The State of Blended Finance 2021 - Convergence Blended Finance
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
The State of Blended Finance 2021
Table of Contents
3 Acknowledgements 48 Low Levels of Coordinated Participation
4 Letter From The CEO from Developing Country Governments and
5 Executive Summary Untapped Domestic Resources
50 Lack of Transparency on Blended Finance
Activity Limits Its Scalability
8 Introduction
52 The Ecosystem for Blended Finance is
8 Blended Finance
Underdeveloped
10 About Convergence
11 Report Methodology and Overview 54 Part III: Recommendations
and Guest Perspectives
13 Part I: Data Trends
55 Recommendations
14 Deal Trends 55 Donors should make private sector mobilization
14 Overall Market an essential pillar of their strategy
16 Deal Sizes and Types 59 MDBs and DFIs must put in place strategies
to engage with investors on a radically different
18 Regions and Countries
scale
22 Sectors and Sub-Sectors
64 Local country governments can create an
24 Blending Approaches enabling environment for blended finance by:
26 Investment Instruments and i) Leveraging limited public funding strategically
Target Beneficiaries to attract private investment
28 Sustainable Development Goals ii) Using regional and national MDBs / DFIs as
and Impact Measurement deal originators
iii) Focusing on blended finance projects
32 Investor Trends
for local investors that are appropriately
32 Overall Landscape structured
34 Development Agencies and iv) Establishing domestic institutional investor
Multi-Donor Funds consortia to mobilize local currency financing
36 Multilateral Development Banks and 74 Practitioners should support scale by focusing
Development Finance Institutions on proven and replicable blended finance
39 Impact Investors structures. They should also fund standardized
simplified fund structures and look to launch
41 Commercial Investors
aggregation vehicles.
43 Philanthropic Organizations
78 Convergence advocates for innovation that
is additional to the market yet familiar and
46 Part II: Achieving Scale In The Blended
replicable to investors
Finance Market – Key Challenges
81 All practitioners, but particularly donors, should
47 Lack of a Private Sector Sector Mobilization publicly disclose blended finance data
Strategy and Action Plan
Guest Contributors Acknowledgements
55 The World Needs an Active Capital Mobilization We would like to thank the following
Agenda, By Leslie Marbury and Cameron organizations for their thought
Khosrowshashi, Prosper Africa leadership and written contributions
to this year’s report:
57 How FCDO is Mobilizing Private Finance
into Development Markets at Scale, By Rob • Bamboo Capital Partners
Probyn, Senior Mobilization Advisor, Foreign,
Commonwealth, and Development Office (FCDO) • BlackRock
59 What Multilateral Development Banks Can Do To • Center for Global Development
Mobilize Private Capital At Scale, By Nancy Lee, (CGDEV)
Center for Global Development (CGDEV)
• Foreign, Commonwealth &
61 Insights from IFC’s Blended Concessional
Development Office (FCDO)
Finance Program, Interview with Kruskaia Sierra-
Escalante, International Finance Corporation (IFC) • InfraCredit Nigeria
64 Creating an Enabling Environment for Blended
• International Finance
Finance: How Ghana is using Public Funding to
Corporation (IFC)
Attract the Private Sector, By the Honorable Ken
Ofori-Atta, Ministry of Finance of Ghana • The Kenya Pension Funds
67 A Real Good Deal for Institutional Investors and Investment Consortium (KEPFIC)
Developing Countries, By Michael Awori, Trade
• Ministry of Finance of Ghana
and Development Bank (TDB) Group
69 Mobilizing Local Currency Financing at Scale • Publish What You Fund
Through a Multi-Donor Funded Blended Finance
• Prosper Africa
Facility, By Chinua Azubike, InfraCredit Nigeria
71 Mobilization of Local Currency Financing at • Trade and Development Bank
Scale through Domestic Institutional Investor (TDB Group)
Consortia, By Ngatia Kirungie, The Kenya Pension
• The Lab Climate Policy Initiative
Funds Investment Consortium (KEPFIC)
74 Moving from Ambition to Action: A Call For
Stronger Public And Private Partnerships, By Rael
McNally and Freek Spoorenberg, BlackRock
76 Launching Aggregation Vehicles to Achieve
Scale in Blended Finance, Interview with Florian
Kemmerich, Bamboo Capital Partners
78 Pushing the Boundaries of Blended Finance:
Introduction to The Lab, By Ben Broche, The Lab
Climate Policy Initiative
81 Boosting Transparency On Blended Finance
Transactions to Achieve Scale, By Paul James,
Publish What You Fund
Convergence ©
Published October, 2021
3
Letter From The CEO
This is the 5th edition of Convergence’s flagship report. We’ve come a
long way since we started reporting on the state of blended finance
in 2017. In the last few years, blended finance has grown from a
niche field to a central topic at major conferences and boardrooms
around the world. As it becomes more mainstream, we also hear
more voices talking about blended finance at ever higher levels of
sophistication.
What we are not seeing is the requisite leap into action. Over the
past five years, blended finance flows have averaged around $9
billion per year – steady growth, but not close to the exponential
growth needed. Then in this year’s report, we saw a significant
decrease in flows (~$4.5 billion in 2020, 50% less than in 2019). This
decrease, at a moment where blended finance is on everyone’s lips
and when it is needed more than ever, is alarming.
As we wrote this report, the effects of climate change raged
unabated as floods ravaged Western Europe, catastrophic tropical
cyclones and extreme heat appeared across Africa, and Turkey
experienced its worst-ever wildfire season, all while the ongoing
pandemic exposed our world’s vast inequalities, with developing
countries bearing the economic brunt of the disease and finding
themselves last in line for vaccines.
That’s why this year’s report is focused on scale. It’s time for blended
finance to reach its full potential and meet its promise of attracting
private capital into emerging markets at volumes never seen before.
There are of course some points of light. A few actors stimulated the
field in the last year, and we’ve given some of them a voice in this
report. However, what we need are a thousand sparks. It will take
many more of us to go out and be bold for radical change to happen
and to overcome the sense that it can’t be done.
