Blended Finance - A Brief Introduction

Blended finance is the complementary use of grants (or grant-equivalent tools) and other types of financing from private and/or public sources to provide financing to make projects financially viable and/or financially sustainable.

Blended finance funds leverage development finance and grant funding to catalyse new investment at scale, into high impact, market-based solutions.

The de-risking element results in both lower cost of capital and access to additional finance for non-profit organisations delivering social outcomes.

 

How does blended finance work?

  • Impact-first investors (e.g. development finance institutions, foundations, high net worth individuals, even the investee itself) are prepared to accept a greater risk, and/or lower returns
  • Finance-first investors (e.g. traditional institutional investors) are interested in supporting impact investments but remain focused on achieving commercial risk adjusted returns
  • Guarantees may also be offered
  • In case of default, the first loss is taken by the impact-first investors, or guarantor, thereby fully or partially protecting finance-first investors

This approach to structuring finance is known as first loss catalytic capital, or blended finance: it leverages the risk tolerance and favourable terms of impact-first investors to enhance credit, thereby attracting investors for whom otherwise the risk would be too high.

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What are the benefits of blended finance?

For the investee:

  • Lower cost of capital
  • Long-term, predictable source of capital
  • Support for capacity building, investment readiness, and post investment management
  • Greater flexibility than restricted funding
  • Increased capacity to scale and innovate
  • Less risky than performance-based contracts
  • Diverse network of partners, sector experts, mentors and donors

For the impact first and finance investor:

  • De-risking through first loss and guarantees
  • Grouping of financial return with social mission
  • Increased portfolio diversification
  • Regular reporting on social impact generated
  • Partnership with organisations possessing local market knowledge and experience
  • Lower transaction costs due to investment readiness technical assistance
  • Risk management through capacity building technical assistance from DFIs
 

Examples of blended finance in international development:

Small scale: Equity for Africa leveraged a $1.2m grant from the Dutch government to catalyse an additional $3.6m investment towards equipment finance lending in Tanzania.

Medium scale: Aavishkaar mobilised $94m in blended capital to support BOP entrepreneurs in India. Development funders included IFC, KFW, FMO and CDC while private investors included CISCO and TIAA.

Large scale: The Danish Climate Investment Fund leveraged $94m in public investment to crowd in an additional $142m from institutional investors for climate projects.

A recent report 'Scaling the Use of Guarantees in US Community Investing' by the Global Impact Investing Network (GIIN) points to the contribution that different types of capital can make, where many projects may offer powerful prospects for social and environmental impact, but not meet the needs of more conventional investors who need risk adjusted, market rate returns.

For these opportunities, credit enhancement can unlock private capital to help scale a variety of impact propositions.

Other research such as Catalytic First Loss Capital (GIIN 2013); Shifting the Lens: A De Risking Toolkit for Impact Investment (Bridges Impact+ 2014); Blended Finance Toolkit (The World Economic Forum 2015) and a report by DANIDA (the Danish development agency) are all useful reads on how to mobilise private capital using structured funds.

 

IFG and blended finance:

In 2014, Investing for Good arranged the world’s first blended finance for social investment in the arts. The fund was supported by the Arts Council England, foundations and private finance.

Investing for Good are currently arranging blended capital facilities for mandates across a wide variety of sectors. These include: finance to support independent media companies in emerging markets, the establishment of a fund to secure long-term affordable workspace for artists in London, a facility to support people living with multiple long-term health conditions, loans to artisanal and small-scale mining communities in emerging markets, and a facility to catalyse the expansion of social enterprise activities for an NGO serving unmet needs in sexual and reproductive health across the Caribbean, and Central and South America.

Investing for Good is a member of Convergence, a platform focused on blended finance transactions that increase private sector investment in emerging markets .

For more information please contact one of the team.

IFG Social Impact Evaluation of the School for Social Entrepreneurs Supports Major Grant Award

We at Investing for Good were delighted that the Big Lottery Fund has renewed its funding for social entrepreneurs, supported by School for Social Entrepreneurs (SSE), with a £2.55m grant.

SSE is a charity with a network of 11 schools, impacting communities across the UK, Canada and India. The charity offer programmes, workshops and short courses, aiming to support individuals on a learning journey, and creating social change together.

The renewal of funding extends Big Lottery Fund’s commitment to the Lloyds Bank Social Entrepreneurs Programme, in partnership with School for Social Entrepreneurs, launched in 2012. The first five years of the programme has supported 1,300 social entrepreneurs. These social entrepreneurs are predicted to reach as many as 1.1 million beneficiaries over five years, according to a social impact review of the programme conducted by CAN Invest and Investing for Good in 2016.

Following a competitive tender, Investing for Good and CAN Invest- a charity committed to helping other charities thrive- were chosen by SSE because both organisations have extensive experience working with intermediary organisations and with the complexities around capturing, measuring impact and attributing impact.

Investing for Good acted as the lead on the project, representing the team and acting as the main point of contact. However, both parties were equal partners during the delivery of the project and worked as one unified team. The partnership made the best use of our respective expertise and experience to date.

We adopted a hypothesis testing approach whereby we developed and tested a number of assumptions in the Theory of Change and the extent to which the activities that the SSE were doing delivered the outcomes that were initially hypothesised.

Mapping backwards from organisational goals, we tested hypotheses around strategic assumptions, placing emphasis on understanding not only whether SSE activities produced the desired effects, but also how and why, throughout the course of different SSE programmes.

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This provided the framework for research for SSE to contribute thought-leadership and become a higher profile, leading voice in the intermediary and educational sectors on excellence in supporting social entrepreneurship.

IFG and CAN Invest used a variety of methods including qualitative research with in-person & telephone interviews, focus groups, surveys, social media approaches, narrative story-telling, and more traditional quantitative, statistical based approaches and study designs.

The review captured the whole spectrum of SSE’s impact: its achievements, success factors, learning elements, progress towards strategic goals, and included an analysis of the various programmes and their performance, and the impact of entrepreneurs to date.

The final report was deliberately designed to catch the eye of a wide audience and encourage readers to find out more.

A social audit can be hugely beneficial to an organisation. Social audits evaluate your current impact processes against best practice, identify any gaps and recommendations for improvements, and give you the opportunity to strengthen relationships with grant makers, social investors and commissioners.

More information on our social audit services can be found at https://www.investingforgood.co.uk/social-audit/