Social Finance Q&A

Blended Finance Purpose

1. What is the main goal of Blended Finance?

I heard about Blended Finance, but don't know exactly what it aims at. It blends and leverages public resources with private sector engagement. It helps development agencies and foundations to finance the SDGs. It's a strategic approach to use development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets. It enables development finance and philanthropic funds to mobilize private capital.

2. How does Blended Finance differentiate from Impact Investing and Commercial Investing?

I have no idea. Blended Finance, Impact Investing and Commercial Investing are three different approaches that have distinct characteristics but also have overlaps in tackling specific development impact challenges. Blended Finance and Impact Investing are two different investment approaches to fostering impact. Blended Finance is a structuring approach that may include Impact Investments. It's essentially the same.

3. What are the key characteristics of a Blended Finance transaction?

It provides a high leverage ratio of private capital on each public and/or philanthropic dollar. It is additional, i.e. it crowds in private sector investment which wouldn't have been attracted otherwise. It's (a) blended, (b) financial and (c) big transaction. There are three key characteristics of every Blended Finance transaction: positive additionality, positive impact and positive financial return. It creates additionality to the project by effectively crowding in private capital while positively contributing to the SDGs.

Blended Finance Actors

1. Who are the primary actors involved in Blended Finance transactions?

All investors who aim to support the SDGs. Providers of development finance and philanthropic funds, impact investors and commercial investors aiming to engage in emerging and frontier markets. Everyone who wants to provide capital. Private, philanthropic and public providers of capital plus the organizations and enterprises on the ground receiving the capital to implement the development impact project. Capital providers from the public and the private sector.

2. What is THE essential Blended Finance feature that triggers more private capital flow to developing countries?

Providing knowledge to private sector investors. Making transactions bigger so they are more efficient. Making local financial markets function efficiently. Improving the risk-return profile of transactions for private sector capital providers. Mitigating the risks of transactions for private sector investors.

3. How do the motives of public, philanthropic and private sector funders differ?

I don't know exactly, probably in terms of return expectations. Public and philanthropic actors strive to achieve more effective and lasting impact with their funding, while private sector capital providers need to aim either for a pre-defined financial return for a given (or perceived) risk, or less risk for a given expected return. Private sector investors want to reduce their risks. Public and philanthropic funders want to achieve more impact for every dollar provided. They dont't differ, all funders are perfectly aligned in their motives.

Blended Finance Instruments

1. What are the main types of Blended Finance solutions?

Standard grants and guarantees. Only standard grants. Catalytic capital in the form of "smart" guarantees and grants, e.g. redeemable grants. There are many ways for grants, guarantees and concessional capital to add value and catalyze. The main types are (1) structured & layered funds, (2) pay-for-results & market incentives, as well as (3) guarantees & insurances for risk-underwriting. On top come support for ecosystem-building or design & preparation of a project (e.g. Technical Assistance, Investment Readiness). Structured & layered funds as well as pay-for-results & incentive solutions, e.g. Development Impact Bonds.

2. What is the core function of concessional capital in Blended Finance?

I don't know. Concessional debt or equity provide favorable terms relative to market pricing. It can protect other more conservative "senior" investors by taking first losses. As the name says: it's cheap! There are several value adds, but the most important for Blended Finance are (a) a better risk-return ratio for private sector investors and (b) less cost of capital for the transaction.

Blended Finance Obstacle

1. What is the biggest obstacle to increasing Blended Finance activities?

I have no idea. Shaping successful Blended Finance transactions and creating best practice examples. Getting the public and philanthropic actors moving towards more innovative solutions. Understanding the different mindsets of public, philanthropic and private sector funders and overcoming mentality gaps to enable effective collaboration. There is none: it's only in our heads.

2. When NOT to use Blended Finance?

When the project/solution doesn't provide additionality and/or isn't ready to take on investment. When it's too complicated. When it's too expensive. When the project or solution doesn't have a market-based model, isn't scalable, lacks additionality and doesn't provide evidence about its ability to create the intended impact as well as about the potential to become self-sustaining. It's ALWAYS useful!

Blended Finance in Practice

1. How many Blended Finance Deals do you think have been closed worldwide to date?

It depends on who you ask. I don't know, maybe 20? Around 500. Less than 100. More than 750.

2. What would you say is the typical deal size of a Blended Finance transaction?

There is a huge range, but typically the median is around 65 million. More than US$ 100 million. I have no idea. Less than US$ 10 million. Somewhere between US$ 100,000 to 8 billion.