Clarity Connect

Blended finance enables market creation, risk mitigation, and capital mobilization in underserved, higher risk sectors and geographies. It is especially vital for early-stage or high-impact projects where traditional investors face challenges assessing risks or collateral. For institutional investors, it offers opportunities for portfolio diversification, reduced volatility, and exposure to emerging asset classes while balancing the risk/return metrics.

According to Convergence, though 2024 volumes dipped from the all-time high of $23.1 billion in 2023 to $18.3 billion in 2024, they remain robust compared to historical averages. Over the past decade, the market has averaged 85 deals annually, with a median annual volume of $15 billion. Between 2021–2023, the average annual deal count rose to 122. Climate finance has become a major focus within blended finance transactions. In 2023, it accounted for 80% of all committed capital, up from 73% in 2021-2022.

Greater participation in blended finance has been supported by an improved understanding of impact-linked risk-return profiles. Notably, for every $1 of concessional capital, $4.10 in commercially priced capital was mobilized on average. This multiplier underscores the transformative role concessional investors play in enabling high-impact capital flows.

The Pivotal Role of Concessional Capital

Concessional capital providers—such as development agencies, public donors, and philanthropic foundations—continue to play an enabling role in the blended finance ecosystem. Development agencies and multi-donor funds accounted for 65% of concessional debt and equity in recent years, followed by DFIs and MDBs at 19%. Although the suspension of USAID operations is expected to have some impact, continued engagement by major donors like Germany’s BMZ, Japan’s JICA, and the UK’s FCDO is critical to sustaining momentum in the blended finance market. Multi-donor funds such as GCF and CTF remain key albeit smaller in overall participation volume.

Whether through guarantees, junior tranches, technical assistance, or performance-based incentives, concessional funders have the unique ability to provide flexible, patient capital toward high-impact, under-served markets. Their strategic engagement not only mobilizes multiples of commercial investment but also sets the standards, safeguards, and provide learning for other markets.

• Financial Innovation: Use concessional tools to improve terms, extend maturities, and mitigate risk.
• Aggregation: Pool projects regionally to scale up impact and share learnings.
• Demonstration & Market Building: Support models in fragile and frontier markets and strengthen enabling ecosystems, build local capacity, and share experiences.
• Standards: Uphold ESG and governance norms across investments.

Tailored solutions for scaling investments in climate, gender, and inclusion

1. Guarantees and Risk-Sharing

• IDI Sao Mai Green Bond (Vietnam):
  A VND 1 billion ($42 million) green bond issued in 2023 to support sustainable aquaculture farming received a full guarantee from InfraCo Asia, enabling a rare 20-year tenor in the local bond market.
  ➤ The guarantee attracted long-term domestic institutional investors like insurance companies and provided fixed coupon stability in a nascent green bond market.
• Nasira Risk-Sharing Facility (Africa and Neighbouring Europe):
  Backed by the European Commission and FMO’s MASSIF Fund, Nasira offers unfunded loan portfolio guarantees to local banks. Access Bank (Nigeria) received a $25 million guarantee, unlocking loans to women, youth, and migrants.
  ➤ The structure uses concessional funding to underwrite first-time borrowers with weak credit histories, enabling inclusive financial access in traditionally excluded demographics.

2. Performance-Based Incentives (PBIs)

• We-Fi & IFC Gender Bond (Indonesia):
  IFC invested $100 million (in IDR equivalent) in Bank OCBC NISP’s gender bond, whose proceeds support loans to women-led MSMEs. We-Fi provided a PBI of up to $1.25 million to incentivize outreach and capacity-building for women borrowers.
  ➤ The PBI also supports non-financial services like financial literacy and mentorship, crucial for long-term sustainability of women entrepreneurs’ success.
• IDB Invest & BAC El Salvador (El Salvador):
  In 2020, IDB Invest provided a US$60 million loan over five years with the aim of promoting growth in BAC El Salvador’s SME and WSME portfolios, and to support the Bank in providing solutions for the WSME segment. The transaction included funds from the Women Entrepreneurs Initiative (We-Fi) program of up to $450,000 performance grant to increase the share of WSMEs in their SME portfolio from 2021 to 2025. The incentive consists of providing $90,000 per year to BAC if they increase the share of WSMEs in their SME portfolio from 26% to 45%. IDB Invest also funded $150,000 technical assistance aimed at enhancing BAC’s gender strategy, specifically tailored to better serve WSMEs.
  ➤ The incentive aligns financial institutions’ internal targets with gender-inclusive lending goals, effectively embedding gender metrics into core credit strategy.

3. Debt Fund Models

• SDG Loan Fund (Global):
  A $1.11 billion vehicle by FMO, Allianz GI, and the MacArthur Foundation, investing in FMO-originated loans across energy, agri, and finance sectors in emerging markets. It uses $111 million first-loss capital, partially guaranteed, to de-risk a $1 billion institutional tranche.
  ➤ With a 1:9 mobilization ratio, the structure showcases how modest concessional capital can mobilize large-scale commercial funding while maintaining strong ESG standards.
• Vivriti Samarth Bond Fund (India):
  A $35 million COVID-19 response fund structured into two tranches: junior catalytic capital from MSDF and a senior tranche bought by institutional investors. It provided liquidity to lower-rated NBFCs serving informal and low-income segments.
  ➤ The fund improved credit access to retail-focused lenders excluded from capital markets, with senior investors protected by first-loss absorption.

4. Equity Fund Structures

• ARAF – Agriculture and Rural Adaptation Fund (Africa):
  A $58 million equity fund managed by Acumen, backed by GCF ($23M) and Acumen itself ($2M) in first-loss catalytic capital. Targets startups improving smallholder farmer resilience in East and West Africa.
  ➤ Ticket sizes of $1M–$5M support innovative, early-stage agribusiness models. The capital structure enables patient, risk-tolerant investment in enterprises often overlooked by VCs and banks.
• ACAP – Acumen Climate Action Pakistan Fund (Pakistan):
  Provides equity, technical assistance, and ecosystem partnerships to climate-smart agribusinesses. Designed to improve livelihoods and resilience of vulnerable farmer communities, while crowding in private investment.
  ➤ ACAP’s model demonstrates how concessional equity can incubate sustainable business models.

Blended finance is a proven, adaptable tool to drive impact and mobilize capital at scale provided there is alignment in the interests of donors, DFIs, and private investors. Stakeholders need to focus on replicability and scale while reducing complexity. BII and BCG’s recent publication on the five key archetypes—provides a practical approach to tailor blended finance structures— based on purpose, investor appetite, and asset risk profile. Concessional capital is limited, and in today’s environment, increasingly difficult to secure, thus making blended finance solutions much more relevant and important to scale.