The time to scale is now. We’re into the last decade of the 2030
agenda and we are nowhere near the trillions we will need to achieve
it. Blended finance isn’t a silver bullet, it’s a tool, and it’s time we
started using it.
JOAN M. LARREA
CHIEF EXECUTIVE OFFICER, CONVERGENCE
4 CONVERGENCE THE STATE OF BLENDED FINANCE 2021
Executive Summary
The Sustainable Development Goals (SDGs) target a
range of development challenges, from combating
Part I: Data Trends
climate change to ending poverty and hunger. To
achieve the SDGs in developing countries, a significant Deal Trends
scale-up of investment is required. Blended finance
is the use of catalytic funding (e.g., grants and Convergence has captured nearly 680 blended
concessional capital) from public and philanthropic finance transactions, representing aggregated
sources to mobilize additional private sector financing of over $160 billion. Key findings from this
investment to realize the SDGs. It is one of several report include:
approaches to financing the SDGs, with the United
• Annual blended finance capital flows have
Nations member countries reaching consensus on
averaged approximately $9 billion since 2015. The
its importance at the Third International Conference
blended finance market has also experienced
on Financing for Development in 2015. Since then,
a steady annual deal count over this period,
blended finance has become a familiar concept for a
averaging 55 closed transactions per year.
diverse set of organizations across the public, private,
Although the number of transactions closed
and philanthropic sectors. At the same time, current
in 2020 follows annual market trends, blended
blended finance flows, averaging around $9 billion
finance flows were significantly lower compared
per year over the past five years, will not achieve the
to historical financing trends (~$4.5 billion in
billions to trillions agenda. For blended finance to
2020, 50% less compared to 2019).
achieve its full potential, blended finance flows must
increase substantially, bolstered by greater and / • Funds continue to represent the largest share of
or more efficient provisions of concessional capital, blended finance transactions, with private equity
combined with significantly more participation from vehicles in particular gaining notable traction
private (and particularly institutional) investors. since 2018. Private equity and venture capital
ecosystems in emerging markets are in turn
In Part I of the report, blended finance data and
driving greater capital flows to more blended
insights compiled by Convergence provide an updated
finance companies.
analysis of the blended finance market, including
blending approaches, sectors, regions, and investor • Sub-Saharan Africa continues to be the most
trends. For the first time, the State of Blended Finance common destination for blended finance flows;
will include a thematic focus on scale, addressed in the region saw a significant uptick in blended
Parts II and III of this report: finance activity in 2020 compared to previous
years.
• Part II highlights key challenges to achieving scale
in the blended finance market. • The agriculture sector has witnessed increased
momentum in the blended finance market
• Part III presents Convergence’s recommendations
from 2018-2020, driven by an increased focus
on achieving scale in the blended finance market,
on agribusiness and climate-smart agriculture.
followed by guidance and perspectives from
Looking forward, Convergence’s live market data
experts in the field (including Development
indicates a growing focus on blended finance in
Agencies, Multilateral Development Banks and
health following the economic fallout from the
Development Finance Institutions (MDBs / DFIs),
COVID-19 pandemic.
and institutional investors) in the form of guest
op-eds. • The number of transactions structured with
1
Note all $ figures are in USD.
5
EXECUTIVE SUMMARY
concessional debt and equity reached a historical total concessional commitments to blended
high in 2020; a possible reflection of heightened transactions.
perceived risk in global investment due to the
• Debt and equity investments are the instruments
pandemic and the resultant need for more
most commonly used by commercial investors,
risk-bearing capital. Conversely, the deployment
MDBs and DFIs, and impact investors.
of guarantee and insurance products remains
limited and continues to make up only a fraction
of concessional capital disbursements by public
institutions. Part II: Achieving Scale
• The blended finance – gender nexus has In The Blended Finance
not yet achieved mainstream momentum.
However, the launch of several gender- Market – Key Challenges
intentional and innovative structures in recent
years demonstrates an established interest In Part II of this report, Convergence discusses four
among private investors and blended finance key challenges to achieving scale in blended finance:
practitioners alike for investment opportunities
• Lack of a private sector mobilization strategy
with an incorporated gender lens.
and action plan: Blended finance is one tool in
the development toolbox centered on increasing
Investor Trends the quantum of financing to SDG projects.
Donors are the main source of the catalytic
According to Convergence’s database, over 5300 funding that creates the market-equivalent
financial commitments have been made to blended investments that mobilize private investment,
transactions to date. This report identifies over 1450 but they have not prioritized and budgeted
unique organizations across the public, private, private sector mobilization as a necessity to
and philanthropic sectors that have made financial significantly narrow the SDG financing gap.
commitments to at least one blended transaction to
date. Key findings on investor trends include: • Low levels of coordinated participation
from developing country governments and
• The use of blended finance as a tool by investors untapped domestic resources: Representation
remains limited, with most organizations tending from developing country governments and
to participate in blended finance on a one-off expertise from regional development banks
basis; a minority of organizations have made and institutional investors is crucial to scaling
multiple commitments to blended transactions. blended finance. Domestic institutional capital
remains largely untapped when it comes to
• MDBs and DFIs have consistently been the most
financing SDG investments.
prominent investor group in blended finance by
both the number of commitments made and the • Lack of transparency on blended finance
value of their aggregate financing. activity limits its scalability: Concessional
capital providers do not publicly disclose
• While development agencies, foundations,
financial terms or ex-post development
and NGOs account for smaller proportions of
outcomes, limiting the evidence base for
total commitments to blended transactions,
blended finance as a development tool, while
they account for outsized proportions of
private investors do not disclose data on
6 CONVERGENCE THE STATE OF BLENDED FINANCE 2021
financial performance due to confidentiality Recommendations
concerns. Together, this hinders blended finance
from scaling. 1. Donors should make private sector mobilization
an essential pillar of their strategy
• The ecosystem for blended finance is
underdeveloped: There is a lack of financial 2. MDBs and DFIs must put in place strategies to
intermediation in the blended finance market, engage with investors on a radically different
and for addressing the SDG investment gap scale
more generally. On the one hand, donors and
3. Host country governments can create an
investors are looking to channel large amounts
enabling environment for blended finance by:
of capital towards market opportunities aligned
with the SDGs. Yet, SDG projects are often small, 3.1 Leveraging limited public funding
and there are few intermediaries in the market strategically to attract private investment
equipped to channel these flows. Even when
blended finance can successfully aggregate 3.2 Using regional and national MDBs / DFIs as
pools of cross-border investment, there are deal originators
few intermediaries that can channel these flows
3.3 Focusing on blended finance projects
effectively.
for local investors that are appropriately
structured
Part III: Achieving 3.4 Using domestic institutional investor
consortia to mobilize local currency
Scale In The Blended financing
Finance Market – 4. Practitioners should support scale by focusing
on proven and replicable blended finance
Recommendations & structures. They should also fund standardized
simplified fund structures and look to launch
Guest Op-Eds aggregation vehicles.
