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02 Feb 21

How can blended finance mobilize institutional investors at scale?

How can blended finance mobilize institutional investors at scale?

If blended finance is to advance from mobilizing “billions to billions” to “billions to trillions” to achieve the global sustainable development goals (SDGs), institutional investments must occur at scale in developing countries. Blended finance is arguably more important than ever. With institutional investors likelier to focus on their home markets due to the impact of the COVID-19 pandemic, Convergence believes blended finance will serve as an important tool in showcasing investable opportunities and providing the protections that can draw institutional investors into EMs at scale.

Convergence’s latest Data Brief explores how institutional investors have participated in blended finance to date, and presents insights drawn from interviews with key industry stakeholders. Given that pension funds and insurance companies often participate in blended finance through asset management firms that are either directly affiliated with them (e.g., AXA Investment Managers), or that simply manage funds on their behalf, an ‘institutional investor’ refers to an organization tagged in Convergence’s database as (i) a commercial investor, and (ii) either a pension fund, an insurance company, an asset manager, an investment manager, an investment fund / facility, or a family office. According to the Convergence database, this investor group has made 295 commitments to 150 blended transactions to date, representing aggregate committed financing of USD 4.6 billion.

Here are some takeaways from the Brief:

Institutional investors participate most commonly through funds, target larger and global transactions, and go where risk protection is most available

61% of institutional-backed transactions are made through funds vs 41% of all transactions. Convergence has long argued that standardized portfolio approaches, which tend to offer larger ticket sizes, are key for achieving scale. Unsurprisingly, institutional-backed transactions often fall within larger size brackets compared to the overall market (e.g., 21% vs 18% for USD 50-100 million; 21% vs 19% for USD 100-250 million; 9% vs 5% for USD 1 billion+), often with a global focus (22% vs 14%). When assessing the participation of institutional investors, institutional-backed transactions largely mirror the wider market by targeted sector (e.g., Financial Services – 34% of institutional-backed transactions, Energy – 23%, and General – 21%) and region (e.g., sub-Saharan Africa – 46%), indicating that blended finance has been successful in drawing institutional capital to the areas where risk protection is most available.

Blended Finance Transactions by Target Regions

Concessional debt / equity and technical assistance are the most common blending archetypes in institutional-backed transactions

73% of institutional-backed transactions have used concessional debt or equity, vs 68% of all transactions. Institutional-backed transactions are also likelier to have used technical assistance (41% vs 34%). Meanwhile, institutional investors have most often committed equity to blended transactions (66% of institutional commitments to blended transactions), which compares to 63% for corporates and 82% for private equity / venture capital firms. However, commitments drop dramatically to 13% for financial institutions, for whom debt is a much more prominent instrument (84% of their commitments to blended transactions).

Launching simplified blended funds with adequate risk-protection features will be key to mobilizing institutional capital at scale

As noted in the State of Blended Finance 2020, institutional investors seek familiar, simple and replicable structures that are comparable to other investment opportunities, and gravitate towards scalable opportunities with a global focus. With donor capital often not having mandates flexible enough to provide first-loss layers for scalable funds, Convergence argues that blended finance practitioners must get creative in finding the simple and replicable risk-protection features (e.g., liquidity features enabling the early redemption of portions of investor capital) that can mobilize institutional capital at scale.

Convergence is a non-profit dedicated to building and accelerating the blended finance market, with a global membership community of philanthropic, public, and private investors and sponsors of transactions and funds. As a member, you receive access to a wide range of proprietary blended finance data and market intelligence, including our Data Briefs, that benchmark blended finance trends, good practices, and opportunities to ultimately unlock additional SDG financing in emerging and frontier markets. Interested in gaining access to our Data Briefs? Sign-up for membership.

About the Author
Andrew Apampa, CFA

As a Manager, Andrew is responsible for developing Convergence’s data and research activities, including building out Convergence’s database of historical blended finance transactions and developing blended finance trends analysis and benchmarks. Prior to joining Convergence, Andrew worked at the African Private Equity & Venture Capital Association (AVCA) as a Research Associate. While there, Andrew inaugurated the Special Report series, publishing in-depth studies on thematic issues within African private equity, such as political and currency risk in African PE, and the rise of the private credit industry in Africa. Prior to joining AVCA, Andrew worked at HSBC as an Emerging Markets Equity Strategist, where he published reports focused on investing in frontier equity markets. During his time at HSBC, he also worked on the European Equity Strategy team and the Global Research Marketing team. Prior to his time at HSBC, Andrew was at the University of Cambridge, where he completed his master’s thesis on protest and mobilization in Sub-Saharan Africa. He is a CFA charterholder.

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