The last few years may be remembered as the “before times” for blended finance. After 2023’s record-breaking year for mixed capital stacks and catalytic commitments in emerging markets, blended finance transactions last year fell by more than 20%, or nearly $5 billion.
And that was before this year, when wealthy countries further cut their commitments to overseas development assistance, and the US government’s $40 billion annual outlay for USAID, one of the largest investors in blended deals, was vaporized.
“It is beyond clear that we are on a precipice; how far we fall is up to us,” writes Joan Larrea of Convergence in the organization’s latest “State of blended finance” report. “As development aid constricts, the rationale for stretching the public dollar through blended finance will only grow.”
The same goes for tapping local pools of capital. “With traditional sources of global blended finance flows under strain, the opportunity for local capital mobilization has never been greater or more critical,” the report states.
Risk off
2024 started out strong, but quickly, global political and macro-economic volatility spooked investors, which tend to retreat from emerging markets at the first sign of trouble. Blended finance showed some “resilience” in a tough environment, with the number of blended deals roughly on par with 2024.
The amount of capital deployed through those 123 deals, however, dropped to $18.3 billion from $23.1 billion the previous year. .
A bright spot: median transaction size was up, hitting $65 million last year, even though the number of “whale” transactions—deals over $1 billion—fell to three from seven the previous year. Those three deals accounted for 25% of blended finance commitments for the year. They include a nearly $1.3 billion infrastructure investment so Nigerian fertilizer producer Indorama Eleme can build a new shipping terminal. Brookfield Asset Management’s secured a $1 billion catalytic investment from the United Arab Emirates’ ALTÉRRA Fund for Catalytic Transition Fund for emerging markets clean energy and infrastructure projects.
Pooling capital
“The shift toward larger deals is promising,” states the report, but “a lack of structural standardization continues to slow the rollout and replication of blended structures.” Moreover, concessional capital is failing to bring new investors into the fold; instead, it’s largely mobilizing development and multilateral bank finance.
Models that mobilize better than most: multilateral funds, like the Green Climate Fund, the Green Guarantee Company, and the Private Infrastructure Development Group.This week the Emerging Asia and Africa Infrastructure Fund, which is part of the PIDG family, secured $325 million in debt from Allianz, Absa Bank, Sumitomo Mitsui Banking Corp. and Swedfund to invest in infrastructure projects in Africa and Asia.
The Hamburg Sustainability Platform, established last year by a coalition of donors, development banks and institutional investors, is aiming to standardize blended financial products for sustainable development projects.
The Investment Mobilization Alliance is providing catalytic capital and technical assistance for climate-focused investments.
BCG and British International Investment have assembled a shortlist of replicable blended fund structures.
Local investors
USAID’s West Africa Trade and Investment Hub Program provided grants as co-investment capital, helping to derisk and mobilize private money for development investments in the region. Its funding made up more than a third of all investment-stage grant money in blended finance deals over the past three years. That funding is now gone.
Local fund managers in Africa and other regions have for years now observed the retraction of international funders and have been laying foundations—through policy, regulation and fund design—to engage local institutional investors, family offices and other asset owners. Local investors now contribute 22% of capital in blended deals in East Asia, 19% in Latin America and the Caribbean and 15% in Africa.
Convergence calls out green bonds as a particularly effective tool. A guarantee from GuarantCo enabled IDI Sao Mai in Vietnam to lock in multiple local insurance companies for its sustainable seafood bond.
Local governments must lead in “strategically drawing on government funds and creating a conducive policy environment for private investment,” Convergance states. “Local governments with experience in setting up successful blended finance facilities should share learnings and promote replicable approaches to peers.”
