We recently launched the State of Blended Finance 2019, the third edition of our keystone report first published in 2017. The report uses Convergence data and insights to provide an updated analysis on the blended finance market. Many developments have taken place over the past year – here are a few highlights from the report:
1. Blended finance is scaling in new regions, with Asia as the new frontier
Blended finance is gaining momentum in new geographies, with Asia at the forefront. While blended finance has historically been concentrated on Sub-Saharan Africa, we have seen this decline proportionally in recent years; 44% of transactions in 2010-2012 targeted Sub-Saharan Africa, while only 37% did in 2016-2018. Meanwhile, the proportion of blended finance transactions targeting Asia – including both East Asia and the Pacific and South Asia – has increased, rising from 27% of transactions in 2010-2012 to 31% of transactions in 2016-2018. What’s more, we have also seen increasing blended finance activity within Asia; while India has been the most frequently targeted country to date (~ 50% of transactions in the region), nearly all of the blended finance transactions launched in the past two years have targeted countries beyond India. This trend demonstrates the increasing versatility of blended finance in new regions and countries.
2. Blended finance vehicles are diversifying, but we need greater standardization
Funds have continued to account for the largest share of blended finance transactions in our database (representing between 44% to 50% of blended finance transactions from 2010-2018), which suggests these vehicles have achieved efficiency and scale, particularly with the private sector. We have also seen increasing diversification across transaction types in recent years, notably in projects (increasing from 20% to 28% of transactions between 2010-2018), and facilities (increasing from 6% to 14% of transactions between 2010-2018). However, to improve the potential of these vehicles to mobilize private sector financing, we need greater standardization of market practices, which will reduce time-to-market and the risk of non-closure (i.e., failure to raise sufficient capital).
3. Concessional capital providers are becoming increasingly sophisticated in approaches and instruments
Concessional debt or equity and guarantees or risk insurance have been the most common type of catalytic capital used in blended finance vehicles in recent years. Concessional debt or equity has been used in two-thirds (67%) of transactions between 2016-2018, while guarantees or risk insurance have been used in more than a third (38%) of blended finance transactions over the same time period. This includes transactions that have used one or both types of blending approaches. Meanwhile, the use of grants has decreased, which reflects increasing sophistication from concessional capital providers who are looking to move beyond traditional instruments to more strategic approaches and practices. We anticipate this will have a positive impact on blended finance and offers great potential to crowd-in more private sector financing to address the Sustainable Development Goals.
4. Energy and financial services still dominate, but there is growing momentum in new sectors
To date, blended finance has most frequently and consistently targeted energy and financial services, with energy alone accounting for nearly half (44%) of blended finance transactions between 2016-2018. However, Convergence anticipates growing momentum in new sectors, with concessional capital providers playing a critical role in leading blended finance towards higher impact projects and countries. So far, this momentum has been most notable in the agriculture sector. For example, nearly 40% of fundraising transactions listed on Convergence’s online match-making platform have been focused, in part or full, on the agriculture sector. With concessional capital providers at the forefront, we hope to see blended finance play a greater role in high impact sectors such as health, as well as in lower-income countries.
5. Blended finance is ultimately targeting low-income populations, albeit indirectly
The majority (68%) of blended finance transactions captured in Convergence’s report ultimately aim to reach low-income populations and/or base of the pyramid consumers (BOP). However, these populations are primarily targeted indirectly ¬– only 8% of blended finance transactions have sought to directly serve these individuals. Rather, blended finance transactions have most commonly (47%) targeted entrepreneurs and small businesses, who in turn serve BOP populations as their primary target market. This suggests that blended finance is a reasonable approach for enabling greater access to goods and services among low-income populations.