In Part III of this report, Convergence presents its 5. Convergence advocates for innovation that
recommendations for achieving scale in blended is additional to the market yet familiar and
finance, followed by perspectives and insights from replicable to investors
key industry stakeholders through guest op-eds
6. All practitioners, but particularly donors, should
and interviews:
publicly disclose blended finance data at the
transaction level
7
Introduction
Blended Finance
To achieve the SDGs, a significant scale-up of This is evidenced by the UN member countries’
investment is required. The UN estimates that the consensus on the importance of deploying
annual funding needed to achieve the SDGs by public funds to attract private investment at the
2030 is nearly $3.9 trillion, much greater than the Third International Conference on Financing for
estimated current SDG-focused funding of $1.4 Development in 2015 in Addis Ababa. Convergence
trillion from domestic and international sources. was established out of the Addis Ababa Action
The $2.5 trillion gap greatly exceeds official Agenda to build the blended finance market to
development flows and philanthropic commitments: attract significantly higher amounts of private
the Organization for Economic Cooperation and capital to the SDGs. Since then, blended finance
Development (OECD) reports that total official has become a familiar concept across a diverse set
development assistance (ODA) from the 30 OECD of stakeholders – from development agencies to
Development Assistance Committee (DAC) members private foundations, impact investors to commercial
reached an all-time high of $161.2 billion in 2020, banks.
while Development Initiatives estimates that
Blended finance is the use of catalytic capital from
private development assistance (e.g., development
public or philanthropic sources to increase private
assistance from non-public sources like foundations,
sector investment in developing countries to realize
corporations, and NGOs) is around $45 billion.2
the SDGs. Blended finance allows organizations
The shortfall in financing for the SDGs has been with different objectives to invest alongside each
exacerbated by the onset of the COVID-19 pandemic other while achieving their own objectives (whether
and its impact on the economies of developing financial return, social impact, or a blend of both).
countries. With the global economic downturn The main investment barriers for private investors
having a disproportionate impact on low-income addressed by blended finance are (i) high perceived
and emerging economies, the OECD’s latest Global and real risk and (ii) poor returns for the risk relative
Outlook on Financing for Sustainable Development to comparable investments. Blended finance creates
projected that developing countries could face an investable opportunities in developing countries,
additional shortfall of $1.7 trillion in financing in which leads to more development impact.
2020, as a result of additional pandemic-related
Blended finance is a structuring approach. It is
financing needs and a drop in external private
not an investment approach, instrument, or end
resources. Adding to the existing annual financing
solution. Figure 1 highlights four common blended
gap of $2.5 trillion this would result in a possible
finance structures:
annual SDG financing gap of $4.2 trillion.
i. Public or philanthropic investors provide funds
Blended finance is one critically important approach
on below-market terms within the capital
to mobilize new sources of capital for the SDGs.
2
Development Initiatives. (2016). Private development assistance: key facts and global estimates. Bristol: Development Initiatives. August 15, 2016.
Accessed August 8, 2019. http://devinit.org/post/private-development-assistance-key-facts-and-global-estimates/
8 CONVERGENCE THE STATE OF BLENDED FINANCE 2020
structure to lower the overall cost of capital or iii. The transaction is associated with a grant-
to provide an additional layer of protection to funded technical assistance facility that can be
private investors utilized pre- or post-investment to strengthen
commercial viability and developmental impact
ii. Public or philanthropic investors provide credit
enhancement through guarantees or insurance iv. Transaction design or preparation is grant
on below-market terms funded (including project preparation or design-
stage grants)
FIGURE 1 TYPICAL BLENDED FINANCE MECHANICS AND STRUCTURES
Example Structures
Structure
Private equity or debt funds with
Market-rate Senior debt or equity
concessional public or philanthropic funding
Private attracting institutional investment First-loss guarantee
Capital
Bond or note issuances, often for infrastructure Structure
projects, with guarantees or insurance from Debt
Blended public or philanthropic funders Guarantee
Equity
Mobilizing Finance
Structures Grant funding from public or philanthropic Structure
funders to build capacity of investments to Debt
TA
Development achieve expected financial and social return Equity
facility
Funding
(Public &
philanthropic Concessional Grant funding from public or philanthropic Structure
funders) funders to design or structure projects to Debt
attract institutional investment Grant Equity
Concessional capital and guarantees or risk the viability of the endeavor and improve impact
insurance are used by the public or philanthropic measurement.
sector to create an investment opportunity with
acceptable risk-return profiles for the private sector It is important to note that blended finance can
by (i) de-risking the investment or (ii) improving only address a subset of SDG targets that are
the risk-return profile to bring it in line with the investable. According to analysis conducted by the
market for capital. Concessional funding includes Sustainable Development Solutions Network (SDSN,
scenarios where the public or philanthropic funder a global initiative of the UN), approximately half the
takes a higher risk profile for the same or lower funding required to achieve the SDGs in developing
rate of return or the same risk profile for a lower countries can be in the form of investment. For
rate of return. Design-stage grants are not direct example, blended finance is highly aligned with goals
investments in the capital structure but improve a such as Goal 8 (Decent Work and Economic Growth)
transaction’s probability of achieving bankability and and Goal 13 (Climate Action), while less aligned with
financial close; similarly, technical assistance funds SDGs such as Goal 16 (Peace, Justice and Strong
operate outside the capital structure to enhance Institutions).
