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• Something for Everyone: The Potential Promise of Blended Finance

October 01 2018
October 01 2018

What is blended finance, and how can it be used to address the Sustainable Development Goals (SDGs)? This is a common question among investors focused on deep environmental and/or social impact, but at the recent Global Climate Action Summit (GCAS) in San Francisco, a number of new actors joined the conversation.

One such discussion, themed “Blended Finance: Climate Solutions Across the Risk/Return Spectrum,” was facilitated by Confluence Philanthropy with the support of the private equity firm, Pegasus Capital Advisors, LP. Confluence Philanthropy is a field-building non-profit focused on advancing mission investing. Pegasus is a 20+ year-old private equity firm that provides strategic growth capital to middle market companies in the sustainability and wellness industries, targeting commercial rates of return.

The pairing of these two organizations to convene a session on blended finance might not seem obvious (why would a growth-oriented private equity firm that seeks market-rate returns care about blended finance?), but that was the entire point. As one panelist, Terry Tamminen, CEO of the Leonardo DiCaprio Foundation (LDF), pointed out, “It’s nice to see so many familiar faces. But we need to expand this room considerably.” And as Joan Larrea, CEO of Convergence Blended Finance and moderator of the session, highlighted, “The trick of blended finance is to bring the best suits from every investment group to the table.”

The diversity of actors is important by the very nature of how blended finance is defined. On its website, Convergence, a field-building and grant-making organization focused specifically on advancing blended finance, writes:

“Blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in developing countries and sustainable development… Blended finance is a structuring approach that allows different types of capital (whether impact or commercial-oriented), to invest alongside each other while each achieving their own objectives (whether financial, social, or a blend). Blended finance structures are observed across a broad range of transaction types – including funds, facilities, bonds, notes, projects, and companies. Blended finance aims to increase the amount of capital directed to sustainable development in developing countries.”

As Joan pointed out, not everyone shares the same definition of blended finance. For instance, some (e.g., the OECD) focus more on the role of development finance to mobilize commercial capital. Additionally, many investors focused on developed markets would argue that there is a need for blended capital to meet developed countries’ environmental and social needs, not just the needs of developing countries. Examples include de-risking new innovations for climate goals (e.g., recycling technologies, energy storage, agriculture), particularly when it comes to making the benefits widely accessible, including to underserved communities.

Regardless of one’s definition, there are significant overlaps, with a key point being the combination of different types of investors and their capital - with varying risk-return mandates - into a deal that might not otherwise happen (due to traditional market structures) in order to achieve a positive impact. But are investors from across the risk-return spectrum coming together enough to structure deals? As Joan stated, “To solve an issue like climate change, we are operating with US$100s of billions. We need trillions more than we have.” As such, a goal of this session was to bring together a diverse set of investors to learn more about the blended finance opportunity and potential to collaborate.

Setting the Stage: The Current State of Blended Finance[1]

Joan opened the session with some helpful context. In their efforts to assess global investment toward SDG 13: Climate Action, Convergence has tracked 115 deals launched between 1998 to 2018 (the majority between 2011 to 2018), with a total aggregate value of approximately US$58 billion and an average total deal size of approximately US$505 million (all deals were investment vehicles or specific projects / companies; the numbers include concessional and commercial investments, but exclude the value of guarantees, risk insurance, and early-stage design funding). Interestingly, these tend to be funds (44 percent of the deals), frequently with junior concessional capital for purposes such as technical assistance for underlying investments (e.g., Acumen’s private equity fund supported by the Green Climate Fund [GCF]). The second most common type of blended finance deal is projects (31 percent), followed by companies (18 percent), facilities (5 percent), and bonds or notes (2 percent). The graphs provide some additional insight into the characteristics of blended finance that Joan outlined to open the session.












Proportion of deals aligned (total will be more than 100%)

Among the funders, the GCF, represented on the session’s panel by Deputy Executive Director Javier Manzanares, is one of the most active. The graphs below illustrate some of the top actors in each segment of the market as defined by Convergence:




































Strange Bedfellows:  New Players Step into the Market

Interestingly, while development finance institutions (DFIs) play an important role when it comes to financing solutions (both environmental and social) in developing countries, Joan pointed out that they are focused on commercial rates of return and more senior types of capital versus concessionary financing. DFIs largely see their purpose as filling a market gap for capital in developing countries and proving the case to commercial investors that there are good risk-adjusted returns in these markets, rather than serving the role of a first-loss or concessionary capital provider.

A distinguishing feature of GCF as a DFI is that it has a unique mandate and approach to crowding in private capital. Javier pointed out, “The Green Climate Fund is exclusively focused on climate change, and the fund is structured around two goals: reduce emissions and support community resilience. As long as we’re focused on our mandate, we’re happy to take the investment risk that others won’t.” Realizing that climate solutions in developing countries (with less liquid and less mature markets) may need some patient and flexible capital, the GCF is willing to play the role of a catalytic and concessionary provider. This is particularly the case when the potential solution may be a new technology, approach, structure, or other innovation. For instance, the GCF offers first-loss capital in the form of grants, equity, and debt, as well as guarantees. Adaptation is also a difficult type of investment to fund that can particularly benefit from blended finance. As Terry mentioned, “The issue with climate adaptation is that there generally isn’t someone to pay for it.”

As panelist Craig Cogut, Founder and CEO of Pegasus Capital Advisors, LP, said, “The technology exists. What we’re more concerned with is, what’s the business model? Do you have the infrastructure in place?” Pegasus, like most private equity firms, has historically managed capital for traditional investors, such as pension funds, and these investors frequently do not have the risk appetite for new innovations or early-stage infrastructure, particularly in less liquid and less mature markets like developing countries (e.g., pension funds and insurance companies have liabilities to cover and cannot afford to take the same risks as the GCF). So, for a firm like Pegasus to come into a deal, the business model, and sometimes the market, typically needs to be relatively proven out.

