The world is awash in money for sustainable development. Not the relatively few billions in public-sector foreign aid or philanthropy — the $218 trillion private capital market.
A new matchmaking platform aims to help leverage the former to get at the latter by facilitating so-called “blended” capital structures to increase the flow of development capital to developing countries. The new platform, Convergence, is a project of the development advisory firm Dalberg, the Global Development Incubator, the World Economic Forum, and the Canadian government, which backed the project with $18 million. Convergence will go live in time for the World Economic Forum’s January meeting in Davos, Switzerland.
Innovative initiatives like this will help expand the pool of foreign and domestic capital for projects that accelerate social and economic progress in the developing world.Christian Paradis, Canada's Minister of International Development
By bringing together investors with different risk tolerances and return expectations, Convergence aims to overcome the obstacles that have kept capital out of markets and sectors where it's needed most. Public and philanthropic funders can mitigate risks for private investors with first-loss protections or loan-guarantees. That can change the risk-return profile of a fund, for example, that lends money for smallholder agriculture in Sub-Saharan Africa.
Financing Sustainable Development
Blended finance is increasingly seen as critical for leveraging the $135 billion in global aid each year to reach the estimated $4 trillion in annual investment needed to achieve the U.N sustainable development goals, or SDGs, the ambitious new set of development goals aimed at eliminating poverty and improving the lives of the global poor.
“The platform’s aim is to reduce the costs and time associated with blended finance, standardize investment processes for institutions, and bring public and private investors onto a common platform in an efficient and effective manner,” says Philip Moss of the World Economic Forum.
Convergence grew out of a report last year from Dalberg and the Global Development Incubator that surveyed 350 innovative financing mechanisms—public sector loans, guarantees, and other catalytic investment vehicles—deployed since 2000. The deals had mobilized nearly $100 billion in capital and grew by approximately 11 percent a year from 2001 and 2013.
The new platform, based in Toronto, is intended to expand such dealmaking beyond the usual suspects. “Investors tend to operate within limited networks and it is hard to identify new investment partners,” says Serena Guarnaschelli, a partner at Dalberg. “With Convergence, we’ve set out to create a system to match the different types of investors.”
Investors aren't always keen to share their trade secrets and expertise. The Convergence team has early commitments, however, from a diverse group of potential users including Black Rhino, MasterCard, Mara Group, Gates Foundation, Rockefeller Foundation, and the Governments of Canada, Ethiopia, the Netherlands, and Senegal, among others. The team has also identified more than 100 historic deals to list on the platform that Convergence users may learn from to inform their future investments.
Matchmaker for Development
The three components of the Convergence platform each address a major challenge impeding the growth of blended finance.
1. The investor marketplace. Blended finance deals are hard to find. So too are investment partners. Convergence aims to match investors and deals with a kind of “Aid-harmony.” An interested investor, for example, can log on and search for vehicles to finance health clinics in India. They can see which public and private investors are involved, the available investment terms, and targeted impact.
2. The new product design facility. Designing new blended finance vehicles is costly and time consuming. Up until now, investment vehicle managers would incorporate these costs into the fund’s operating costs unless they could find a philanthropic or public funder. Convergence will award grants of $50,000 to $750,000 to design and test new structures.
3. Market building tools. Blending finance is mechanically complex. Term sheets are unique, structures are new. Public and private investors speak different languages. Convergence aims to address this knowledge gap by compiling a database of past deals, case studies, and document templates. The team will organize trainings, workshops, and investment clubs in cities around the world.
“We know that post-2015, financing the Sustainable Development Goals will be challenging,” said Christian Paradis, Canada's Minister of International Development. “Innovative initiatives like this will help expand the pool of foreign and domestic capital for projects that accelerate social and economic progress in the developing world.”