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10 Dec 19

To accelerate the blended finance market, we need more design funding

To accelerate the blended finance market, we need more design funding

In November, Convergence launched two new design funding windows: i) the Indo-Pacific Design Funding Window, initially focused on sustainable and resilient infrastructure, in partnership with the Australian Government, and ii) the Asia Natural Capital Design Funding Window, in partnership with the RS Group. Through both windows, we will deploy grants to support the design of early-stage blended finance transactions that aim to attract private capital at scale to the Asia-Pacific region in the identified focus areas.

Here, we break down what design funding is, and where we see its greatest potential to strategically use grant funding to accelerate the blended finance market and support the launch of transactions that have a demonstration effect for the market.

What is design funding?

While blended finance holds significant potential to crowd in additional capital to achieve the Sustainable Development Goals, these transactions can be complex, time intensive, and highly costly to structure and launch.

Design-stage funding supports transactions that may otherwise be too risky or complex to pursue, by funding activities such as i) feasibility studies (e.g., to assess the investability or bankability of a transaction) or ii) proof of concept (e.g., to complete design and structuring activities to launch a transaction). Design funding is typically provided as traditional grant capital; however, we’ve also seen models that use repayable grants and other innovative mechanisms (e.g., funders have the option to take an equity position at a discounted rate if the transaction closes).

Grant funding in the form of design funding is different from technical assistance, another common form of grant funding for blended finance transactions. Design-stage grants are provided prior to the financial close of a transaction and are specifically aimed at providing funding and early stage support to a team that is designing and structuring the transaction. Meanwhile technical assistance funding can be deployed at different stages of a transaction to support a variety of activities throughout the investment cycle, such as developing pipeline and impact monitoring.

What does design funding look like in practice?

Convergence has captured 68 blended finance deals in our historical deals database that use design funding. These deals represent over $9 billion in aggregate deal flow. Relative to the overall blended finance market, design funding recipients have been more likely to be companies. While companies represent 16% of vehicles in the overall blended finance market, they represent over a third of transactions (34%) that have used design funding. This may be because design-stage grants can provide critical support to early-stage businesses that require seed capital but face challenges finding investors due to higher transaction costs and insufficient returns potential.

To date, design funding has been most commonly provided through grant programs such as Rockefeller’s Zero Gap Portfolio, USAID’s Development Innovation Ventures, and Blue Haven Initiative’s Catalytic Investments fund. We have also seen design funding target specific sectors and vehicles via Challenge Funds, whereby public funding is awarded, on a competitive basis, to innovative solutions developed by the private sector that yield social benefits. For example, the Africa Enterprise Challenge Fund, funded by the UK’s Department for International Development (DFID) along with other public donors, awards early-stage grant funding to private sector companies in the agribusiness, renewable energy, and financial services sectors in select countries across Africa.

Design funding can be a particularly useful tool for supporting the development of blended finance solutions in frontier markets and nascent sectors. For example, our latest Data Brief on design funding in blending for conservation finance finds that conservation projects have been twice as likely to benefit from design-stage grants relative to the overall market. When it comes to conservation finance it can take more time and resources to design finance mechanisms that generate cash flows, establish lawful and equitable land claims, and develop measurable targets. For example, the Land Degradation Neutrality Fund, an impact investment fund dedicated to supporting sustainable land management and land restoration, received initial funding from the Governments of France, Luxembourg, Norway and the Rockefeller Foundation through its Zero Gap Portfolio to build a pipeline of viable investment projects and support the development of appropriate impact metrics.

In addition to frontier markets and nascent sectors, design funding can also be used to bolster the impact of blended finance solutions. For example, design funding has been commonly used to promote gender equality; one-third of blended finance deals that have benefitted from design funding have had a gender focus. Design funding can support gender equality by i) providing support to integrate a gender lens early in the design of a transaction, ii) de-risking the development of a transaction targeted to a critical but underserved or underfunded market, and iii) deepening the impact of a gender-focused transaction by supporting development of additional gender tools.

For example, Women’s World Banking leveraged a design-stage grant from Convergence to develop its Gender Assessment Methodology tool, which will be used to assess gender diversity among the staff and client base of the companies the fund will invest in. Additionally, the Women’s Livelihood Bond, which lends to enterprises focused on empowering women in Southeast Asia, leveraged design-stage grants provided by the Rockefeller Foundation’s Zero Gap Portfolio to support the costs of identifying and conducting due diligence on a strong pipeline of underlying women-led and women-focused social enterprises, thereby improving the investability of the transaction.

Convergence’s design funding program

Convergence’s design funding program is the only funding program exclusively providing design stage grants for innovative blended finance solutions. Since the establishment of the program, Convergence has awarded $6 million in funding to 18 solutions, which have gone on to mobilize over $400 million from public, philanthropic, and private investors.

To date, Convergence has most frequently supported transactions in the clean energy sector (39% of grantees). For example, Convergence partnered with the Development Bank of Southern Africa and the Coalition for Green Capital to support the establishment of the Climate Finance Facility (CFF), which is the developing world’s first “Green Bank”. Here, design funding was used to adapt a proven model in developed markets to an emerging market context. The CFF will be used to scale up private investments in climate-friendly infrastructure projects in the Southern African Development Community region and aims to prove replicability across middle and lower income countries.

Convergence has also provided design grants to prove the investability of sectors that are often grant-funded, such as water and sanitation. In 2018, Convergence awarded Developing World Markets (DWM) a proof-of-concept grant to structure a $100 million Water, Sanitation, and Hygiene (WASH) Note to on-lend to financial institutions and businesses active in the WASH space. Convergence’s grant allowed DWM to complete the design work needed to reach financial close including finalizing the borrower pipeline, vehicle structuring and establishment, investor commitments, and contracting service providers.

Check out our new design windows

To view our full grant portfolio and find out more about our new design windows, including information about our eligibility criteria, evaluation criteria and application process, visit our design funding page.

About the Authors
Ayesha Bery

Ayesha is an Associate supporting Convergence's data and research activities, including developing case studies on blended finance transactions and working with knowledge collaborators in the development finance community. Prior to joining Convergence, Ayesha completed her Masters at the University of Toronto’s Munk School of Global Affairs. While there, her interests focused on the intersection of development and innovative finance, and included an internship at the Centre for Financial Regulation and Inclusion in Cape Town. Previously, she worked as a project consultant for Grand Challenges Canada, where she developed an M&E tool to assess the impact of their innovations one year after completing their Transition to Scale program. Ayesha holds a B.A. from McGill University in International Development Studies and Psychology.

Adhiti Gupta

Adhiti is the Manager of the Market Acceleration & Design Funding team at Convergence. Prior to Convergence, Adhiti advised funds, family offices and foundations making impact investments in developed and emerging markets while working at RPCK, a boutique law firm in New York City. Adhiti has also practiced in India, where she advised on cross-border M&A transactions and private equity/venture capital transactions. Adhiti also counseled social enterprises as a consultant with Accion Microfinance Council and a project manager with Columbia Impact Investing Initiative. Adhiti holds a master’s degree from Columbia Law School, and a law degree from National Law School of India University. She has been awarded the Temasek Foundation Leadership Enrichment and Regional Networking Award by the National University of Singapore.

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