Insights from blended finance investment vehicles facilities

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  • Insights from Blended Finance Investment Vehicles & Facilities
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Official Development Finance for Infrastructure: pecial ...

ReDesigning Development Finance Initiative
A joint initiative of the World Economic Forum and the OECD
Insights from Blended Finance
Investment Vehicles & Facilities
January 2016
Contents
3 Executive Summary
4 Methodology
4 Objectives
4 Scope
4 Execution
6 Data Overview
8 Key Takeaways
8 Investor Motivations
10 Leverage
12 Impact
13 Returns
14 Supplemental Insights from
Practitioners
16 Conclusions
17 Appendices
17 Select Participating
Funds and Facilities
24 Survey Questions
24 Blended Finance Lexicon
and Survey Definitions
26 Endnotes
? World Economic Forum
2016 - All rights reserved.
No part of this publication may be reproduced or
transmitted in any form or by any means,
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information storage and retrieval system.
REF 160715
Executive Summary
Additionally, realized returns do not appear to be
This insight paper synthesizes the findings of a survey affected by this approach, with average expected and
commissioned by the ReDesigning Development realized returns in line with the market. Reported
Finance Initiative (RDFI) to: (1) generate a view of average yields for debt were 5.4% and equity
existing Blended Finance funds, facilities and supporting investment returns of 16.3% are competitive.
mechanisms (the "investment vehicles"), (2) derive
insight into the implementation and motivations of these Respondents emphasized the non-financial benefits of
vehicles, and (3) analyse the additionality, impact and Blended Finance as particularly interesting, including
effectiveness of different Blended Finance approaches. the ability to address market failures, extend the reach
of finance, reduce risk exposure, increase the viability of
The survey is an initial attempt to start building the innovative structures and access specialized knowledge
evidence base on the role of Blended Finance in from partners.
contributing to development outcomes in emerging and
frontier markets and the ability of this approach to Development funders surveyed cited the ability to
catalyse private capital. The lack of consistency in leverage private capital or demonstrate the viability of
common terminology and definitions for Blended transactions as a primary motivation to adopt Blended
Finance has limited data analysis to date, which the Finance, with the vast majority of respondents (89.2%)
recent development of the Blended Finance Toolkit is citing an intent to scale, replicate and raise additional
helping to address. rounds of funding for a Blended Finance investment
vehicle.
The results of the survey show that Blended Finance
has contributed significantly to catalysing capital for Private capital providers indicated that their interest in
emerging market investment, resulting in positive Blended Finance is a reflection of demand from clients
development outcomes. The 74 funds and facilities for access to attractive and responsible investments in
within the scope of the survey account for $25.4 billion high-growth markets and the ability to mitigate
in assets ($14.9 billion in direct funding across 61 funds, investment risks such as those related to early-stage
and $10.5 billion supplied through 13 supporting business models.
mechanisms). In addition, while only 32.4% of funds and
facilities responded to questions on social, While feedback from the survey wasn't comprehensive,
environmental and economic returns, the data indicates funds and facilities that provided a breakdown of capital
that development and philanthropic funders sources show significant funding coming from private
("development funders") have achieved or outperformed capital sources. Private capital leverage is limited at
their impact targets, reaching at least 177 million early investment stages, but ranged over 20x for some
beneficiaries. of the supporting mechanisms, suggesting a need for
increased development funding support for early-stage
and higher risk projects that need to mature to attract
private capital at scale.
Based on this limited survey sample, Blended Finance
appears to be an effective approach for engaging
private capital to deliver impact and returns. However,
key challenges need to be addressed to gain deeper
insight into the impacts and effectiveness of Blended
Finance, including standardized interpretation of
concepts and related classifications, consistent
approaches to evaluating impact and leverage ratios,
recognition of new approaches within the measurement
of Official Development Assistance, and greater visibility
of financial returns for investment vehicles.