9
INTRODUCTION
FIGURE 2 ALIGNMENT BETWEEN BLENDED FINANCE TRANSACTIONS AND THE SDGS (2018-20)
17: Partnerships for the Goals 100%
8: Decent Work & Economic Growth 63%
9: Industry, Innovation & Infrastructure 55%
1: No Poverty 32%
7: Affordable & Clean Energy 32%
2: Zero Hunger 24%
10: Reduced Inequalities 24%
5: Gender Equality 21%
13: Climate Action 16%
12: Responsible Consumption & Production 13%
11: Sustainable Cities 10%
3: Good Health & Well-Being 8%
6: Clean Water & Sanitation 6%
4: Quality Education 4%
15: Life on Land 3%
14: Life Below Water 2%
16: Peace, Justice & Strong Institutions 1%
About Convergence
Convergence is the global network for blended Investment Bank (EIB), Rabobank, Old Mutual,
finance. Convergence generates blended finance and World Wildlife Fund (WWF). We create
data, intelligence, and deal flow to increase private many opportunities for Convergence members
sector investment in developing countries and to connect, including through networking
sustainable development. Convergence works to events, capacity building sessions, access to
make the SDGs investable through transaction and our fundraising deal platform, and member-
market building activities: exclusive content and support.
• A Global Network: We have a global • Data and Intelligence: We curate and produce
membership of over 200 public, private, and original content that builds the evidence base
philanthropic organizations like the European for blended finance and supports practitioners
10 CONVERGENCE THE STATE OF BLENDED FINANCE 2021in their efforts to execute blended transactions, independent evaluator to the United Nations
including (i) data on deals and investors, (ii) case Joint SDG Fund for operationalizing the Call
studies, intelligence briefs, and market reports, on SDG Financing Component 2: Catalyzing
(iii) workshops and trainings, and (iv) webinars. Strategic Investments. So far $41 million has
been awarded in funding to UN country teams
• Deal Flow: We have built a fundraising deal to design financial structures to catalyze
platform for investors and those seeking capital additional investment for the SDGs, based on
to connect. As of September 2021, there are live Convergence’s recommendations.
opportunities seeking to raise over $6 billion,
representing over $11 billion in aggregate deal Convergence focuses exclusively on blended finance
value. All deals are screened by our team to to catalyze private investment. Other important
ensure fit within our mandate. stakeholders and initiatives, such as the DFI
Working Group on Blended Concessional Finance
• Market Acceleration: Our Design Funding for Private Sector Projects (DFI Working Group)
program offers grants for the design of focus on a broader scope of blended finance that
innovative blended finance vehicles that aim to includes the use of development funding to mobilize
attract private capital at scale. As of September commercially oriented public capital (e.g., capital
2021, grantees have raised over $800 million from MDBs and DFIs). Convergence works closely
of additional capital – that’s more than a 100x with the OECD, DFI Working Group, and other key
multiple on the over $7 million Convergence stakeholders to coordinate blended finance activity.
has awarded. Convergence also acts as the sole
Report Methodology and Overview
The State of Blended Finance is Convergence’s Convergence curates and maintains the largest
annual report on blended finance trends, and most detailed database of historical blended
opportunities, and challenges. It builds upon the finance transactions to help build the evidence
inaugural report released in July 2017.3 The State base for blended finance. Given the current state of
of Blended Finance 2021 provides an updated information reporting and sharing, it is not possible
analysis of the blended finance market based on for this database to be fully comprehensive, but it is
Convergence’s continuous data and intelligence the best repository globally to understand blended
collection efforts and outlines key blended finance’s scale and trends. Convergence continues
finance trends and developments in the past year. to build out this database to draw better insights
The report includes input from Convergence’s about the market and disseminates this information
200 member institutions and other key market to the development and finance communities to
participants. improve the efficiency and effectiveness of blended
3
The State of Blended Finance 2017 was jointly produced by Convergence and the Business and Sustainable Development Commission’s Blended Finance
Taskforce (BFT). The purpose of the working paper was twofold: (i) to expand the evidence base around the potential of blended finance to help close
the SDG funding gap and (ii) to inform the recommendations the BFT intended to deliver to unlock systemic barriers in the blended finance ecosystem
that were preventing the flow of mainstream capital into blended finance transactions at scale. Based on the work of Convergence and others, the BFT
produced an Action Programme in early 2018.
11INTRODUCTION
finance to achieve the SDGs. This year, Convergence 3. The transaction aims to create development
also leverages in-house data from its proprietary impact related to the SDGs in developing
fundraising deal database to provide a forecast on countries
emerging trends in the market. All data in this report
Defining Scale: This report includes a thematic focus
reflects Convergence’s data collection efforts as of
on scale in the blended finance market. Convergence
September 2021.
uses ‘scale’ to refer to the crowding-in of significant
Information is collected from i) credible public volumes of financing towards the SDGs, particularly
sources such as press releases, ii) information private sector financing. Institutional investors have
sharing agreements with key data aggregators like significant assets under management (AUM) and
the OECD, and iii) data validation exercises with prefer larger deal sizes to avoid the high relative
Convergence members and partners. To be included transaction costs associated with many smaller
in Convergence’s database, a deal must meet three deals, They generally prefer larger investment sizes
main criteria: ($10 – 15 million) and for their investment to be no
larger than 20% of the overall transaction size. This
1. The transaction attracts financial participation means that to achieve scale in blended finance,
from one or more private sector investor(s) there is a need for more transactions that are at
2. The transaction uses catalytic funds in one or least $100 million in size, which can be achieved by
more of the following ways: pooling developing country assets within portfolio
approaches.
