Every August, philanthropic funders, development agencies, development banks, NGOs and implementing agencies gather in Stockholm for World Water Week – the leading conference on global water issues. More than ever, blended finance became a key topic in sessions this year. Convergence participated in a panel on water-related investments and economic development, focusing on mobilizing capital.
Based on last week’s experience, I’ve provided three observations and reflections on how best to advance blended finance solutions in the water, sanitation and hygiene (WASH) sector:
1. Private investors and fund managers take the stage
This year, many sessions featured certain types of speakers that used to be rare at World Water Week – asset managers like Incofin Investment Management and Actiam. For many water practitioners, their remarks presented a great opportunity to understand basic principles of finance. For example, when asked whether Actiam would sometimes choose social and environmental impact over financial returns, Theo Brouwers reminded participants that due to Actiam’s fiduciary responsibility, he does not have the ability to choose. It was encouraging to see this exchange of opinions between those dealing mostly with grant funding and those involved in equity and debt transactions. The central foundation of blended finance is that it brings together funders and investors with very different risk-return expectations. Therefore, gaining a better understanding of the spectrum of risk-return and impact appetites, as participants at this session did, will help accelerate deal structuring.
2. Funders emphasize data sharing to increase efficiencies
Public and private water and sanitation service providers collect a range of operational data and key performance indicators. But suppose each new funder and investor asks for a different set of data. In that case, service providers are burdened with (baseline) assessment after assessment, adding unnecessary costs to an already low-margin business.
Stockholm showed that there is hope. First, technology platforms can help streamline the type of data requested. Factor(e) Venture Studio, a global venture builder with funding from the Stone Family Foundation, is working on a platform that allows water service providers to upload a standard set of key performance indicators that funders use for due diligence and monitoring. Modeled after Odyssey, an end-to-end investment and asset management platform for distributed infrastructure, this platform focuses on off-grid solar projects; CrossBoundary Energy is one Convergence member that uses it. Such platforms, adapted to the water and sanitation sector, can ease impact asset managers’ entry into the sector since they won’t need to put together their own excel files with different metrics. Such platforms can also accelerate innovative finance solutions like results-based financing and revenue-based loans. (Compared to fixed-interest loans, revenue-based loans require a detailed set of enterprise-level data because the amount due for repayment is calculated based on the revenue in a given period.)
Second, funders in the water and sanitation sector are increasingly coordinating among themselves. Take the WASH Funders group, for example. What began as a small group of U.S. and UK-based foundations that decided to share their grant and investment pipeline and their due diligence questions has now evolved into a forum of over 20 organizations that meet regularly and share strategies, portfolios and pipeline data. This sort of referral system from one funder to the next eases and streamlines the due diligence process, which is good news for individual enterprises and sponsors of blended deals seeking grants and investments.
3. Blended finance is gaining interest, but the road ahead may be bumpy
Because the world is off track to achieving Sustainable Development Goal 6, organizations are doubling down efforts to mobilize private investment. Stockholm World Water Week saw participation from several new blended finance initiatives, including the Sanitation and Hygiene Fund, managed out of UNOPS, the India WASH Fund, being developed by Intellecap with support from USAID Invest, and the International Blended Water Investment Fund for Africa, developed by UNDP in collaboration with UNICEF, Global Water Partnership (GWP) Africa, and the Development Bank of Southern Africa (DBSA).
While the prospect of mobilizing private investment is exciting, it is important to be realistic about what can be achieved within our own organizations:
Not every organization needs a dedicated investment arm.
True, The Nature Conservancy founded NatureVest, and WaterEquity spun out of water.org. But before you emulate this model, think about other ways to realize your private finance mobilization goals. Maybe, partnering with a specialized fund manager is a better way to complement your water-related expertise. For example, Danone Communities partnered with Incofin Investment Management, a Convergence member, to set up the Water Access Acceleration Fund, and UNCDF partnered with Bamboo Capital Partners to set up the BUILD Fund, a blended finance vehicle that seeks to capitalize small businesses in the world’s least developed countries. Or perhaps your organization’s expertise is best used to improve the enabling environment that facilitates investments. For instance, stand-alone Technical Assistance programs such as USAID’s WASH-FIN program are at the heart of mobilizing private investment – even though they don’t make any debt/equity investments themselves.
Blended transactions on average need several years to reach first close.
If you have decided that setting up a blended fund or facility is your path forward, understand that these transactions don’t happen overnight. Even with the support of an entity that brings the necessary financial expertise to the table, setting up the vehicle and aligning the different actors in your transaction will take time. According to a survey Convergence conducted among the grantees of our Design Funding program, 74% percent indicated that the design and structuring process has taken longer than expected. For example, in 2017, Convergence and the Canadian government awarded Clarmondial a proof-of-concept grant to develop and launch The Food Securities Fund, an open-ended private credit investment fund focused on sustainable agriculture. In 2021, the fund launched with a USD 15 million investment from the Global Environment Facility and support from the Sall Family Foundation, the U.S. International Development Finance Corporation (DFC), and others. Since blended transactions are still new to many funders and investors, you may spend longer than planned negotiating the terms. You may also end up pursuing a more complicated structure than planned, for example, one with a multitude of share classes and several investment vehicles: As WaterEquity described in one session, to build their track record, they included certain investors even though it required yet another tweak to their capital stack. In short, budget your resources wisely, and expect a bumpy road.
The rich and abundant conversation around blended finance at World Water Week 2022 showed us that there is a real appetite for it in the WASH sector. This appetite is only expected to grow as more people realize that traditional funding sources will be inadequate to meet our water goals. As more WASH-focused organizations turn to blended finance, Convergence is here to support you. You can leverage Convergence’s knowledge products, videos, trainings, and member network to learn about blended finance and learn from those blended transactions that have successfully reached financial close.