Methodology
Objective
Discussion about mainstream adoption of Blended Finance By definition, the survey focused on funds and facilities
to encourage emerging market investment has been that supply capital to emerging or frontier markets.1
constrained by a lack of quantifiable data to benchmark
current activity and effectiveness. To understand the Execution
market landscape, a research survey was commissioned
with a series of questions to explain: The research team identified Blended Finance
investment vehicles through interviews and desk
1. Investor motivations: What motivations drive private, research, and summarized the following data:
development and philanthropic actors to invest in Blended
Finance structures? - Fund overview: Name of fund, size of fund ($
million), high-level description, sectors of focus,
2. Leverage: Has the strategic use of development finance geographies of focus, market opportunity and
and philanthropic funding in Blended Finance models investors/partners.
facilitated flows of private capital to emerging and frontier - Capital structure, risk and return: Capital structure
markets that would otherwise not have been deployed? and returns for development funders and private
3. Impact: Have Blended Finance models delivered capital
actors, including debt, equity, guarantees, grants,
to investments that drive social, economic and
technical assistance, target returns and realized
returns.
environmental impact? - Impact: Details on development impact to date.
4. Returns: Have Blended Finance models been structured
- Scalability and replicability: Data indicating intention
and/or ability to scale, replicate and raise funds.
to deliver financial returns in line with business objectives - Miscellaneous: Sources and contact details.
for private capital providers?
Scope Questionnaires were sent to development funders
and fund managers identified through the World
Economic Forum network, desk research and
The survey focused on a cross-section of existing stakeholder analysis. Participants were asked to (1)
Blended Finance funds and facilities with pooled, populate and validate survey data, and (2) add
committed capital from development funders and private additional, relevant funds and facilities to broaden
capital sources. The scope was deliberately limited in the survey sample. Follow-up conversations were
order to: held to clarify the research objectives and to ensure
- produce aggregate, macro-level insights the best data quality possible. Data collection
- create a standardized sample spanned five weeks from the initial survey outreach
- highlight actors engaged in Blended Finance to the close of collection.
- avoid double-counting financing at the fund level
Of the 102 investment vehicles shortlisted for the survey,
To accomplish this, the survey sought a spread of sufficient information was available to classify 74 (50
investment vehicles that ranged across sectors, based on survey data, 24 based on secondary research)
geographies, maturity of target investments, and as eligible for the survey.
stakeholders to provide insights on investor behaviours
and scalable models and generate results that could be Investment vehicles were classified into five market
standardized and classified. Subsequently, individual segments (Figure 1) based on the type of capital
projects that received Blended Finance at the project level
were deliberately excluded to avoid double counting, given provided, the stages of maturity that the vehicle
a presumed lack of visibility into individual fund targeted, and the role played by development funders to
investments. Breakdowns of the capital structure were support investment. Common elements surveyed across
also studied to highlight the diverse types and interests of market segments included risk-return profiles, the roles
actors using this investment approach. of development funders and private actors, and the
types of financing structures required.
Note:
The Working Party on Development Finance Statistics (WP-STAT) of the Organisation
for Economic Co-Operation and Development's Development Assistance Committee
(OECD-DAC) is preparing a complementary survey issued through its network of
statistical correspondents. Its objective is to collect comprehensive data on amounts
mobilized from official development interventions in the private sector, and to survey
activities such as guarantees, syndicated loans and shares in collective investment
vehicles from 2012-2014. In addition, the OECD-DAC effort will seek to determine
attribution among various parties that invest together in a pooled structure. This effort
will complement the survey findings indicated herein and will provide a more detailed
view of leverage and appropriate mobilization calculations.