• Public or philanthropic investors provide
concessional capital, bearing risk at below Additionally, standardization plays a critical role in
market returns to mobilize private investment, scaling by reducing incremental transaction costs and
or provide guarantees or other risk mitigation simplifying structures for the benefit of institutional
instruments investors. Finally, the replication of well-proven
solutions, including in new geographies or sectors, is
• Transaction design or preparation is grant also an important pathway to scale.
funded
• Transaction is associated with a technical
assistance facility (e.g., for pre- or post-
investment capacity building)
12 CONVERGENCE THE STATE OF BLENDED FINANCE 2021Part I
Data
Trends
13DEAL TRENDS
Deal Trends
Overall Market
FIGURE 3 OVERALL BLENDED FINANCE MARKET (2010 TO SEPTEMBER 2021)
$14
$12
$10
USD billions
$8
$6 71
$4
$2
36 33 44 45 54 55 53 63 58 53 54 18
$0
2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018 2 019 2 02 0 2 021
Total Transaction Count (Closed) Transactions Currently Fundraising Aggregate Financing
This report surveys nearly 680 closed blended global flows of foreign direct investment (FDI) fell
finance transactions, capturing over 5300 individual by one-third to $1 trillion, well below the low point
investments disbursed by over 1450 unique reached after the global financial crisis a decade
investors. To date, aggregate blended finance flows ago. While the contraction was more acutely felt in
have totaled just over $160 billion, with annual developed economies, the International Monetary
capital flows averaging approximately $9 billion Fund (IMF) predicts that the FDI slump will be
since 2015. The blended finance market has more prolonged in emerging markets. Although
experienced a steady annual deal count over this the number of blended transactions closed in
period, averaging 55 closed transactions per year. 2020 follows annual market trends, blended
The preliminary transactions count for blended finance flows were significantly lower compared to
deals launched in the first half of 2021 is 18. historical financing trends (~$4.5 billion in 2020,
50% less compared to 2019). This trend could be
Like the rest of the global financial system, the due to several factors, including donors and private
blended finance market was impacted by the investors pivoting to protect and provide pandemic-
unprecedented effects of the COVID-19 pandemic. related relief to their existing programs and
The World Investment Report (WIR) 2021 found that portfolios. For many, this has diverted resources
14 CONVERGENCE THE STATE OF BLENDED FINANCE 2021away from funding new opportunities. According under 1% of total ODA. This compares to 2.2% in
to the WIR, the number of greenfield projects 2019, and 1.7% in 2018. Our analysis finds similar
launched in 2020 fell by about 42% in developing conclusions, revealing that public concessional
countries. In addition, it is likely that fund managers funding channeled towards blended finance
and deal sponsors have postponed or reduced transactions was less than 50% of volumes in 2019
target fundraises for 2020, choosing instead to ($0.7 billion in 2020, compared to $1.3 billion in 2019).
hold a smaller close with the aim of renewing
With the Decade of Action already upon us, coupled
fundraising efforts once markets have stabilized
with the real and long-term impacts of COVID-19
and investor appetite has resumed. This might
on global development, blended finance actors
explain why Convergence has captured a similar
must do more to scale up financing. The provision
number of transactions, but overall financing flows
of concessional finance has remained relatively
are lower. Indeed, the median overall deal size
unchanged year-on-year, including both ODA and
for blended transactions in 2020 was $30 million,
other concessional funding types (including non-
compared to $49.5 million in 2019, and $77.7 million
ODA donor funding and philanthropic capital).
in 2018, respectively. Other factors could include
Concessional finance must be used more efficiently
an increased perception of risk associated with
to mobilize private capital at scale. As expected,
emerging markets in light of the pandemic, as well
private sector financing towards blended finance
as logistical barriers due to travel restrictions.
transactions was lower than previous years,
While preliminary figures from the Organisation for representing $1.1 billion, compared to $2.2 billion in
Economic Co-operation and Development (OECD) 2019. Current levels of blended capital flows will not
show that Official Development Assistance (ODA) reach the “billions to trillions” in financing needed to
flows increased to their highest level on record in achieve the SDGs by 2030. Part II and III of this report
2020 ($161.2 billion), these donor capital flows were will reveal the top challenges to scaling blended
mostly directed in the form of traditional aid. For finance, as identified by Convergence, followed by
example, in 2021, $1.3 billion of ODA was reported recommendations from leading stakeholders in the
as Private Sector Instruments (PSI), representing market.
FIGURE 4 SOURCES OF BLENDED FINANCE FLOWS 4
$20
$15
USD billions
$10
$5
$0
2015 2016 2017 2018 2019 2020
ODA Concessional (Non-ODA) Commercial (Private) Commercial (Public)
4
ODA levels here are estimated based on provision of public concessional funding in the database that qualify as ODA instruments. Public concessional funding
refers to non-ODA amounts (e.g., instruments such as guarantees and concessional funding provided by non-DAC members or philanthropic sources).
15DEAL TRENDS
The effects of the pandemic on blended finance one outside investor. Convergence is currently
are clear when examining Convergence’s database tracking 71 deals in its fundraising deal pipeline,
of blended finance vehicles currently fundraising representing over $8 billion in aggregate blended
(“fundraising deals”). As with the previous edition capital. Of the 55 fundraising deals captured in last
of the State of Blended Finance, this year’s report year’s report, 21% successfully closed in 2020 (30%
encompasses Convergence’s in-house knowledge of of which targeted Latin America and the Caribbean).
blended transactions raising capital. This includes If this fundraising trajectory continues, Convergence
both deals that have reached an interim financial expects to capture only ~33 deals in 2021, a marked
close and continue to raise successive funding drop from the annual average of ~55 transactions.
rounds, and newly launched blended structures Further trends in fundraising transactions will be
that are in advanced discussions with more than explored below.
Deal Sizes and Types
Convergence’s database identifies six blended Private equity funds in particular have gained
transaction types: (i) bonds / notes; (ii) companies momentum. In 2020, 47% of all blended funds
(i.e., businesses as direct recipients of blended recorded were private equity vehicles, compared to
financing); (iii) facilities5; (iv) funds (i.e., debt and 36% in 2018 (defined here as funds with primarily
equity funds and funds-of-funds); (v) impact bonds equity-based investment strategies). Recent research
(including development impact bonds and social from the African Private Equity and Venture Capital
impact incentive bonds (DIBs and SIINCs)); and (vi) Association (AVCA) for example, shows that sustained
projects. Funds continue to be the most common macroeconomic growth in Sub-Saharan Africa over
blended structure, comprising 35% of all transactions the last two decades has catalyzed an enabling
in 2020. Convergence has previously highlighted entrepreneurial ecosystem and is contributing to
the advantages of funds when it comes to achieving greater demand for equity financing among small- and
scale in blended finance: funds reduce investor medium-sized enterprises (SMEs). Blended vehicles
risk exposure via diversification and are a familiar are a part of the wider ongoing transformation of
investment structure for private investors. Funds FDI in developing countries to better meet these
also exhibit larger transaction sizes compared to the capital needs. Recent examples include the Novastar
market, thereby providing investment ticket sizes Ventures Africa Fund II (NVAF II), a private equity
sought by large-scale institutional investors. Between fund that leveraged concessional commitments from
2018-20, the median blended fund size was ~$94 million public investors, including DFIs such as FMO and the
(compared to the market average of $50 million). Given European Investment Bank (EIB), to unlock over $90
these advantages, Convergence anticipates that funds million in private sector financing for start-up and
will continue to be the dominant structure within the early-stage businesses in East Africa.
