This September, Convergence, Din4mo, and Invest Social co-hosted Brazil’s first blended finance seminar in São Paulo. The event was attended by over 200 individuals from the private, public, and philanthropic sectors, including organizations like Boticario Group Foundation, Grupo Gaia, ICE (Instituto de Cidadania Empresarial), and IFC.
There’s great potential for blended finance to help narrow the SDG financing gap in Brazil, and as the largest economy in Latin America, the building blocks for a strong blended finance ecosystem are there, including local funders, investors, intermediaries, and entrepreneurs, not to mention well developed capital markets. So, what does blended finance in Brazil look like today, especially in comparison to the Latin America & the Caribbean (LAC) region as a whole?
According to Convergence’s database of nearly 500 blended finance transactions, 85 transactions have targeted LAC to date, representing over $13 billion in aggregate financing. These transactions have primarily (74%) launched after 2010, with nearly a third of transactions (28%) launched during or after 2015.
As stated in Convergence’s recently published State of Blended Finance 2019 report, the LAC region accounted for 13% of all blended finance transactions in 2016-2018. While this has declined proportionally from 19% of transactions in 2010-2012, the median transaction size has increased considerably, rising from $23 million in 2010 to $63 million in 2018. Further, we have seen larger leverage ratios (more dollars of commercial capital mobilized per dollar of concessional capital) in LAC than in any other region, standing at 5.1x.
There is room for greater blended finance activity in Brazil
Based on Convergence’s data, blended finance in Brazil is still in its early stages. While Brazil has the largest economy in LAC –representing between 30% and 40% of the region’s economy – only nine blended finance transactions in the country have been captured in Convergence’s database to date. In contrast, we have identified 32, 20, and 19 transactions for Mexico, Peru, and Colombia, respectively. While this variance is notable, this indicates there are probably additional transactions that have not been captured yet.
The philanthropic sector as market builder
Interestingly, transactions targeting LAC have most commonly been led by the philanthropic sector (37% of transactions), making them notably more active in the region than they are globally (11% of transactions). In line with this trend, a recurring conversation in Brazil was around the need for foundations, which are already playing a big role in the impact ecosystem, to become blended finance leaders and support market building.
How do they blend?
Convergence identifies four common financial instruments used in blended finance: 1) concessional debt or equity, 2) guarantees or risk insurance, 3) technical assistance, and 4) design-stage grants. Concessional debt or equity has been the most commonly used instrument in LAC (80% of transactions use concessional debt or equity, compared to 66% for the overall market). This is particularly true in Brazil, where 100% of transactions have used concessional debt or equity. While guarantees or risk insurance have been used relatively less in transactions targeting LAC compared to the overall market, this has increased over time, rising from 17% in 2011-2014 to 29% in 2015-2018.
The way forward
There is reason to be optimistic. Transactions such as Albion Capital’s Green FIDC, a green receivables fund which will build on a specific type of special purpose vehicle (SPV) available within the Brazilian legal framework specifically used for securitizations, and Din4mo’s Programa Vivenda, Brazil’s first social impact debenture supporting the renovation of low-income housing, are a step in the right direction.
For blended finance to scale in Brazil, local blended finance champions and leaders who can build the market will need to continue to emerge. Further, there is potential to replicate transactions that have worked in different jurisdictions in Brazil. Considering the current state of the market, it will be increasingly important for ecosystem builders and intermediaries, like Convergence, Din4mo, and others, to guide and support like-minded organizations.
There is clearly immense potential in Brazil for blended finance to mobilize significantly more capital into the sectors and regions where it is needed most to achieve the SDGs by 2030, and given how well developed its ecosystem already is, Brazil is well positioned to catch up to its LAC peers and become a blended finance leader in the region over the coming years.