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Blended Finance Could Flip the Risk–Reward Equation for Private Equity Investors in Emerging Markets


Blended finance is traditionally associated with fixed-income vehicles, but it may prove a useful model for raising private equity in emerging markets by reducing risks for investors. 

Just 17% of global capital raised is invested into emerging markets. The majority of this capital is channelled to eastern Europe and the Asia-Pacific region, with Latin America and sub-Saharan African receiving relatively little due to the perceived risks associated with these markets. Some fund managers in Latin America are designing innovative and flexible financing arrangements to maximize investment impact, lower the risk for investors, and generate stable returns. These flexible arrangements include revenue-based repayments, mezzanine and structured debt, grace periods, recapitalization of interest, and other innovative repayment schemes. They build in flexibility for investors while providing capital and expertise to early-stage entrepreneurs. 

Benefits of Blended Finance Structures 

Investing in emerging markets is perceived as high risk, especially relative to developed economies. But blended finance structures that use development finance institutions (DFIs) and multilateral development banks (MDBs) to provide initial first-loss capital at below-market terms, are able to ease these concerns by ensuring that private sector investors gain from subsequent higher rates. The benefits of involving DFIs in blended finance deals go beyond securing higher rates for private investors. DFIs are able to provide expert financial and technical assistance, measure the impact of investments, manage risks, and strengthen the general commercial viability of the projects and programs being funded. 

Blended Finance and the SDGs

The Blended Finance Taskforce suggests that blended finance structures are growing. Capital raised through such deals has doubled to over USD 50 billion in just five years, and this trend is set to continue. Blended finance could help close the investment gap to achieve the Sustainable Development Goals (SDGs), estimated to stand at USD 6 trillion annually.

Already some SDGs are receiving more capital through blended finance than others. Mapping the current alignment of blended finance deals onto the SDGs shows that the majority align with Goal 1 (No Poverty), Goal 9 (Industry/Infrastructure), and Goal 17 (Partnerships for the Goals). This alignment changes with the type of investor. Public sector investors show an appetite for blended finance solutions for climate change, while private sector investors have disproportionately invested in blended finance solutions concentrated on Goal 5 (Gender Equality). Looking ahead, nine goals show greatest potential to scale through blended finance deals: Goal 2 (Zero Hunger), Goal 3 (Good Health & Well-Being), Goal 4 (Quality Education), Goal 5 (Gender Equality), Goal 6 (Safe Water & Sanitation), Goal 7 (Affordable & Clean Energy), Goal 11 (Sustainable Communities), Goal 13 (Climate Action), and Goal 15 (Life on Land),

Challenges and future directions

Attracting finance into emerging markets remains a challenge. High corruption and counterparty risk, institutional weakness, and limited availability of funds are off-putting for investors. As a result, overall investments remain low. Blended finance may offer a way to flip the riskreward equation for emerging market investors and entice capital into projects with positive climate and social impact.