blended finance market; our fundraising data shows
that 65% of the vehicles seeking blended capital are
funds, with a median size of $100 million.
5
Convergence defines a blended facility as an earmarked allocation of public development resources (including funding sometimes provided by
philanthropic sources) combined with private capital at the vehicle-level, for deployment towards a specific recipient or intervention. This also includes
risk-sharing facilities, or bilateral transactions, typically between donor or public entities and financial intermediaries, where the concessional capital helps
mitigate potential losses on underlying loans originated by the financial institution. A notable example of a blended facility is the CRAFT Project, a $500
million blended structure that is comprised of two region-specific sub-facilities investing in climate change adaptation and resilience technologies.
16 CONVERGENCE THE STATE OF BLENDED FINANCE 2021Convergence also observes an increase in the number in 2020 vs. 32% of transactions between 2015-17).
of blended companies and corporates. The proportion The COVID-19 pandemic has exacerbated many
of company-level blended transactions captured of the challenges inherent in project finance, such
by Convergence has steadily grown in recent years, as prolonged and complex fundraises and under-
representing over 37% of deals in 2020 (compared financed pre-investment project preparation. In fact,
to 11% between 2015-17). Also, the median size of only 16% of the fundraising project transactions
company transactions doubled in 2018-20 compared captured in last year’s report reached financial close
to 2015-17 (~$20 million in 2018-20 vs. ~$10 million in 2020. Looking forward, project developers in
in 2015-17). We note a positive correlation between developing countries will also have to contend with
the growth of company transactions and the growth growing public and private debt levels and the risk of
of the agriculture sector in blended finance: 40% of sovereign credit downgrades, all of which will increase
all blended companies in 2019 and 2020 operated their cost of capital.
in the agriculture sector. Notable examples include
In last year’s report, Convergence noted the increased
Sistema.bio, a Mexico-based social enterprise that
prevalence of blended bonds / notes in recent years
sells biogas digesters to smallholder farmers, which
(particularly in 2018), including corporate issuances
break down animal waste into a source of renewable
energy. Since its establishment in 2010, Sistema.bio and green bonds. However, we have yet to see
has maintained a blended capital structure, attracting sustained growth in 2019 and 2020, with 2020 data
grants, concessional debt and equity, and private showing only 6% of blended transactions in the form
investments, to achieve international scale, including of bonds / notes. This might signal that fewer bonds
completing a bridge financing round in 2020. / notes in emerging markets require concessional
component(s) to attract private sector interest. For
Blended projects, the blended structure with the example, recent findings from the International
largest median transaction size, have grown in size Finance Corporation (IFC) reveal that investor
in recent years (median size of $130 million between appetites for green bonds in emerging markets were
2018-20, up from ~$107 million between 2015-17). resilient in the face of the economic turmoil caused
However, they have declined by proportion of total by the pandemic; in fact, the number of issuances
transaction count since 2018 (19% of total transactions increased by 21% from 2019.
FIGURE 5 PROPORTION OF CLOSED TRANSACTIONS BY VEHICLE TYPE FIGURE 6 PROPORTION OF CLOSED
TRANSACTIONS FUNDRAISING
2015-17 2018 2019 2020
BY VEHICLE TYPE
39%
37% 37% Impact
35%
Bond
32%
7%
Percent of transactions
Project
22% 11%
21%
19% 19% 19% Fund
16% 16% 62% Bond
2%
11% 11%
Company
8% 8% 8% 7%
6% 6% 14%
4% 4%
Facility
0% 4%
Bond Company Facility Fund Impact Project
Bond
17DEAL TRENDS
Regions and Countries
Sub-Saharan Africa South Asia and East Asia
Sub-Saharan Africa has historically represented and Pacific
the largest proportion of blended finance activity As Convergence has previously noted, Asia has
by region, on a transaction count basis, if not a emerged as an increasingly important destination
dollar value basis. This trend has continued in for blended capital. In 2020, Asia (i.e., East Asia and
recent years. Almost two-thirds (61%) of blended the Pacific and South Asia) accounted for 36% of
finance transactions in 2020 targeted Sub-Saharan blended transactions. Examining the data further
Africa (SSA), a significant increase compared to reveals an uptick in both funds (8% of regional
previous years. Convergence believes this trend transactions in 2018 vs. 33% in 2020) and companies
will likely persist, given that 45% of the fundraising (increasing from 18% of regional transactions
transactions captured by Convergence are in 2018 to 28% in 2020). The data aligns closely
targeting the region, in part or in full. In line with with the results from the OECD’s 2020 Funds and
market-wide trends, blended raises for companies Facilities Survey, which found that 36% of blended
and corporates in the region have increased in vehicles had a geographic focus that included Asia.
frequency in recent years (27% in 2018 to 40% Looking forward, the mid- to long-term effects of
in 2020), with a noticeable inclination towards the pandemic will likely have large implications
agribusinesses; between 2018-20, an average of 27% for the evolution of blended finance in the region
of company-level deals in SSA involved financing
given its growing prominence. The WIR noted that
enterprises across the agriculture value chain. by the end of 2020, FDI inflows in Southeast Asia,
Likewise, we also see company-level transactions
typically a driver of continental economic growth,
in the region making up a larger portion of deals in had contracted by 25% - only Latin America and the
the energy sector than in the past (58% of energy Caribbean experienced a more severe contraction
deals in SSA in 2020 were company transactions, (45% reduction in FDI inflows in 2020). While
up 30% from 2018). This coincides with a decline in investment levels in South Asia were buoyed by
the frequency of project transactions in the region, a strong merger and acquisition market in India,
which have dropped from 18% of 2018 transactions uncertainties surrounding the outlook for the
to only 9% in 2020. As the emergence of venture pandemic could lead to a reversal in the market.
capital in SSA orients blended finance more towards
The ripple effect of slowed export-driven industries
direct investments in start-ups and early-stage in the region, particularly manufacturing, is likely to
private businesses, this could result in smaller be felt in the blended finance market in the years to
transactions sizes in the region relative to the overall come.
market. In recent years, SSA-focused transactions
had a median size of ~$40 million, declining from
~$60 million between 2015-17.
