Blended finance is the strategic mobilization of private capital alongside development funding (i.e. public and philanthropic funding) to finance sustainable development in emerging and frontier markets.This moves the risk-averse capital into impact investments that try to reach sustainable development goals.
This catalytic capital “de-risks” the investment opportunity, making it economically viable. Usually, it does this by charging a rate of return that is below market or not fully risk adjusted. Most of the time, this mixing of different types of capital to help development is possible when three things are true. First, the investment opportunity is seen as having a high risk. This is usually because the sector or business model is still in its early stages, making it hard to measure the risks.
Second, for the investment to make economic sense, the catalytic capital must be willing to subsidize the investment by earning a return that commercial investors see as not fully risk-adjusted. Third, the investment opportunity must be seen as a “win-win” by both types of capital. This is usually possible if everyone wants to make a positive impact on development, even if their other reasons might be different. Read more about Blended Finance in our article: What is Blended Finance?
