ReDesigning Development Finance
Blended Finance: The Road to Addis and Beyond
March 2015
Terri Toyota
World Economic Forum
ReDesigning Development Finance Initiative (RDFI)
The World Economic Forum and OECD-DAC are institutionally committed to
advancing the Blended Finance ecosystem through a multi-year initiative
Vision
Blended finance is a systematic and structured approach to finance and investment in emerging
and frontier markets
A scaled-up market where…
private investment flows
beyond niche units
A liquid market with…
standardized products and
investments
A transparent market that…
connects all players on a
virtual active platform
Objectives
•
•
•
Extend the reach and effectiveness of ODA through the complementary deployment of
philanthropic and private capital investment
Expand private investment in developing countries through the complementary deployment
of risk mitigation and concessional finance tools by official and philanthropic institutions
To this end, expand the pool of foreign and domestic capital available for economic
development, including small and medium enterprises, agriculture, infrastructure and key
public services
2
Blended Finance
The deliberate and strategic alignment of public-private capabilities and capital to
accelerate social and economic growth in emerging and frontier markets
Impact: investments in emerging and frontier markets that deliver
transformative social and economic progress
Impact
Leverage
Returns
Leverage: systematic and strategic
use of development and
philanthropic funds to mobilize and
engage private capital at scale
Returns: market-based, riskadjusted returns that meet
business goals and fiduciary
duties
3
Investment Barriers to Scale
There are seven key reasons why supply of capital does not flow at scale to emerging
and frontier markets
Both public and private sector face challenges that hinder exponential capital from flowing
to emerging markets and ultimately limit development impact and business goals
Business Case
Not Viable
Not an
intermediated
market
Limited local
market
knowledge
Difficult local
investment
climate
Lack of
mandate and
incentives
Asset and
capability gaps
Development
needs
outpacing
capital flows
…while public sector challenges
are largely due to mandate and
funding constraints.
Private sector challenges largely
stem from the difficulty to realize
risk-adjusted returns…
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Variables Affecting Risk-Adjusted Returns
The most significant barrier to private capital flow in emerging and frontier markets is
that returns are often not commensurate with the high level of risk (real or perceived)
Returns
Private capital providers have a fiduciary duty
to maximize risk-adjusted returns….
Returns in emerging and frontier markets
are realised based on several variables:
Risks
Emerging and frontier markets face a
number of unique risks:
•
Seniority
•
Tenor / Exit
•
Credit Spread
•
Liquidity
•
Volatility
•
Macroeconomic
•
Political
•
•
Growth Rates
Regulatory
•
Costs
•
Business
•
Sector performance
•
Hard & Local Currency
•
Leverage
•
Liquidity
•
Tax Conditions
•
Market Segmentation
….if risk-adjusted returns are less attractive
relative to other markets, investors will not
allocate capital to emerging and frontier markets.
5
An Approach to Mitigating Risks and Managing Returns
However, in blended finance, public capital can mitigate risk or manage returns
bringing risk-adjusted returns in line with investor requirements
Mitigating Risks
Managing Returns
Public investors can mitigate risks for the
private sector
Public investors can also apply mechanisms
that enhance returns for the private sector
•
Improving credit worthiness
•
•
Limiting downside loss exposure
Absorbing transaction and project
preparation costs
•
•
Insuring against unforeseen market and
catastrophic events
‘Topping-up’ returns by sharing or
forgoing any returns to public capital
•
Providing technical assistance and
other advisory services
Providing incentives for successful
performance outcomes
•
Providing low cost leverage
•
Eliminating funding shortfalls
•
Taking subordinate positions
•
Encouraging necessary risk taking
•
Among others….
•
Among others….