18 CONVERGENCE THE STATE OF BLENDED FINANCE 2021Latin America and the Caribbean practitioners; 15% of our fundraising deals target
the region. However, given the sharp effects of the
Convergence noted in last year’s report that 35% pandemic on Latin American and island economies,
of transactions in its fundraising pipeline had it will be particularly interesting to monitor how
investment mandates focused on Latin America blended finance proponents navigate the new
and the Caribbean (LAC), signaling renewed interest market conditions. Our analysis of the LAC region
in the region. Nearly 50% of these deals reached is caveated by the fact that there is limited publicly
financial close in 2020, resulting in an increase in available information compared to other regions,
market activity in the region compared to previous with an outsized proportion of data sourced from a
years (17% of transactions targeted LAC in 2020). few multilateral banks such as IDB.
LAC remains an area of interest for blended finance
FIGURE 7 PROPORTION OF CLOSED TRANSACTIONS BY REGION FIGURE 8 PROPORTION
OF TRANSACTIONS CURRENTLY
2015-17 2018 2019 2020
FUNDRAISING BY REGION
61%
48%
44% Sub-Saharan Africa
Percent of transactions
45%
38% 20% Global
15% Latin America and the Caribbean
22% 21%
19% 19% 14% South Asia
17% 15% 17%
16% 14% 16%
11% 11% 11% 13% 13% East Asia and Pacific
7% 6% 8% 6%
4% 4%
2% 3% 6% Middle East and North Africa
East Europe Global Latin Middle South Sub-
Asia and and America East and Asia Saharan
Pacific Central and the North Africa
Asia Caribbean Africa
Country Recipients historical trends. As noted in last year’s report,
this can be attributed to a number of factors,
Kenya continues to be the most frequent recipient including an enabling policy framework for private
country of blended capital in recent years (32 sector investment and a range of geographical and
transactions between 2018-2020), in line with logistical advantages.
19DEAL TRENDS
FIGURE 9 TOP COUNTRIES FOR BLENDED FINANCE, BY NUMBER OF TRANSACTIONS (2018-20)
Kenya India Uganda Nigeria Tanzania South Vietnam
32 18 18 16 13 Africa 10
11
Ghana Indonesia Ethiopia Myanmar
15 11 9 8
As noted previously, there has been an uptick in launched in 2020 to support Indonesia’s healthcare
blended finance activity in countries in the East Asia sector in response to the COVID-19 pandemic.
and Pacific region; especially in Vietnam, Myanmar The Fund, which achieved first close in 2021, is
and Indonesia. Since 2018, all three countries supported by several public investors, including the
have been targeted by 30% or more of blended United States Agency for International Development
transactions, and all are present in the top ten (USAID), the United States International Development
league table over that timespan (with 8, 11, and 10 Finance Corporation (DFC), and the Australian
transactions, respectively). Notable transactions Department of Foreign Affairs and Trade (DFAT), as
include Bayfront Infrastructure Capital’s $455 well as private investors. However, with investments
million warehousing facility, a securitization program in Myanmar paused as a result of the civil unrest in
bundling infrastructure loans originated in Vietnam the country, we expect that blended finance activity
and Indonesia, backed by a guarantee from the in this country will not be sustained at current rates.
Singapore Ministry of Finance. Other examples
include the Indonesia Resilience Fund (IRF),
FIGURE 10 TOP COUNTRIES FOR BLENDED FINANCE: PROPORTION OF DEALS BY TARGET COUNTRY LAUNCHED BETWEEM 2018-2020
Myanmar 44%
Vietnam 43%
Indonesia 30%
South Africa 29%
Kenya 29%
Nigeria 25%
Ghana 25%
Uganda 24%
Philippines 22%
India 21%
Tanzania 21%
Cote d’Ivoire 20%
20 CONVERGENCE THE STATE OF BLENDED FINANCE 2021The participation of special purpose financial In recent years, the proportion of blended
intermediaries like GuarantCo and InfraCo Asia transactions that target at least one least-developed
(both subsidiaries of the PIDG Group of companies) country (LDC) has also declined, representing 32%
are common in transactions in Vietnam, Myanmar, of deals between 2018-20. Challenges arise when
and Indonesia, signaling their role in growing the applying blended finance in LDC contexts, in part due
presence of blended finance in new markets. One to the relative scarcity of both concessional capital
such example is the financing of Kacific Broadband and appetite from commercial investors. Findings
Satellites International, a provider of high-speed from the OECD and UNCDF reinforce this narrative,
broadband internet to clients in East Asia and the revealing that only 7.5% of financing mobilized by
Pacific Islands. GuarantCo extended a $50 million blended finance in 2018 was directed towards LDCs.
partial, credit-enhancing guarantee to Kacific, Convergence believes that traditional ODA has a key
enabling it to secure a $222 million senior debt role to play in LDCs and vulnerable states, where
facility, co-financed by the Asian Development Bank support for basic needs and key sectors (i.e., health)
(ADB) and a European institutional investor. is a top priority. Convergence advocates for small
allocations of ODA to be deployed to blended finance
transactions, where there are opportunities for
Income Level LDCs to attract private investment. This can also be
Lower-middle income countries continue to achieved using portfolio approaches, whereby higher
receive the bulk of blended capital flows in recent risk investments can be aggregated alongside lower
years; 62% between 2018-20. Conversely, blended risk investments in middle income countries, thereby
investments in low-income countries have decreased offsetting risks through diversification.
proportionally, representing 24% of total aggregate
financing in 2018-20, compared to 32% between
2015-17.
