Blended financing: An invaluable tool

Blended financing: An invaluable tool

July 15, 2020

$2.5 trillion: This is the annual funding gap estimated by the UN in order to achieve the Sustainable Development Goals (SDGs) in developing countries. This amount cannot come solely from government funding agencies. The private sector will also have to do its part. Is this realistic? Absolutely.

Over the past few years, DID has carried out several projects that incorporate blended financing, and it has established promising partnerships with a number of private investors. These projects have induced investing in the creation of 5 microfinance institutions in Africa and Latin America. These investments, made with our own capital, have served as a catalyst and enabled supported organizations to raise 4 times more capital and 8 times more financing from other investment partners, both private and public.

The following key elements helped us deliver on these projects and make these innovative partnerships successful:

Choosing our partners carefully, based on their priorities and capabilities: Development financing includes a wide range of stakeholders. It's important to know what matters to partners in order to develop a financing proposal that meets their priorities, risk tolerance and range of financing instruments.

Being patient, persistent and optimistic: Implementing a blended financing proposal is more complex and time-consuming as it combines several types of investors, some of whom may not have worked together before. But it can take you further!

Clearly stating the risks, expected return and duration of investment projects: Blended financing entails long-term relationships with partners who need to know and share your vision. As an impact investor, DID targets markets in which there are still very few traditional private investors and which involve longer holding periods (up to 10 years), higher risks and lower expected returns.

That said, blended financing is not the answer to all financing problems: Some companies or industries are simply not suitable, or ready, for private equity investment.

And sometimes, money alone isn't enough: Technical assistance is also crucial. Our experience has proven to us, and to our partners, the key role it plays in blended financing. By strengthening the capacities and environments of supported organizations, technical assistance can be essential to the viability and success of an investment project.

DID has been active in the field of impact investing for nearly 25 years and plans to strengthen its actions in the coming years. We would like to add our contribution to that of the Canadian government and the many other players involved in blended financing. We're aware that there is still a lot of work to do in terms of clarifying the rules of the game and encouraging the essential buy-­in of more private players, but the movement is well underway.