•
Note: Blended Finance does not seek to eliminate risks, but rather to encourage necessary risk taking
at acceptable levels relative to opportunities in other markets and investor tolerance
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Five Institutional Barriers to Scaling
RDFI has identified five key barriers that must be addressed in order to scale up
blending finance as a core business for both public and private sector investors
…impacting success by…
Blended Finance currently lacks…
Education and awareness of the potential for
blended finance to meet return and impact goals,
through evidence and analytics on results of
existing models…
…hindering adoption of best practices without a
champion and evidence to support the business and
impact case
A common language and understanding between
development and private funders…
…missed opportunities and a steep learning curve
for every new opportunity that slows down timeline
…impeding ability to communicate and collaborate
and the execution of investments in a streamlined,
structured fashion
Institutional readiness that provides a clear
mandate to engage the private sector, along with
internal assets and capabilities…
Standardized deals and opportunities, as well as a
pipeline of bankable projects…
…limiting commitment of capital due to high
transaction costs and limited opportunities to invest
creating high competition for capital
A platform to connect return- and impact-oriented
capital providers for early co-design of structures
and alignment on purpose…
…leaving blended finance fragmented and
duplicative and development challenges persistent
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The RDFI Blended Finance Toolkit
RDFI seeks to overcome these barriers by influencing policy, raising awareness,
creating enabling assets & capabilities and curating a diverse community
The RDFI seeks to overcome barriers to scaling blended finance…
Education &
Awareness
Blended Finance
Network
Global
Finance Exchange
Concrete
Opportunities
Ecosystem
Infrastructure
Thought leadership
provides evidence and
high-profile forums
generate commitment
and spark big ideas
Curated community of
pioneers and
influencers facilitates
innovation, and new
partnerships
Provides a platform for
diverse stakeholders to
connect and deal
facilitation
Creates results and
new partnerships by
placing ideas and
opportunities in front
of investors
Embedding blended
finance in narrative for
policy and reform and
other ecosystem
infrastructure
…by providing stakeholders with a “blended finance toolkit”
 Primers for private
 Formalized Blended
capital and
Finance Network
development
with online
investors
collaboration space
 Catalogue of existing  Webinars and
models and analysis
knowledge sharing
of results
 ‘How-To’ Roadmap for
development funders
 Pipeline of
transactions and
marketplace
liquidity
 Incubator for new
opportunities
 Development and
maintenance of
necessary systems
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 Current ideas and
opportunities for
blended investment
 Large, signaling
opportunities
 Scalable, replicable
opportunities
 ‘Blended Finance
Marketplace’
sessions
 GAC on Sustainable
Development
working papers
 Engagement on the
3rd International
Conference on
Financing for
Development the
Financing forcument
Scenarios for Applying Blended Finance
Five identified scenarios for blending that vary based on the maturity of the challenge
at hand are complemented by three supporting mechanisms across the lifecycle
Explore
SUPPORTING MECHANISMS
SCENARIOS
PREPARING
High upfront costs and
binary risk a project
will not happen
creates bottleneck.
Grant funded upfront
costs and activities
reduce uncertainty by
creating bankable
projects
Build
Grow
Mature
PIONEERING
FACIILTATING
ANCHORING
Early stage, high
business model risk
and transaction costs.
‘Soft’ capital with little
to no return
expectations used for
testing innovative
products or business
models, and advisory
services in order to
absorb the highest
risks
High perceived sector
or other risks and
expected returns
below market. Public
capital will take a
subordinate position
and may top-up
returns to attract
commercial capital
Some perceived macro
or sector risk, funding
needed to achieve a
‘first-close’ or
demonstrate viability.
Public needed to
‘crowd-in’ private fund
TRANSITIONING
Public capital seeks
exit from mature
investments to
commercial actors,
provides a pipeline
TECHNICAL ASSISTANCE – New or distressed markets require incentives. Public investors attract private capital by offering
incentives or contingent payment in exchange for upfront investment in new products and services
NEW MARKET INCENTIVES – New or distressed markets require incentives. Public investors attract private capital by offering
incentives or contingent payment in exchange for upfront investment in new products and services
RISK UNDERWRITING – credit-enhancing instruments that fully or partially protect investor capital against various forms of risk
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A How-To Guide for Development Funders
Seven steps to initiating or scaling blended finance
1 Benchmark your
starting point in
blended finance
Each step has:
 Purpose—objectives to initiate
or scale blended finance
 Principles—an approach to
achieving these objectives
 Practical steps—a series of
actions a blended finance
‘champion’ can carry out
2 Build buy-in and
awareness across
the organization
3 Set goals
for blended
finance
7 Learn and
scale up
across the
organization
5 Build
capabilities
6 Partner
and invest
44. Assess gaps
in capacity for
blended finance
Select, Concrete Examples from Davos Blended
Finance Marketplace (1 of 2)
Abraaj Growth Markets Healthcare Strategy
Opportunity: While demand
for affordable, high-quality,
mass market healthcare in
South Asia and sub-Saharan
Africa is large and rapidly
growing, supply lags and
healthcare businesses require
substantial capital, deep
operational expertise, and
access to high quality clinical
staff.
Danish Climate Investment Fund (DCIF)
Structure: Purpose-built team to
deliver strong financial and impact
returns. Impact objectives integrated
into the investment strategy and
governance framework. Invest in
scalable healthcare services models
in low- to middle-income markets
that provide measurable
improvements in health status of the
underserved low- to middle-income
population segments. Work with
various funders to maximize impact.
Opportunity: While investment
opportunities in renewable
energy and energy efficiency in
developing countries exists, few
projects initially offer riskreturn profiles in line with
institutional investors’
investment criteria.
Mobilizing Institutional Investments in African Infrastructure
Opportunity: Africa needs
significant investments in
energy and infrastructure but
faces a significant investment
shortfall. Pension funds have
considerable capital but limited
access to and knowledge of
African infrastructure
investment opportunities and
risk-mitigation tools.
Structure: DCIF provides risk capital,
including a preferred return for
institutional investors, for climaterelated projects to mobilize further
financing from both public and
private investors. The fund will be an
active minority investor and
contributes only part of the total
project financing in the individual
projects.
