Taking a ‘blended’ approach to development finance has been on the rise since 2008. Following the financial crisis and the resulting sudden lack of liquidity and risk aversion for many investors from the private sector, the impact investment industry needed to find another way of continuing to fund activities. Many of BlueOrchard’s managed funds are made up of a blended finance structure, making it one of our core areas of expertise. Our blended finance approach focuses across a number of key impact themes, including financial inclusion, education finance, female empowerment, and climate action.
At BlueOrchard, we believe that partnerships between the public and private sectors are key in allowing investors to leverage each other’s expertise, reaching markets, and achieving scale that simply wouldn’t be possible otherwise. In today’s challenging environment, it is now more relevant than ever to consider blended finance as a tool that can unlock more commercial capital with a purpose. Indeed, BlueOrchard has seen blended finance initiatives working at their best when used in response to unexpected market challenges – we expect that in the coming years we will look back at the Covid-19 pandemic as one of those scenarios.
We see many of these themes in ’The State of Blended Finance 2019’, a report written by Convergence, the global network for Blended Finance. The report presents a factual and informative picture of the blended finance landscape, its developments, and future trends. It highlights a world dominated by funds as the most used investment instrument in blended finance, with Development Finance Institutions (DFIs) and Multilateral Development Banks (MDBs) the most frequent investors. In most cases, these investors, together with other public or philanthropic institutions, provide funds on below-market terms in the form of ’concessional’ debt or equity, in order to provide an additional layer of protection for private investors.
Most recent blended finance funds have also seen the engagement of new types of public sector investors, such as UN agencies, leading the creation of blended finance mandates with a focus on achieving the UN’s sustainable development goals (SDGs). In turn, this has created private sector teams within these institutions who are focused on leveraging blended finance to support their field offices and pipeline of projects. Only time will tell whether they are successful in setting up financially sustainable vehicles that deliver attractive financial returns for private investors.
Some of the specific trends highlighted in the Convergence report give us a glimpse of where the industry may be heading. In terms of geographic focus, Asia has become an increasingly popular destination for blended finance transactions, with Convergence naming the region ’the new frontier for blended finance’. This may be partly due to the increased awareness and interest from Asian investors who want to have a positive impact on the region.
BlueOrchard has witnessed this trend first hand, having recently doubled the size of the Japan ASEAN Women Empowerment Fund (JAWEF), which focuses on addressing the significant gap of financing female entrepreneurs in Asia. Moreover, successful structured funds like the Microfinance Initiative for Asia (MIFA) debt fund had already whetted the appetite of institutional investors in Europe by securing their contributions to tackling financial inclusion in Asia with a focus on early-stage micro and small business financial intermediaries.
With regard to sectoral focus trends, Convergence highlights that climate change and infrastructure are gaining increased popularity. This is consistent with what we had seen in our own survey of private investors in 2018, where sustainable infrastructure (58%) ranked second only to financial inclusion (63%) in terms of areas that private investors’ intended to focus their attention. Climate finance ranked third (42%) in 2018, but we have already seen an increased interest in the topic from private investors since then.
As many as 80% of the respondents to our survey on opportunities and challenges for financial players in Rethinking Climate Finance indicated that a blended finance structure would help to overcome barriers to increasing investment in climate finance. BlueOrchard considers climate finance a top strategic priority, particularly because climate change will disproportionately affect the poor and most vulnerable, especially in developing countries. To tackle this, the InsuResilience Investment Fund (IIF) invests in improving the access to and the use of insurance against climate-related incidents in developing countries, thus reducing the vulnerability of low-income households and MSMEs to extreme weather events.
Grant-funded Technical Assistance (TA) is also another side of the blended finance coin. It allows investees and portfolio companies to benefit from advisory and capacity building services thus fast-tracking their commercial viability and developmental impact, by participating with reasonable contributions and TA cost-sharing arrangements.
Despite being a key instrument for catalysing private capital investments and bridging the annual USD 2.5 trillion investment gap to reach the SDGs, blended finance has not been able to reach its full potential. As the Overseas Development Institute rightly concluded, “billions to billions” is – or at least has proven to be – more plausible than the “billions to trillions” target. We advocated for several solutions to these issues in our Blended Finance 2.0 vision, published in 2018, and we believe that many continue to be relevant today. Encouragingly, industry trends show progress in the right direction and the public sector is increasingly becoming more open to private sector needs. We ultimately believe that it is up to investment managers like us to coordinate the market participants and create the right investment opportunities that will allow the blended finance model and its power to deliver impact, to reach scale and respond promptly in times of market turmoil.
 The State of Blended Finance 2019 report looks at more than 3,700 financial commitments to over 500 blended finance transactions. Convergence curates and maintains the largest and most detailed database of historical blended finance transactions.
 Convergence, The State of Blended Finance 2019, p. 3
 BlueOrchard, Rethinking Climate Finance, p.24
 United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance, 2018.
 UNCTAD World Investment Report, 2014.
 The Overseas Development Institute (ODI) is an independent global think tank focused on international development and humanitarian issues.