally, it’s sobering to see that blended finance is not yet achieving its full potential for achieving development impact and mobilizing additional financing for certain SDG targets. We need to increase blended finance volumes beyond $15 billion annually through scale. The persistence of blended funds suggests, among other things, that funds introduce a transaction efficiency: the work of negotiating a blended structure happens once at the fund-level and the funding goes to individual transactions in pre-blended form from there. To achieve scale among other types of blended finance solutions, we need more shared experience that leads to accepted market practices, which then can reduce time-to-market and the risk of non-closure (i.e., failure to raise sufficient capital).

Ultimately, we hope that this report provides a useful benchmark and checkpoint for blended finance practitioners. We believe that given the high levels of interest in blended finance and the lag time in structuring and closing these transactions, next year’s report will tell a very different story.

Read the report here.

About the Author
Joan M. Larrea

Joan M. Larrea is an expert in catalyzing investment in places that need it most and brings with her over 20 years of experience in emerging markets investing. Joan serves on HRH The Prince of Wales' Sustainable Markets Council, the Global Environment Facility Advisory Group for Non-Grant Instruments, the Impact Canada Initiative Advisory Committee for the Government of Canada’s Privy Council, and the Advisory Council for FinDev Canada. Prior to joining Convergence, she led the U.S. Overseas Private Investment Corporation's (OPIC) efforts to partner with philanthropic and private investors to increase capital flows to OPIC's target markets. While at OPIC, she also directed a pilot program to finance smaller, high impact, and innovative funds, many of which drew on blended finance structures. Before OPIC, Joan served as a managing director on the emerging markets team at Global Environment Fund, an asset manager dedicated to the energy, environmental, and natural resource sectors. She began her career as an investment officer at International Finance Corporation, where she concluded pioneering transactions in a variety of infrastructure and manufacturing sectors across Asia.

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