Last week, Convergence and the DFID Impact Programme co-hosted a webinar to share findings from our latest report, How to Mobilize Private Investment at Scale in Blended Finance. The webinar focused on key takeaways based on conversations with over 20 private investors for building a more efficient and effective blended finance market. The online event brought forward perspectives from Credit Suisse, The GIIN, and Moody’s Investor Service. Here’s a snapshot of the key findings and recommendations shared during the webinar and insights from our guest speakers to advance the market.
Convergence maintains that with only 10 years left to achieve the SDGs, current blended finance flows (~US$15 billion annually) will not be sufficient in mobilizing the “billions to trillions” needed to meet the SDG financing gap by 2030. The development community must move beyond rhetoric to mobilize private investment at scale.
So, what do private investors recommend to scale the blended finance market?
Portfolio approaches are preferred to stand-alone projects: Private investors report that portfolio approaches are more effective for three key reasons: i) only a small number of stand-alone projects are large enough, ii) diversification across projects reduces risk for investors, and iii) development organizations have a long project approval cycle – portfolio approaches provide larger investment sizes, therefore reducing the relatively high transaction costs.
As highlighted during our panel discussion, the “bespoke” nature of projects can be a challenge for financial institutions like Credit Suisse when investing in blended finance products. Financing collective structures (such as a fund) that can invest in a number of projects provide a solution to the challenges associated with standalone projects.
Standardized investments should be pursued aggressively: Consistently, private investors express greater need for more simplified and standardized investment assets. Investors recommend development organizations shift away from creating new innovative solutions towards scaling up and refining existing solutions. In addition, blended finance practitioners should focus on creating more assets that are investment-grade (rated or implied) and are publicly traded.
To this end, DFID has partnered with the London Stock Exchange (LSE) in an effort to increase the number of assets in emerging markets, particularly from Africa, that are listed on the LSE. This is a positive signal for scaling institutional investment into emerging markets and will address a number of barriers faced by private investors, by: i) increasing liquidity, ii) providing greater transparency, and iii) building a track record for assets in emerging markets.
Moody’s report on blended finance in emerging countries explores how more standardized investment structures such as securitizations, which use a portfolio approach, have allowed for scale while diversifying assets for private investors. In 2018 the AfDB carried out a synthetic securitization of a portion of its private loan portfolio, totaling $1 billion, allowing institutional investors to gain access to a new asset class. By introducing multiple tranches including a first-loss tier retained by AfDB, Room2Run was able to achieve an A rating on its senior tranche. Such structures demonstrate how blended finance can better attract private investors and achieve investment grade ratings.
The gap between development organizations and private investors needs to be narrowed: Private investors are a diverse group, sharing vastly different motivations and constraints when it comes to achieving the SDGs in developing countries. While they are increasingly allocating their capital to a range of different investment strategies with beyond financial returns, including Responsible Investment, Sustainable Finance, ESG Investing, and Impact Investing, private investors cannot sacrifice financial returns. Likewise, the landscape of development organizations allocating concessional capital is fragmented, making it challenging for private investors to know the priorities, investment processes and types of capital provided by donors. To achieve its full potential, blended finance practitioners should align structures with investment strategies already being pursued by the private sector. To do this, better communication and a deeper understanding is needed between the donor community and private investors.
Convergence and DFID have recently established a Scale Working Group, convening over 16 donors in an effort to better coordinate activities across the development community and focus on financing scale blended finance initiatives. Recently, the GIIN has also created a Knowledge Hub, with the goal of convening quarterly meetings with its members around specific themes, including blended finance and gender. Such efforts will support better communication across donors and investors and provide some much-needed coordination in the market.