This article discusses the strategic use of blended capital, different types of blended capital used especially Collective investment vehicles (CIV) and role of blended capital in meeting Sustainable Development Goals (SDGs) by 2030. One of the major strategic use of blended finance is to enhance funds in the development sector especially in low and middle-income countries for meeting SDGs targets. In order to attract capital from the private sector especially institutional investors the idea of catalytic first loss capital evolved.
Although blended capital can include both concessional and non-concessional finance, IFC deployed about $560 million of concessional development funds between 2010 and 2016 to support more than 100 projects in 50 countries. This signifies the skew towards concessional finance as part of blending. Development Finance Providers take the first loss capital through guarantees, grants, insurance working as different ways of blending capital for credit enhancement. Guarantees work in covering the first set of losses while Grants might include first loss guarantee or deployment of capital without any repayment over a fixed time period. Grants also include money for technical assistance for completion of the project specifically to develop capacity and scale up the business model. While guarantees are the most widely used in blending capital especially in infrastructure projects, more instruments including pay for success (social and development bonds among others), securitization, hedging, and junior equity/ subordinate debt and collective investment vehicles are incorporated today. Continue reading “Blended Finance Explained”