The tool that arguably has the most potential for unlocking private financing for emerging markets is chronically underutilized. Blended finance transactions, critics and champions agree, are too niche, too complex and too opaque to replicate and scale. These concerns, in turn, drive up risk perceptions and transaction costs and stunt impact.
The Columbia Center on Sustainable Investment offers a fix: A consolidated, open-access platform for deal-level details, including financial performance, risk allocation, concessionality levels, and realized impact.
And to keep it all straight, standardized reporting templates, term sheets, and key metrics to allow for comparability and benchmarking for investors across the risk spectrum.
The Columbia Center’s new research, “From promise to performance: Reforming blended finance for scale,” produced with the SDG Impact Finance Initiative and Route 17, draws on more than 65 interviews with investors, development finance institutions, foundations, credit rating agencies, governments and academics.
The new tools could build on existing data sets like Convergence Blended Finance’s database and loan performance data released by the Global Emerging Markets Risk Database Consortium, or GEMs, as well as Pitchbook. These tools “provide useful insights into the overall state of the market, and the characteristics of certain types of deals,” CCSI writes.
Those data sets, however, rely primarily on self-reported information without standardized formats, limiting their accuracy and comparability.
“None offered the level of granularity, standardization, or reliability required to run a meaningful simulation,” the researchers found. The market remains “markedly opaque.”
Data transparency
The GEMs data in particular has been criticized for its lack of transparency. Little data has been released, and that which has, has been criticized for being too incremental.
“Every time someone decides to draw a line on how much data they will share, and how it should be aggregated, they’re depriving us of the creativity markets are capable of,” Thomas Venon of impact financial advisory firm Eighteen East told ImpactAlpha. “Stonewalling has, in this context, a very real developmental cost.”
Development finance institutions, which play a critical role in private market building and capital mobilization in emerging markets, are less forthcoming about transaction details and portfolio performance than the market would like.
“Even basic information relating to co-financing, concessionality and private capital mobilization isn’t being shared,” says Gary Forster of Publish What You Fund, a UK-based nonprofit that benchmarks DFIs on their transparency.
The OECD has issued guidance on deal transparency to unlock more commercial finance in emerging markets. But voluntary reporting remains sparse, largely because of confidentiality and non-disclosure agreements, which both Publish What You Fund and CCSI say are “overused.”
As one practitioner put it, “the reason we do not have any specific impact data for the GEMs database or others is because of these contracts.” Investment professionals and other practitioners have limited ability to assess the effectiveness and value for money of blended-finance in low-income markets.
The lack of such data in turn fuels market uncertainty and inflates the cost of capital.
“Non-transparent markets engender abuse,” one CEO of an emerging market investment firm told the researchers.
Complexity premium
Compounding the challenges of blended finance is what the researchers call a “complexity premium.” Most blended finance deals are highly tailored to each transaction and that results in extra legal, advisory and administrative expenditures.
There are market efforts to standardize and streamline blended finance structuring. A report from British International Investment, the UK’s development finance institution, identified five replicable blended finance models, spanning equity and debt deals.
Moving blended finance from a niche to a scalable tool requires more sophisticated and institutionalized data infrastructure, the researchers say. That could propel blended finance into a mainstream vehicle for closing the multi-trillion-dollar gap for sustainable development and climate finance.
“Equipped with [transparency and standards], blended finance can evolve into a mature marketplace,” the researchers write, “supporting the coordination of public and private sectors and capable of mobilizing private capital at scale.”