FIGURE 11 PROPORTION OF CLOSED TRANSACTIONS BY RECIPIENT COUNTRY INCOME LEVEL
80% Proportion (2015-17) Proportion (2018-20)
Percent of transactions
60%
62%
58%
40%
42%
32% 32%
20% 24% 21% 22%
4% 4%
0%
Low Income Lower-Middle Upper-Middle High Income LDCs
Income Income
21DEAL TRENDS
Sectors and Sub-Sectors
Agriculture and Energy more commonplace in the portfolios of many
institutional investor types, especially for assets based
In line with early signals from last year’s report, in middle-income countries. This market evolution and
blended finance in the agriculture sector has risen. growing track record may be reducing the need for risk
Agriculture focused transactions comprised 28% mitigation and credit enhancement in larger renewable
of 2020 deals, compared to 16% between 2015- energy deals, thus diminishing the need for blended
17. Investment into agribusinesses is driving these finance in the sector.
growing capital flows, especially in firms focused on
agricultural inputs (accounting for 55% of agriculture
deals since 2018). Recent analysis by Convergence Financial Services
also highlighted that the agriculture value chain
Deals in the financial services sector have exhibited a
is experiencing increased pressure to improve
similar graduation effect to those in the energy sector.
sustainability and become more responsive to the
Financial services transactions have made up a steady
effects of climate change, thereby fueling the demand
proportion of the overall market since 2018, averaging
for capital.
about 25% of transactions between 2018-20, yet total
Despite the increase in deal count, the median size of financing flows mobilized to the sector have been
agriculture transactions launched between 2018-20 in decline (~$45 million median deal size between
fell to ~$30 million, ~$5 million lower than the median 2018-20 vs. ~$71 million between 2015-17), suggesting
transaction size between 2015-17. This is consistent a reduced need to use blended finance to mobilize
with blended finance trends generally, as median private capital flows to more traditional opportunities
deal sizes fell across the board between 2018-20 (the in the sector, such as investing via financial institutions.
median deal size across all sectors fell, on average, Instead, Convergence’s database shows that smaller-
by ~$40 million compared to 2015-17). The energy sized transactions focused on expanding financial
sector, which remains the most active sector for inclusion are a rapidly growing segment of the
blended finance, witnessed a decrease in median sector, with many taking the form of direct financing
deal size to $63 million between 2018-20, from $110 to microfinance institutions or small businesses
million between 2015-17. While this is partially due to a providing specialized financial services and products
decline in aggregate blended financing in the past year, to specific groups. For example, Babban Gona, a social
this is also reflective of the uptake of new renewable enterprise that seeks to improve access to credit and
energy asset types, such as off-grid energy systems insurance products for smallholder farmers in Nigeria,
and mini-hydroelectric dams, which tend to be smaller raised ~$30 million in financing from public, private,
in size. One example here includes the $39.4 million and philanthropic sources, supported by a technical
Xoxocotla solar plant, a 70MW facility in Mexico that assistance package from USAID.
closed in 2020, and attracted $8.3 million in senior
debt financing from the Japanese commercial bank,
Mitsubishi UFJ Financial Group, following concessional
Health and Education
support from two donor capital pools, the Canadian 2020 saw modest increases in the application of
Climate Fund for the Private Sector in the Americas blended finance in the social finance sectors (health
and the China Fund for the Co-financing of the and education). This includes, for example, blended
Americas. Renewable energy assets are becoming structures launched to support the healthcare sector
22 CONVERGENCE THE STATE OF BLENDED FINANCE 2021in response to the COVID-19 pandemic, including the structures typically required in health and education
aforementioned Indonesia Resilience Fund. Other financing (like Development Impact Bonds (DIBs) and
examples include BlueOrchard’s COVID-19 Emerging Social Impact Bonds (SIBs)). This is reinforced by our
and Frontier Markets MSME Support Fund, which fundraising data: while education and health deals
achieved a second close of $200 million, backed by a made up 18% and 19% of the fundraising pipeline
range of public investors, including IDB Invest, CDC, respectively last year, just 10% of deals targeting
DFC, the Japan International Cooperation Agency either sector secured a financial close in 2020. With
(JICA), as well as private investors. The Fund is also ~20% of health and education-focused transactions
accompanied by a technical assistance facility. in our current fundraising pipeline structured as
As noted in previous reports, blended finance is DIBs or SIBs, Convergence believes that alternative
less deployed in the health and education sectors blended structures, including health focused funds
given the less obvious financial returns pathways like the TEAMFund, could more rapidly scale the
for commercial investors and a prevailing view that outcomes already achieved by impact bonds and
health and education delivery are the domain of boost capital flows to these sectors. The TEAMFund
public entities. Restricted FDI flows in 2020 also combines a for-profit fund structure, backed by medtech
likely capped the growth experienced in the two players and pharmaceutical multinationals, with a
sectors, as private investors were less willing to philanthropic, concessional pool of capital, funded in
invest in less commercial sectors, particularly given part by the fund sponsor, to deliver capital to health
the innovative and resource intensive transaction companies focused on non-communicable diseases.
FIGURE 12 PROPORTION OF CLOSED TRANSACTIONS BY SECTOR
40% 37% 2015-17 2018 2019 2020
35%
33%
Percent of transactions
30% 28% 28% 28%
25% 26%
23%
21%
20% 19% 18% 17%
16% 15% 12%
11% 9%
10% 7% 8%
4% 5% 5% 4% 5% 4%
2% 2%
1% 0% 1%
0%
Agriculture Education Energy Financial General Health Housing and Industry Infrastructure
Services Real Estate and Trade
FIGURE 13 PROPORTION OF TRANSACTIONS CURRENTLY FUNDRAISING BY SECTOR
32% Energy
27% Financial Services
23% Agriculture
20% General
18% Health
17% Education
10% Infrastructure
8% Housing And Real Estate
8% Industry And Trade
23You can also read