This is a key reason why Pegasus is pursuing a partnership with the GCF through its accreditation program. Pegasus believes that there are many opportunities to make a positive impact, but many need to mature further before traditional private equity investors can invest. The firm sees an opportunity to de-risk earlier stage innovations and developing market deals in partnership with the GCF so that it can blend/catalyze commercial capital like pension funds and insurance companies into the structures later on.

Examples of Opportunities

During the session, panelists highlighted various projects that illustrate the potential of blended finance. Lorenzo J. de Rosenzweig is the Executive Director of the Fondo Mexicano para la Conservacion de la Naturaleza (the Mexican Fund for Nature Conservation, or FMCN), a private, non-profit organization which finances and strengthens strategic actions and projects to conserve Mexico´s natural heritage. In his remarks, Lorenzo shared that FMCN is developing models to de-risk investment in sustainable ranching, fishing, and forestry.

For instance, in a preliminary regenerative ranching project, a €500,000 grant from the French Development Agency (AFD) and donated land is being used for project design and preparation of a program to restore three to four million acres of prairie land. While the program has already reached approximately 260 ranchers practicing intensive rotating grass-fed grazing across one million acres of prairie land, blended finance would help this model scale. FMCN is now in discussions with the GCF for US$10 million for capacity building and technical assistance and with AFD for a €40 million credit line for producers in transition, as well as a subsidy for commercial financial institutions who lend to the ranchers. While loans to the ranchers are commercial in nature, ranchers will be able to borrow at rates slightly lower than the standard.

Terry shared how the LDF worked with the government of Fiji to structure a trust through a concessionary loan for rural villages to buy solar generators and thereby offset diesel consumption. The loan repayments are being used to fund the expansion of the program to other villages.  Upon reaching a certain threshold, the deal could be packaged into a green bond for commercial investors.  The model leverages concessionary capital to make catalytic change that is scalable and replicable. LDC is even considering taking this model to India. Terry also mentioned how the R20 Regions of Climate Action provides grants to de-risk early-stage utility scale renewables projects in developing countries, along with technical assistance funding, and how grant capital helped a solar street lighting project in Brazil become feasible.

Craig highlighted opportunities Pegasus has evaluated to develop solar street lighting in Pakistan and electricity in women’s markets in Liberia, but due to the assessed creditworthiness of the off-takers and long-time horizons required for the payback periods, Pegasus believes the projects would only be financeable if a concessionary provider offered support, e.g., in the form of grants or guarantees.

During the panel, additional examples that were mentioned included:

  • The Development Bank of South Africa (DBSA) and the Coalition for Green Capital (CGC) are working on structuring a green bank for Southern Africa that can crowd in private capital and support such investors in managing their currency risk. Convergence is supporting CGC’s work with a grant, and DBSA and CGC have invited the GCF to participate in the final structure.

  • There are a number of opportunities in conservation projects with REDD+ programming, including those that can benefit indigenous peoples, such as the Maasai in Kenya. However, the panelists agreed that the carbon markets have faced significant challenges in their development and maturity. There is certainly a role for blended finance here.


The panelists highlighted that a key challenge in working with blended finance partners, particularly among the concessionary or catalytic providers, is speed. For instance, it may take some time to apply for a grant or concessionary capital from the GCF, an aid organization, or a private foundation. As Craig pointed out, investment opportunities typically need capital within a shorter time frame than what is being made available.

In the audience, Alfred Griffin, President of the New York Green Bank, noted that it can be difficult for larger institutions to participate in blended finance due to the tendency for the deal sizes to be smaller, but that his bank was working on initiatives to become more involved in the space. To that point, Joan noted that approximately 40% of blended finance is actually in the financial services sector, due to the sector’s ability to aggregate transactions into larger opportunities. Additionally, Terry highlighted an example of how technologies exist with strong potential to address sustainable waste management, but many of them are small one-off projects. He suggested that aggregation of projects could help make such technology accessible to more investors.

And lastly, the point was emphasized that in all investing toward SDG 13 on climate, it is important to consider the efficiency of capital.  For instance, how much CO2e is saved per dollar invested in the opportunity?  Where can your dollar make the greatest impact?

Getting from A to Z: Next Steps in Practice

“If you were to ask me what Fondo Mexicano [para la Conservacion de la Naturaleza] will be doing in 20 years, I would tell you that we will mainly partner with private investors to fund programs at a larger scale,” Lorenzo noted in his closing remarks. Overall, the room seemed optimistic, and Joan reminded everyone of the resources and tools that Convergence offers to help build the field, facilitate deal flow, and bring investors together.

Interestingly, many organizations with various investor constituencies are increasingly focused on blended finance. For instance, Confluence Philanthropy’s membership is very active in blended finance through their foundation membership’s activity in grant-making and program-related investing. The Global Impact Investing Network (GIIN) has a large membership of DFIs, private equity firms, and private debt firms, and has an active working group on blended finance. Ceres has a number of large institutional members looking for de-risked deals, and even hosted its own events exploring blended finance during GCAS. With so much interest brewing, the timing seems ripe for cross-collaboration and increased deal-making. A possible call to action could be for these convening organizations to come together and unite our discussions.


[1] All data from Convergence as of August 2018.  MDB is the abbreviation for Multilateral Development Banks.  Numbers in graphs naming specific organizations represent number of deals by each organization.


- Delilah Rothenberg is an ESG and impact specialist with over 13 years of experience in financial services and over 9 years focused on developing countries, including application of the Equator Principles and IFC Performance Standards.


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