Creating replicable blended finance structures
By: Regina Vasarais, Manager, Training & Engagement Convergence & Sadiq Mussani, Advisor, Strategy and Special Projects, The Development Guarantee Group
On Day 1 of the Blended Finance Collective Annual Meeting, we turned to the topic of how to create replicable structures.
To set the scene, Convergence highlighted trends in the blended finance market targeting emerging markets and developing economies. Participants learned pieces of good news and bad news: On the positive side, blended finance deal flow was higher in 2024 than the market average for the previous four years, with 123 deals reaching close totalling USD 18 billion in financing. Also positively, deal sizes are trending upward, with the median size increasing from USD 39 million (2020 – 2023) to USD 65 million (2024). That said, the decline in Official Development Assistance also means that there is even greater urgency to mobilize private capital at scale. This scale investment mobilization will only be possible if deal sponsors focus on “big, boring and repetitive” structures.
The need for standardization and replicability has been highlighted numerous times by a variety of blended finance practitioners - institutional investors have no time, nor the ambition, to engage in ever more complicated and small-scale vehicles that often don’t fit their risk-return appetite.
Over the last year, the conversation around standardization has evolved significantly, with two new reports taking the conversation to a new level. First, Convergence, the global network for blended finance, released the Consultations Report on Private Investment Mobilization Models, as part of a project co-funded by the French development agency (AFD), the Swiss State Secretariat for Economic Affairs (SECO), Luxembourg’s Ministry of Finance, the Ministry of Foreign Affairs, Finland, as well as the Gates Foundation. Secondly, British International Investment (BII) and Boston Consulting Group (BCG) released a Guidance Document with Practical Tools for Blended Finance Fund design.
During the session, participants learned about some of the standardization models featured in Convergence’s report. The report recommends that providers of catalytic and concessional funding spread their capital strategically across four primary activities:
Increase project viability
Improve project-level investability
Improve portfolio-level investability (fund)
Mitigate currency risk for investor
One example are public sector blended finance debt funds, which Convergence found to have the strongest ability to deliver the most benefits for developing country governments. Such a debt fund could be capitalized with three tiers of capital: (i) senior capital for 90% in the form of notes/bonds rated at investment grade (BBB), (ii) 7.5% mezzanine capital in form of bonds/ notes with a rating aligned with MDB and DFI investment mandates, and (iii) 2.5% junior capital (see graphic below).
Figure 1: Convergence Scale Private Investment Mobilization Model 9: Public Sector Debt Fund
Source: Convergence Standardization Fact Sheet 9
Participants then dove into two case studies for replicable structures: Access - The Foundation for social investment’s Growth Fund, and the Development Guarantee Group’s work developing the Green Guarantee Company and Nautilus, the Blue Guarantee Company, in partnership with the Ocean Risk Resilience Action Alliance.
Helena Tuxworth, Head of Blended Finance at Access - The Foundation for social investment, presented the Growth Fund’s structure and its use of grant funding. As part of the engagement with grant recipients, Access introduced the terminology “Grant A” for operating cost subsidies, “Grant B” for first-loss capital, and “Grant C” for on-granting. Interesting, the team discovered that this terminology was subsequently adopted by the social investors, as well as some of the recipient charities and social enterprises as well. Helena concluded that unifying language, in an environment where diagrams can often be complicated and potentially confusing, is a very powerful way to advance investor-investee conversations faster.
Figure 2: Access- The Foundation for Social Investment’s Growth Fund: Structure & uses of grant funding
After much discussion around financial guarantees earlier in the conference, Sadiq Mussani from the Development Guarantee Group (DGG) went through the details on how guarantees work in practice and how DGG are using guarantees to build sustainable markets. Guarantees are a ‘promise to pay’ an investor in case a borrower defaults and they are used to build confidence and bridge a gap between the perception of risk and actual risk. Guarantees were compared to stabilisers on a bicycle – providing the comfort needed for investors to invest in new markets and sectors, with the ultimate view to remove the stabilisers in the future. The Green Guarantee Company (GGC) for example has an independent BBB stable rating from Fitch Ratings, which can derisk deals in emerging markets and make them investable for international institutional investors. Over time, investors will be able to better assess and price risk themselves for future deals and may not require the continued protection of a guarantee.
Nautilus, the Blue Guarantee Company, is being developed to de-risk and mobilise private investment into regenerative and sustainable blue economy projects across coastal countries in the Global South. This has some similar design features from GGC, but is also contextualised to meet the unique needs of the blue sector (e.g. by providing guarantees to SMEs in local currency).
Sadiq then presented a view of how DGG sees the guarantees market as a relationship between underlying risk (and guarantee leverage) and commerciality as per the diagram below.
Figure 3: Development Guarantee Group’s view of the guarantees market.
DGG’s guarantors sit across this spectrum, with GGC sitting in the top right as its objective is to demonstrate to the private sector that green investments in emerging markets can generate competitive returns. DGG’s ambition is to use guarantees to support sectors to trend towards the top right of the diagram, regardless of where they start. In other words, DGG use guarantees to help support transactions to ultimately create self-sustaining sectors that are effectively supported by capital markets.
In the subsequent break-out group discussions, participants reflected on their own organization’s role in standardization. Some of the key take-aways from the group discussion include:
Looking at the portfolio as a whole rather than as a series of bespoke transactions could support both replication and scaling.
Identifying what can be standardised (such as legal documentation, impact categories, or reporting timelines) without sacrificing responsiveness.
Private capital mobilisation must not come at the cost of meaningful impact.