What is special about blended finance?
One of the interesting type of vehicles are blended finance mechanisms. Simply put, blended finance refers to public funds provided as de-risking instruments to mobilize private capital. It allows parties with different objectives to invest side by side. Such vehicles offer investors a variety of unique features in which financial and social returns, risks, and protection against capital loss are adjusted to match the private investor’s particular risk/return positioning. development finance institutions (DFIs) are a key player in the blended finance ecosystem due to their high participation and investments volume in these types of transactions.

Taking a closer look at DFIs
As specialized development banks, DFIs are established to support private sector development in developing countries. However, there is a wide range of DFIs including both bilateral (such as KfW German Development Bank and the British Investment Corporation) and multilateral organizations (such as the International Finance Corporation and the InterAmerican Development Bank). Their strategic focus and operational capabilities vary depending on their mandate. For example, some focus on a specific country or region and/or development theme such as education, climate, or gender. DFIs generally engage in blended finance in two ways: Through so-called “catalytic capital” and through mixed concessional financing. Catalytic capital is meant to attract private capital by accepting a disproportionate risk/return profile therefore enabling third-party investments that would not occur otherwise. In other occasions, DFIs can provide financing at commercial terms while donors or other public organizations provide the concessional capital. To truly mobilize capital at scale for the grand challenges of our time, actors such as DFIs and private investors need to understand each other’s approaches and needs even better. In this context, the Catalytic Capital Consortium and Convergence recently published a research brief exploring the role of DFIs in providing catalytic capital.

Catalytic capital – the magic formula?
According to the study, DFIs use catalytic capital primarily for two purposes: building a track record and mobilizing additional investment. Another key finding is that DFIs tend to invest capital primarily in vehicles that can promote scaling and replication. In addition, DFIs focus on using catalytic capital to promote economic growth and climate finance. Not surprisingly, the majority of mobilized investors in these deals are private investors, including both traditional private investors (such as commercial banks) and impact investors. This is great news and is consistent with our experience in this space. We have managed more than USD 1 billion in blended finance mandates over the past 20 years, successfully mobilizing private capital. Over the years, we have worked hard to understand the needs of both groups of players, DFIs, and commercial investors, to figure out how to mobilize more private capital even more efficiently.

What do private investors need?
In our Blended Finance 2.0 study, we conducted a survey of our private investors to determine their basic motivations for participating in investment vehicles using blended finance. In terms of expectations for public investors, we found that the investors surveyed were looking for credit enhancements such as downside protection and 1st loss guarantees. These factors were seen as critical aspects for private investors to participate in these structures. Another key finding was that private investors are more willing to participate in blended finance funds once the investment has passed the proof-of-concept stage. This aligns well with the Convergence study findings that DFIs tend to invest capital primarily in vehicles that can foster scale and replication. One important aspect we noted is complexity. A significant number of investors surveyed wanted more simplicity in blended finance vehicles. For example, greater simplicity could be achieved through simpler liability structures, simpler operational aspects, and more private-sector management procedures.

Public and private players must move closer together
Studies like these help us to further improve the design of blended finance instruments so that public and private actors can work together toward the same impact objectives in an efficient and accountable way. We need to continue to improve our understanding of each other – DFIs, private investors, impact investors – to take a big step toward our social and environmental goals. In this way, we can be good company and partners for each other on our impact journey.



The information in this publication was produced by BlueOrchard Finance Ltd (“BOF”) to the best of its present knowledge and belief. However, all data and financial information provided is on an unaudited and “as is” basis. The opinions expressed in this publication are those of BOF and its employees and are subject to change at any time without notice. BOF provides no guarantee with regard to the accuracy and completeness of the content in this publication. BOF does not in any way ascertain that the statements concerning future developments will be correct. BOF does not under any circumstance accept liability for any losses or damages which may arise from making use of, or relying upon any information, content or opinion provided by BOF in this publication. This publication is provided for marketing reasons and is not to be seen as investment research. As such it is not prepared pursuant legal requirements established for the promotion of independent investment research nor subject to any prohibition on dealing ahead of the distribution of investment research. This publication may contain information, references or links to other publications and websites from external sources. BOF has not reviewed such other publications and websites. BOF in particular does neither guarantee that such information is complete, accurate and up-to-date nor is BOF responsible in any way in relation to the content of such publications and websites. The information in this publication is the sole property of BOF unless otherwise noted, and may not be reproduced in full or in part without the express prior written consent of BOF. All investments involve risk. We note specifically that past performance is not an indication of future results. Emerging markets impact investments involve a unique and substantial level of risk that is critical to understand before engaging in any prospective relationship with BOF and its various managed funds. Investments in emerging markets, particularly those involving foreign currencies, may present significant additional risk and in all cases the risks implicated in this disclaimer include the risk of loss of invested capital. To understand specific risks of an investment, please refer to the currently valid legal investment documentation. The materials provided in this publication are for informational purposes only and nothing in this publication can be construed as constituting any offer to purchase any product, or a recommendation/solicitation or other inducement to buy or sell any financial instrument of any kind and shall not under any circumstances be construed as absolving any reader of this publication of his/her responsibility for making an independent evaluation of the risks and potential rewards of any financial transaction. We note in particular that none of the investment products referred to in this publication constitute securities registered under the Securities Act of 1933 (of the United States of America) and BOF and its managed/advised funds are materially limited in their capacity to sell any financial products of any kind in the United States. No investment product referenced in this publication may be publicly offered for sale in the United States and nothing in this publication shall be construed under any circumstances as a solicitation of a US Person (as defined in applicable law/regulation) to purchase any BOF investment product. The information provided in this publication is intended for review and receipt only by those persons who are qualified (in accordance with applicable legal/regulatory definitions) in their respective place of residence and/or business to view it, and the information is not intended under any circumstances to be provided to any person who is not legally eligible to receive it. Any recipient of information from this publication who wishes to engage with BOF in furtherance of any transaction or any relationship whatsoever must consult his/her own tax, legal and investment professionals to determine whether such relationship and/or transaction is suitable. By no means is the information provided in this document aimed at persons who are residents of any country where the product mentioned herein is not registered or approved for sale or marketing or in which dissemination of such information is not permitted. Persons who are not qualified to obtain such publication are kindly requested to discard it or return it to the sender. BOF disclaims all liability for any direct or indirect damages and/or costs that may arise from the use of (whether such use is proper or improper), or access to, this publication (or the inability to access this publication). BOF has outsourced the provision of IT services (operation of data centers, data storage, etc.) to Schroders group companies in Switzerland and abroad. A sub-delegation to third parties including cloud-computing service providers is possible. The regulatory bodies and the audit company took notice of the outsourcing and the data protection and regulatory requirements are observed.

Copyright © 2022, BlueOrchard Finance Ltd. All rights reserved.