The Danish state and IFU (The Danish Investment Fund for Developing Countries) established the Danish Climate Investment Fund (KIF) in 2012 to attract institutional capital to investments in low-carbon and climate-resilient projects in developing countries. KIF aims to support the achievement of the goals of the Copenhagen Accord.
KIF represents a best-practice example of utilizing blended finance—specifically a preferred return structure—to attract institutional investors to sustainable development investments. Under KIF’s unique preferred return structure, institutional investors receive preferential upside of up to 6% per annum, without exposing public money to disproportionate downside losses.
KIF presents several insights useful for others looking to create or invest in similar structures:
- Open and regular communication between government and public pension funds builds trust and common language;
- A collaborative design process is critical to understanding investors’ requirements and ensuring the capital structure is catalytic;
- In blended finance, public investors often deploy instruments to reduce private investor risk; however, leveraging public money to alter the return profile is also a smart approach to attracting private capital; and
- A deeply networked and experienced general partner–such as a development finance institution–is critical to attracting institutional capital to invest in markets where they do not have experience.