It’s 2022 and COVID-19 continues to ravage populations and disrupt economies worldwide. The annual Sustainable Development Goal funding gap has increased from $2.5 trillion to $4.2 trillion. And we are no closer to reaching our global climate goals.
We need the deep pockets of private investors in order to get even remotely close to solving these problems. And we need public and philanthropic players to work strategically to attract private investors to co-invest in blended finance deals.
But how do these different investors find each other or identify specific opportunities?
Several impact investing and blended finance deal matchmaking platforms were launched a few years ago that aimed to address that – Convergence’s included.
Convergence’s platform, launched in 2017 to bring investors together on blended finance deals, is one of the few deal matchmaking platforms still standing. More than 150 deals have been posted on the platform, around 30% of which have raised financial commitments after being listed. The deals that reached financial close represent about $4 billion of commitments.
As it’s more urgent than ever to bring investors together to put money into deals that support sustainable development, we have reflected on the key challenges we’ve faced and are sharing lessons learned from operating such a platform, while also learning from those who came before us. Here are five takeaways:
1. Platforms must be led by a neutral, trustworthy, market observer with an established reputation. It requires time and runway for an organization to position itself in the market as a credible and trusted network. Convergence has managed to build credibility with those seeking to get involved in blended finance through the breadth of what we do, including data aggregation, capacity building, grant making and market building. The role we play as a deal facilitator works only because it is informed by everything else we do.
2. Business models matter. When it comes to longevity, financial sustainability cannot be ignored. The question of whether to pursue a fully fee-based model, operate as a non-profit reliant on donor funding, or take a hybrid approach gives rise to the inherent tension that impact platforms face. Should they be a trusted network that investors who have paid to be there turn to habitually for pipeline? Or should they be funded by a third party and be open, inclusive and accessible to all new and interested participants?
These two issues are mutually exclusive. The fee-based model is more attractive to investors for the exclusivity it offers. After all, investing is a relationship business where an investor’s deal sourcing function is often its ‘secret sauce’ and justification for its own fees. The challenge is that accessing a deal platform is not yet a typical part of an investor’s comprehensive origination process, making fully fee-based revenue models difficult to pull off.
The free-and-open model is more attractive to donors, for reasons of equity. But without any curation of dealflow or vetting of participants, it will draw little investor interest.
Convergence uses a hybrid funding approach paired with a tightly curated deal platform. We charge a single membership fee for the entirety of our offerings, of which the platform is one component. The fee creates discipline: Members who pay will make greater use of the services, and it forces Convergence to be responsive to the needs of the field to keep members on board. We pair that revenue stream with donor funding that supports our overall business model, including its many public-good elements.
3. There is no such thing as passive matchmaking. Successful platforms require either large volumes of data and activity where meaningful, statistically significant behavior patterns persist, or they require human intervention and a deep grasp of users’ needs and interests. Investors can’t be expected to just log on and find each other.
A niche market like blended finance does not have a high volume of standardized, fast-closing transactions generating big data. So, Convergence adopts a high-touch, relationship manager approach where we work closely with both supply and demand-side stakeholders – that is, capital providers, to understand the types of capital they are able to deploy, and capital seekers, to get a good grip on their capital needs and blended finance approach.
We also aim to bolster the use of our platform by connecting it to our convening and capacity building work, reinforcing an active matching approach.
4. Regulatory and compliance regimes for deal platforms in most jurisdictions are complex and time consuming to navigate. Matchmaking tends to trigger regulatory issues even if the party leading it intends it as a public good. This can come as a surprise to the platform’s host. Legal advice to gain approvals to operate be costly and strain mission-oriented organizations, as can the associated internal protocols necessary to adhere to regulatory rules and restrictions.
5. Skepticism of platforms persists. There is a strong stigma attached to listing a deal on a platform to connect with potential investors or accessing a platform to identify opportunities. Behavior change and greater incentives for capital providers to transparently engage on platforms are required to attract widespread buy-in and increase uptake across sectors.
Where do we go from here?
The decision to develop and build a matchmaking platform of any kind should not be taken lightly. Such platforms require significant capacity and should be integrated into and informed by other pieces of an organization’s activities. However, in our case, operating a platform has ultimately helped us gain a deeper understanding of the true challenges and barriers that stand between us and the blended finance market’s ability to reach scale.
Looking at our data going back to the 1990s, only about 50 investors have made 15 or more financial commitments to blended deals. This high concentration of activity among a few organizations, along with the lack of a deliberate approach from catalytic capital providers to attract and mobilize private capital at scale, signal that the key challenges holding blended finance back are structural in nature and will require a hands on, strategic approach from the most critical stakeholders in blended finance.
If we are going to achieve the Sustainable Development Goals or meet the 1.5-degree-Celsius global warming target, we must all become more transparent, willing to collaborate with new players, and be open minded about new ways to do business and identify opportunities. If anything has become clear to us while operating our deal matchmaking platform, it’s that no single organization alone can build and create a well-functioning market.