BlueOrchard, with a rich history spanning over two decades, is a leading impact investment manager dedicated to fostering inclusive and climate-smart growth in emerging and frontier countries. Our extensive experience has positioned us as experts in mobilising private capital and adeptly designing, structuring, and managing blended finance mandates. With a portfolio exceeding USD 1 billion in assets under management in blended finance structures, we have continuously evolved and improved our approach in the past decade. In 2018, we published the “Blended Finance 2.0” white paper, drawing on insights from a survey of private sector investors and leveraging on our own extensive experience. This paper articulated our vision of blended finance, placing a strong emphasis on private sector mobilisation and incorporating the key principles that guide our strategies today (see Chart 1).
Chart 1: Main components of BlueOrchard’s “Blended Finance 2.0” concept
Since then, we have launched four additional blended finance strategies, accumulating more than USD 440 million in assets. These strategies have been carefully tailored to address market needs and cater to the preferences of our investors. Through these endeavours, we have gained valuable lessons that have shaped our current approach to “blending”:
1. The importance of partner selection: understanding the role of public funders
Partnering with the right anchor public investor early on is crucial for the success of blended finance structures. While the inception process may vary for each structure, the anchor investor plays a key role in shaping the strategy. In our experience, effective partnerships are those in which the investors and the fund manager engage in an iterative “push and pull” process, leveraging the expertise of both parties to achieve the desired outcomes. Public investors, driven by their mandate to maximise development impact, collaborate with the fund manager to create feasible, scalable, and attractive products for the private sector. Given that the composition and functioning of public organisations can sometimes result in a disconnect between the initial vision and the realities of capital markets, success lies in the manager being able to contribute relevant commercial expertise and industry knowledge to find a middle ground and bridge the gap. The goal is to develop a commercially viable strategy that allows public capital to maximise its catalytic effect.
In any partnership, trust and alignment of interests are essential. The public investor must have confidence in the fund manager and leverage their experience, understanding that impact investing must be commercially attractive and complement other impact-first initiatives. Therefore, open and transparent conversations about the feasibility of a specific strategy are essential. While it may be tempting to agree to all requests initially, delivering on commitments throughout the mandate is what truly matters. Fund managers should prioritise long-term relationships and work transparently with public partners to reach ambitious yet realistic agreements that align expectations.
2. Navigating the challenges of attracting capital: the significance of understanding private investor needs
On the other side of the equation, the success of a blended finance strategy relies on the participation of private investors. It is crucial for industry participants to convey and demonstrate to the private sector that blended finance has the ability to provide market returns alongside its impact, and the design of the structure is key in enabling this. In our white paper, “Blended Finance 2.0”, we noted the importance of involving private investors early in the creation process. However, based on our experience in recent years, we have observed that most private investors prefer to be presented with investment opportunities that are ready-to-go, similar to traditional investment products. As a result, it is crucial to stay connected with existing and target clients, continuously understanding their evolving needs and preferences. This enables fund managers to provide investment opportunities that align with the requirements of investors. As a member of the Schroders Group, BlueOrchard has gained access to additional knowledge and understanding of private-sector investors globally, complementing our existing expertise. By leveraging this in-house knowledge, we have been able to enhance our ability to meet the needs of commercial-minded private investors even more effectively. This synergy has strengthened our position in catering to the needs and requirements of private investors.
In the pursuit of designing market-relevant products, it has become evident that it is almost impossible to please everyone. Investor preferences vary based on many factors, including investor type and regions of operation. For example, emerging market investors may have a higher risk appetite due to their market knowledge, enabling them to perceive risks more accurately. On the other hand, investors such as pension funds often prioritise predictability in returns, while other private investors may seek upside potential in their investments. Additionally, investors place different value on the liquidity of their investments. These diverse preferences, combined with the guidelines and operating scope of each organisation, inform the product design process. However, given the conflictive nature of many preferences, it is key to identify the target audience for a specific strategy, understand their preferences, and plan accordingly.
