Some things I read this week: 15/7/18

A Brief Introduction to Blended Finance

  • When it comes to sustainable development projects (think economic development without depleting natural resources) in developing countries, financing mechanisms can be complex. Some of these projects may gain access to government grants, while others that promise higher returns on capital may gain access to public or private financing.
  • Blended finance allows for targeted risk distribution such that investors are efficiently matched with terms of the deal that best suit their own risk/reward goals. This matching process opens more opportunities for co-investing in high impact, market-based solutions.
  • A great way to conceptualize blended finance is illustrated in the chart below. Imagine you have two groups of potential investors: impact-first investors (1) and finance-first investors (2). Impact-first investors may be government organizations like USAID, foundations like the Bill & Melinda Gates Foundation, or high net worth individuals. These investors are arguably more likely to accept greater risks and lower rates of return on their investments, whereas finance-first investors like the traditional commercial bank, hedge fund, or pension fund will likely demand higher rates of return while mitigating their risk exposure.

Blended Finance.png

  • The blended finance model allocates risk in the following manner. The first loss on an investment is taken on by the guarantor, which can be pre-designated as the impact-first investors, while the finance-first investors are protected from initial losses. This risk adjustment can sufficiently raise the credit of a project such that an institutional investor could be willing to offer capital, thus attracting new money to the table which wouldn’t otherwise fund such development projects.
  • Overall, the benefits to the project are:
    • Greater access to long-term, deep pockets at lower costs
    • Diverse network of partners, sector experts, mentors and donors
    • Greater opportunities to scale and innovate
  • The benefits to the investors are:
    • Aligning financial incentives with social mission
    • Further portfolio diversification opportunities for funds
    • Opportunities for knowledge transfer among local experts

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