4 of Blended Vehicles
Figure 1: Market Segments by Project and Enterprise Life Cycle
Preparing Pioneering Facilitating Anchoring Transitioning
High upfront costs; Early-stage projects Sectorial or project Macro or sectorial Lack of local markets
binary risk that a with high business risks; returns below risks; liquidity, knowledge and deal
project will not model risk; high commercial rates refinancing and exit pipeline; inefficient
happen transaction costs risks markets
Explore Build Grow Mature
Life Cycle of Projects & Enterprises
Source: Blended Finance Vol. 1: A Primer for Development Finance and Philanthropic Funders
Respondents included:
The survey also segmented investment vehicles that
use development funding to facilitate private investment Development and philanthropic funders:
into specific supporting mechanisms: Asian Development Bank (ADB)
- Technical assistance: Supplements the capacity of African Development Bank (AfDB)
investees and lowers origination and transaction costs. UK Department for International Development (DFID)
- Risk underwriting: Fully or partially protects the investor European Investment Bank (EIB)
against risks and capital losses. Netherlands Development Finance Company (FMO)
- Market incentives: Provides results-based financing and Grand Challenges Canada
offtake guarantees contingent on performance and/or Inter-American Development Bank (IDB)
guaranteed payments, in exchange for upfront financing in International Finance Corporation (IFC)
new or distressed markets. International Finance Corporation Asset Management
Company (IFC-AMC)
KfW
Ministry of Foreign Affairs of the Netherlands
Overseas Private Investment Corporation (OPIC)
United States Agency for International Development
(USAID)
Private fund managers:
21 fund managers provided responses to the survey on an
anonymous basis.
of Blended Vehicles 5
SEGMENT
Data Overview
The following overview of the survey includes the breakdown of capital between types of investment vehicles and the
size of funds (Tables 1-2); and investment breakdowns by region and sector (Tables 1-3). Note that the tables and
figures reflect a sample of Blended Finance market activity rather than indicative data that provides a comprehensive
view of the Blended Finance market.
Table 1: Survey Sample Size and Capital under Table 2: Breakdown by Type of Capital
Analysis
Total Sample Size 74
Number of funds/facilities 61 ($ ($
Number of supporting mechanisms 13 245.3 806.3
Total capital under analysis ($ million) $25,445.4 Median 96.9 180.0
Total funds/facilities $14,964.0 Minimum 4.8 10.0
Total supporting mechanism $10,481.4 Maximum 3,000.0 6,500.0
Source: Survey Source: Survey
Table 3: Breakdown by Geography and Sector
Development Region Sample Median Minimum Maximum
Capital Fund Fund Size Fund Size
% of No. of Funds/ Size ($
($ million) Capital Facilities million) ($ million) ($ million)
Region-specific investments 9,483.5 37.3 52 85.4 4.8 1,200.0
Sub-Saharan Africa 5,675.5 22.3 36 61.3 4.8 1,200.0
East and South-East Asia 1,723.0 6.8 6 250.0 23.0 625.0
Latin America and the Caribbean
(including Mexico) 390.2 1.5 3 89.2 20.0 281.0
South Asia 324.3 1.3 4 87.7 14.0 135.0
Middle East and North Africa 160.0 0.6 1 160.0 160.0 160.0
Eastern Europe, Russia and
Central Asia 1,210.5 4.8 2 605.3 10.5 1,200.0
Global investments 15,961.9 62.7 22 250.0 36.7 6,500
Total 25,445.4 100 74 -- -- --
Source: Survey
The survey reviewed Blended Finance capital pools The survey sampled investment vehicles that address a
across a range of geographies. Of the investment range of objectives targeted by the Sustainable
vehicles surveyed, almost two-thirds of funds (62.7% of Development Goals in emerging and frontier markets.
total capital sampled) did not have a specific regional Among sectors (Figure 2), healthcare accounted for
focus, although this was heavily influenced by $6.5 billion 29.2% of fund and facility capital analysed, followed by
in capital commitments allocated by the International financial services (21.4%) and infrastructure (17.7%).
Finance Facility for Immunisation (IFFIm). When IFFIm is Viewed on global and regional levels (Figure 3), regional
removed from the dataset, the spread between global and funds tended to focus on infrastructure (35.0% of capital
regional capital invested is nearly equal (49.9% and sampled), while global funds focused more on healthcare
50.1%, respectively). Most other global funds or facilities and financial services (41.3% and 26.4%, respectively).
were below $800 million in size. Data on investment
vehicles focused on Sub-Saharan Africa were most
readily attainable, heavily weighting the capital attributed
to this region (22%).
6 of Blended Vehicles

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