Blended finance is gaining momentum — according to Convergence’s database blended finance has already mobilized $140 billion in capital toward sustainable development in developing countries. But occasionally the terminology used around blended finance can make it difficult to grasp.
To (hopefully) provide some clarity, we’ve put together this jargon buster for some of the most important terms in blended finance.
Additionality
Additionality describes the role concessional capital plays in bringing a deal to financial close. A deal is additional if concessional capital was the determining factor in bringing private capital into the transaction; i.e. the private capital would not have come in otherwise and is therefore considered “additional”.
Concessional capital
Also known as catalytic capital, concessional capital comes from the public and philanthropic sectors. It has low or no return expectations or is able to take on outsized risks and is used in a blended finance transaction to improve the risk/return profile of a deal to attract commercial capital that would otherwise not participate.
Development Impact Bond (DIB)
A pay-for-success model where an investor pays up front for an intervention's costs (e.g. providing access to education to kids in rural India), the results of the intervention are then measured by clear, predetermined metrics (e.g. results of literacy tests in the intervention area). Then an outcome funder (usually a development agency or philanthropic organization) repays the investor, and provides a return on the investment, if the intervention achieves pre-agreed outcomes.
*Read our report with Brookings on development impact bonds. *
Guarantee
A commitment in which a guarantor agrees to pay part of the entire value of a loan, equity, or other instrument in the event of non-payment or loss of value. In blended finance transactions, guarantees are often provided by a public or philanthropic organization to shield an investor from what they perceive to be the risk of a transaction, in order to get that investor into a deal. Perceived risk is often higher than real risk. If the guarantee is never needed, it can help demonstrate that real risk was lower than perceived risk. Over time, this helps to draw in more capital on less expensive terms.
*Read our blog on development guarantees. *
Impact investing
An investment philosophy that seeks to generate both financial returns and development impact. Not to be confused with blended finance, which is an approach to structuring transactions that brings together multiple types of investors (e.g. public, private and philanthropic). Impact investors often take part in blended finance transactions.
*Watch our video on the difference between
. *Innovative finance
The use of financial instruments beyond grants that mobilize new capital to fund social and environmental development projects. (e.g. impact bonds, concessional loans). Blended finance, impact investing, and ESG investing all fall under the umbrella of innovative finance.
Institutional investors
Large entities that invest on other people’s behalf, such as pension funds, insurance companies, sovereign wealth funds, commercial banks, private equity firms, and asset/wealth managers. In blended finance, institutional investors are usually the providers of commercial capital.
Intermediary
Intermediaries can be advisory firms or even NGOs that facilitate deal sourcing between investors and investees. In blended finance deals that bring together public, philanthropic, and private investors, intermediaries are often the glue that makes these very hard transactions actually happen.
*Read our blog on intermediaries in blended finance deals. *
Leverage
Leverage refers to the amount of commercial capital mobilized by concessional capital. It is measured by dividing the amount of commercial capital in a transaction by the amount of concessional capital.
*Watch our video on
. *Official Development Assistance (ODA)
Government aid that promotes the welfare and economic development of a developing country. ODA may include grants, flexible loans, and technical assistance.
Risk-adjusted return
Risk-adjusted return defines an investment's return by measuring how much risk is involved in producing that return.
Technical assistance
Technical assistance is funding (usually in the form of grants) provided by donor agencies and foundations to pay for information, expertise, instruction, skills training, transmission of working knowledge, and consulting services. Technical assistance is not part of the financial structure of a deal. The aim of technical assistance is to maximise the quality of project implementation and impact. The idea being that a stronger project will lead to private capital being drawn into the transaction.
Read our blog on technical assistance.
*By Laura Iruegas, Communications Intern at Convergence. *
