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Convergence, the global network for blended finance, launched the 4th edition of the State of Blended Finance today.

The State of Blended Finance 2020 provides an updated analysis of the blended finance market, including blending approaches, sectors, regions and investor trends. For the first time, it also includes perspectives from experts in the field and a forecast of where the market is headed, based on Convergence’s in-house knowledge of transactions raising blended capital. The report also reflects upon the blended finance market’s journey to scale, and the role of blended finance in responding to the COVID-19 pandemic.

“Since our inaugural report in 2017, blended finance has entered the mainstream as a serious structuring approach for mobilizing additional capital for sustainable development,” says Joan Larrea, CEO at Convergence. “The conversation has moved beyond whether blended finance is part of the solution to figuring out how we can best approach blended finance to move billions towards developing markets.”

To date, based on Convergence’s data, blended finance has mobilized nearly $144 billion. The blended finance market has delivered a consistent 45-50 transactions per year since 2015, with 45 launched in 2019 (collected so far), with some transactions larger than $5 billion. Convergence maintains that for the blended finance market to reach scale, it is crucial that structures reach a level of standardization and simplicity that appeal to the mandates of institutional investors.

Funds (e.g., equity funds, debt funds, and funds-of-funds) continue to account for the largest share of blended finance transactions (38% of transactions over 2017-2019, and 43% historically), indicating that these structures have achieved a level of efficiency in the market. However, we are also seeing structures diversify; notably, bonds and notes are growing more popular, accounting for 16% of transactions in 2017-19; 65% of the bonds and notes captured in Convergence’s database were launched in the last three years.

Blended finance transactions across all time periods have been most concentrated on energy and financial services. Using Convergence’s live deals database as a leading indicator, increased momentum can be expected in agriculture, health, and, to a certain extent, education in the coming years.

The COVID-19 pandemic has placed a greater spotlight on financing healthcare. The financing gap facing global health, projected to reach $371 billion annually by 2030, is expected to increase due to the pandemic. According to the Convergence database, blended finance has been particularly useful in crowding in capital for the delivery of health services, SME financing, and pharmaceuticals and vaccinations.

Challenges for blended finance transactions looking to achieve scale include a lack of a robust pipeline of bankable projects due to small transaction sizes, complex and unfamiliar structures, and continued silos between the donor community and the private sector. Encouragingly, The State of Blended Finance 2020 identifies a shift towards less complex blended finance transactions, noting transactions launched between 2017-2019 less likely to employ multiple blending approaches in a single structure (e.g., concessional debt or equity and technical assistance grants), indicating a preliminary but positive step towards more streamlined vehicles.

Overall, for blended finance to mobilize private capital at scale and meet the challenge of COVID-19, Convergence calls for concessional finance to become more efficient, prioritizing portfolio approaches and simplifying structures, while embracing greater transparency and targeting capacity-building amongst local institutional investors.

Photo courtesy of AMISOM Public Information.