Figure 1: Annual deal count and aggregate financing of transactions with foundation investors and all transactions within the HDD, 2014-2023
Within the past decade, foundations have played an important role in blended finance. Since 2014, an average of 18% of blended transactions annually recorded in Convergence’s historical deals database (HDD) have included capital from at least one foundation. Given their ability to provide flexible capital, their focus on achieving impact, and their mission to catalyze big solutions to global challenges, foundations have the potential to play a larger role in blended finance. In the HDD, there are examples of how foundations can be grant providers, catalytic concessional investors, and commercial senior investors. This article provides a snapshot of our latest members only data brief on blending with foundations, including opportunities and challenges related to incorporating capital from foundations in blended finance transactions.
Click here for the Blending with Foundations data brief (paywall).
Data highlights from the brief:
Overall, Convergence has recorded 236 blended finance transactions that include at least one foundation as an investor, totaling $24.2 billion in aggregate financing.
Two-thirds of foundation investment commitments are concessional
When looking at all foundation investment commitments to blended finance transactions within the HDD, 66% are provided on concessional terms and 34% on commercial terms. This indicates that foundations are largely using financial tools within the blended finance structure as a means of mobilizing commercial investors.
Within the pool of concessional capital provided by foundations, grants account for 38% of the financing, while return-seeking investment instruments, including equity, debt, and guarantees account for 62%. Commercial investments, like concessional investments, see higher financing levels for equity (61%). Equity investments may allow foundations to have more influence over the strategic direction of a project or company, ensuring their values and mission align closely with the investment’s outcomes.
Figure 2: Percent of concessional financing (left) and commercial financing (right) used by foundations in blended finance transactions by investment instrument
Funds are more than twice as frequently used in transactions with foundations than without
Funds are the preferred blended vehicle for foundations, accounting for 51% of all foundation-investor blended transactions. Funds are likely a popular vehicle choice because foundations lack the operational or regulatory flexibility to make numerous, smaller direct investments, such as through projects. Foundations may have fewer staff, or lower capacity for administrative overhead, and managing a direct investment into a project can be resource intensive. This is clearly shown within the HDD, as projects account for only 5% of transactions funded in part by foundations, compared to 34% of those that are not. Meanwhile, funds offer a centralized investment vehicle, simplifying monitoring and due diligence.
Figure 3: Transactions with foundation funding vs. those without by blended vehicle type
Challenges and opportunities for using capital from foundations in blended finance transactions
To address the challenge of balancing mission and financial returns, increase impact-based investments within endowments
Foundations must continuously balance their fiduciary responsibilities of ensuring sustainability within their operations and investing in mission-related transactions. In the United States of America (U.S.), regulations governing foundation investments, especially program related investments (PRIs) can make the legalities around return-seeking concessional investments difficult to navigate. While PRIs can enable blended finance, because they allow foundations to invest while focusing on both generating returns and higher levels of impact, there are also opportunities to align more of a foundation’s endowment with other impactful investments, rather than committing financing to commercial investments with no impact.
To address the challenge of structural complexity, create standardized models and build confidence in strategic investment methods
For many foundations, blended finance creates a layer of complexity that is difficult to overcome. There are currently no standardized models that are easily replicable and that also show high levels of impact and appropriate returns. The creation and execution of standardized, replicable models can therefore reduce the overall load on small foundation investment teams and minimize transaction costs. It may also encourage using concessional capital through PRIs, which can draw in higher levels of private capital mobilization. Another means of reducing complexity is through becoming familiar with a particular investment strategy. For example, some focus mainly on using guarantees or concessional debt.
To address the challenge of smaller investment ticket sizes, focus on high-impact areas
Foundations typically have smaller investment ticket sizes, which can lead to limited additionality within a blended finance transaction. Through focusing investments on high-impact areas with low private mobilization, such as education or healthcare, and seeking out specific challenges, foundations can have an outsized impact. They can also focus on providing early-stage capital and partnering with development finance institutions to tackle larger issues.
Foundations have already shown their ability to play a catalytic role in blended finance transactions using flexible capital and impact-driven investment strategies. Through grants, catalytic concessional investments, and commercial investments, foundations have contributed to blended finance transactions in a myriad of ways throughout the past decade. While there are barriers that impact foundations’ ability to participate at even higher levels, these challenges also present opportunities. If given the proper tools, foundations can become an even more powerful force for blended finance.