3. Tailoring blended finance: recognising the need for customised approaches
In the quest to mobilise private capital at scale, many market participants argue that replicability and standardisation are crucial for the growth of blended finance, and we tend to agree with this based on our experience. However, in practice, it is important to acknowledge that achieving complete replicability and standardisation is only feasible and efficient up to a certain extent. Public investors and development finance institutions vary in terms of investment scope and abilities, which subsequently affects the types of strategies and structures they can engage in. Additionally, different impact themes and asset classes have unique requirements and require different approaches. Moreover, blended finance is driven by innovation and finding new ways to mobilise private capital for impact. We have witnessed the emergence of new and innovative vehicles in the market, such as those leveraging guarantees. While it would be ideal to have a convergence of market participants and collective efforts towards shared development goals, it is not realistic to expect a single standardised and replicable design for blended finance vehicles.
Blueprint for capital mobilisation: the BlueOrchard template
Based on our experience, achieving efficient capital mobilisation in blended finance structures requires a combination of replicability and personalisation. Our standard framework serves as a foundation, providing a starting point for design. We then customise this standard framework to align with the specific requirements of each strategy and investment. This customisation process takes into account the preferences and abilities of the anchor investor, as well as the needs of the target private investor group. For example, our typical starting point for a private debt strategy includes a three-tiered structure with shares, periodic target dividends, and a 10-year lifespan. However, this structure can be further modified by incorporating notes or beneficiary units to attract investors who prefer those instruments. Additionally, some of our strategies allow for excess income to be donated to a parallel technical assistance facility or distributed as complementary dividends to specific investors.
While not all structures are identical, they do share substantial similarities that allow for investors to easily grasp the concept and optimise operational efficiency. At the same time, we accommodate certain aspects for personalisation as required. Furthermore, we believe it is relevant for the growth of blended finance and impact investing to strive for structures that closely resemble commercial funds. This approach helps flatten the learning curve and achieve comparability with other offerings in the market.
Conclusion
Blended finance has the potential to become a powerful tool to tackle the most pressing developmental challenges of our times. Blended finance is not only innovative and impactful, but it also has the ability of providing market returns to a wide array of investors. We are dedicated to exploring innovative approaches and maximising the potential of private capital mobilisation for impact. Leveraging our extensive experience in this field, along with the insights of our peers and other market participants, we continuously improve the strategies we bring to market. This enables greater private sector participation in emerging market impact investments.
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Annex
Market size and development: This type of blended financing has increased over the last decade, with Convergence data showing the blended finance market has comprised 84 deals per year on average, amounting to $14.3 billion in annual financing. The aggregate capital committed in blended finance grew from approximately USD 82 billion in 2014 to almost USD 200 billion as of 2023[1]. However, the industry is not yet where we wished it was, with a funding gap of more than USD 4 trillion required to achieve the Sustainable Development Goals by 2030[2]. The current impact investing landscape in emerging markets is still dominated by the public sector[3], but for blended finance to reach its potential we must catalyze private capital at scale. To do so, blended finance structures must be customized to meet the needs and expectations of private investors.
Glossary
Blended Finance: At BlueOrchard blended finance is defined as “Funding by development finance institutions (DFIs), multilateral development banks (MDBs), bilateral governments, and foundations (e.g. endowments and philanthropists) in de-risking instruments (e.g. guarantees, first loss or risk sharing capital, technical assistance and capacity building) to crowd in private capital in frontier and emerging markets in order to accelerate the achievement of the SDGs by scaling-up activities.”
Development finance institutions: As defined by the OECD, development finance institutions are “specialised development banks or subsidiaries set up to support private sector development in developing countries. They are usually majority-owned by national governments and source their capital from national or international development funds or benefit from government guarantees. This ensures their creditworthiness, which enables them to raise large amounts of money on international capital markets and provide financing on very competitive terms.
[1] Data between 2014 and 2022. Convergence.
[2] GIIN (2022).
[3] Investing for Impact: The Global Impact Investing Market 2020 (ifc.org)
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