Impact Finance Bulletin: Who floats, who sinks in the blended finance storm
Laura Joffre introduces this month's digest of impact investing news and analysis.
In a storm, whales will be fine but little fish will be in serious trouble. I doubt this is totally accurate in the natural world (although a quick Google search suggests I'm not far off), but it seems that this is what is going to happen in the world of blended finance.
Let’s explain. Blended finance is a type of impact investment where concessional capital (which accepts lower returns or higher risk than a conventional investment, sometimes grants), usually from government-backed or philanthropic sources, is used to attract private capital in investment deals, usually targeting the SDGs.
The market has been growing steadily over the years, but it is now facing an – almost existential – hurdle: the development aid cuts that governments around the world are currently implementing, starting with the US and its dismantling of USAID. The problem is that most of the concessional capital used in blended finance deals comes from international development aid – and less catalytic capital means less blended finance. Brace yourselves, warns global network Convergence.
Not all blended finance deals will be affected to the same extent. Recent years have seen the emergence of “whale deals” – blended finance transactions topping US$1bn. Those tend to require less catalytic capital as a proportion of the overall transaction, because they typically invest in established sectors like energy and infrastructure. This lower risk perception also attracts more easily private investors, such as pension funds, which are independent of government and generally resilient in crises. Altogether, it means those whale deals are pretty sheltered from the current storm of aid cuts.
- Read more: Blended finance market should brace for impact of development aid cuts – Convergence warning
Things are very different for smaller and high-impact investments, pioneering by their nature, which are seen as more risky by investors: those require a higher share of concessional capital to go ahead, and co-investors are often government-backed development finance institutions or multilateral banks. In the face of aid cuts, many of those will no longer go ahead, predicts Convergence.
So what do we do? Development finance institutions say they have to be strategic about the financial instruments they use to make the most of smaller amounts of money (I know, I also wondered, were they not already doing that?). Philanthropists are keen to step up, but they won’t be able to fill the gaps left by, for example, USAID, whose catalytic role was much more than just providing the finance.
Blended finance might have to reinvent itself, starting with blended fund managers actively seeking to diversify sources of catalytic capital so they’re no longer so exposed to government policy changes. Impact investors are a mixed community of capital providers – more of them could get involved in blended finance, but to attract their interest, blended transactions need to be structured in ways that work for different types of investors, not just public-backed aid agencies or development finance institutions.
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This month's top stories:
Blended finance market should brace for impact of development aid cuts – Convergence warning
New Arab Impact Network aims to push MENA impact investment beyond 2% of global market
How to unlock VCs’ full impact potential
Top image: Freepik.
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