Citibank and SMBC Infrastructure Investment Partnership
Structure: A task force was created
to address this investment shortfall
through public private collaboration.
Joint efforts by public and private
institutional investors, donors
providing risk mitigation tools, and
multilateral agencies with access to
project pipelines offer significant
potential to lever up infrastructure
investments and financing in Africa.
Opportunity: In order to
effectively implement
infrastructure projects that
promote real prosperity, quality
of life, and opportunity for
emerging market countries,
players must utilize the best
available expertise and arrange
for the most cost-effective
funding, credit enhancement
and capital resources.
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Structure: The U.S. Government, in
partnership with SIDA, Citi, SMBC,
and Capitol Peak Asset
Management, launched a $10B
Infrastructure Investment
Partnership to fund and fast-track
critical infrastructure projects in
emerging markets, with an initial
focus on Africa and Asia as well as
Latin America.
Select, Concrete Examples from Davos Blended
Finance Marketplace (2 of 2)
Bank of America (BofA) Catalytic Finance Initiative (CFI)
Opportunity: BofA committed
to help meet the challenge of
scaling up investment in
sustainable energy around the
world. At the United Nations
Climate Summit in September
2014, the bank launched its
Catalytic Finance Initiative (CFI),
designed to catalyse at least
$10 billion of new investment
into high-impact clean energy
projects.
Women Entrepreneurs Debt Fund (WEDF)
Structure: BofA will commit $1
billion to investment structures that
employ a range of de-risking tools,
developed in conjunction with
development finance institutions,
insurance providers, foundations and
institutional investors. The goal is to
make clean energy investments more
financeable, particularly in emerging
markets where project impact is
often amplified – addressing other
large-scale issues like health,
education and job creation.
The Patient Procurement Platform
Opportunity: Significant
opportunities exist across
agribusiness value chains in
developing markets. In Africa
alone, food systems currently
valued at $313 billion are
forecast to grow threefold to
$1 trillion by 2030. Smallholder
financing also represents a vast
untapped market estimated at
$450 billion, 80% of which is
currently unmet.
Opportunity: Women-owned
SMEs are an untapped and
attractive market in developing
countries with a $300 billion
estimated credit gap and as many
as 70% having unserved or underserved credit needs. Working with
lenders in developing countries,
WEDF accesses a market segment
with higher product cross-selling,
deposit growth and loyalty,
benefiting from the lower risk
tolerance of women-owned SMEs.
Structure: Seeks to empower
women entrepreneurs in developing
countries through investing in a
portfolio of senior loans to
commercial banks. It provides a
platform for investing at scale in
commercial banks in developing
countries, playing a critical role in
bridging the financing gap for
women-owned SMEs and achieving
a greater reach.
Atlas Mara (ATMA)
Structure: Addresses risks of all
stakeholders, in particular
inconsistent large buyer engagement
and insufficient financing, through a
multistakeholder consortium of
input companies, distributors and
dealers, traders, buyers, capital
providers and smallholder farmers.
The platform aggregates demand
from large buyers using longer than
typical forward contracts to secure
access to finance and inputs.
Opportunity: Opportunity to
create a local financial
institution that provides
leadership, liquidity and
technology. Combining global
institutional knowledge with
extensive local insights to
create innovative, welldesigned products can reach
underserved customer
segments (women, rural areas
and youth) that represent a
large commercial opportunity .
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Structure: Financial inclusion focus
and goals align ATMA with
development investors and suppliers
of finance. Partnering with the
private sector enables development
finance institutions to mobilize large
amounts of capital quickly for target
markets in sub-Saharan Africa. Lowcost debt financing from
development institutions catalyses
product innovation in servicing SMEs,
trade finance and mobile banking.
Blended Finance Coalition of the Committed
The growing blended finance network includes diverse stakeholders who are pioneers
in blended finance and actively applying blended finance in a mainstream fashion
RDFI Steering Group
Hon Christian Paradis (Chair)
Canadian Minister for International
Cooperation and La Francophonie
Julie Sunderland (Vice Chair)
Bill and Melinda Gates Foundation
Dale Mathias
Partners Forum for Private Capital
Charlotte Petri Gornitzka
Swedish International
Development Cooperation Agency
Tom Speechley
Abraaj Group
Gavin Wilson
IFC Asset Management
Corporation
Private Sector Capital Providers
Development and Philanthropic Funders
Institutional Investors
Donor Governments and Agencies
Development Finance Institutions
Diversified Financial Institutions
Coalition of
the Committed
Financial Intermediaries
Philanthropic Foundations
Developing country governments
Corporations & Operating Partners
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Engaging in the Forum’s Blended Finance Initiative
As Blended Finance gains momentum, there are numerous ways for players to get
involved—and the Forum and OCED-DAC can help you get started
For further information please contact:
Terri Toyota, Director, Foundations and Development
Community, World Economic Forum
terri.toyota@weforum.org
Jens Sedemund, Executive Advisor to the DAC Chair, OECD
jens.sedemund@oecd.org
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Thank you