Image Source: By Rosieponting – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=48446058
As increased focus is placed on achieving the SDGs by 2030, it has become apparent that the amount of capital to accomplish them requires a very different paradigm than typical capital investments. This is where Blended Finance comes in.
The OECD defines Blended Finance as the follows:
“Blended Finance is the strategic use of development finance and philanthropic funds to mobilize private capital flows to
emerging and frontier markets.”
Given the fact that the annual investment capital needed to ensure that the emerging markets reach the SDGs equals $4 trillion, unlocking the vast private investment funds now deployed in developed countries is key. By using philanthropic and development resources to draw in private capital into frontier markets is perhaps the greatest asset of Blended Finance. Right now billions, if not trillions of dollars in private investment resources still remain on the sidelines of the developing world.
The hesitation in small and large investors is often due to the percieved risk involved with investing in emerging markets. Returns are seen as too low in regards to the risk involved. Whether these worries are accurate is not important, they exist. Blending Finance is key to assuaging the fears in investing in the emerging markets.
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Another area where there an in built challenge to bringing private investors into the emerging markets ecosystem is the perceived challenges in doing business in these geolocations. There is good reason for this viewpoint, and that is why Blended Finance is becoming critical. Philanthropic and development institutions not only lend initial capital to projects smoothing over private capital entry to the developing world, but the foundations these institutions create in the beginning often times eases the flow of private capital in a secure setting within the developing world.
Think of Blended Finance as Co-Investing
When I first stepped foot into the emerging markets ecosystem, most investors I spoke to were wary. They wanted to know who else was investing. It was often hard to convince these Western investors to put their capital into these emerging markets without someone else to invest in. They all wanted a co-investor. This is what Blended Finance brings to the table. Philanthropic and development resources and institutions are essentially co-investors within a project’s broader capitalization.
Private investment sources see these development institutions as a sort of safety net around the project. The latest figures show emerging markets contributing 49% of the global GDP. There is a need for private investors, large and small to include an array of impact investments in their portfolios. Blended Finance will enable this shift at a quickened pace.
- David is SDG-Market's Chief Marketing Officer. He is considered an expert in the Middle East and Sub-Sahara African regions as they relate to indigenous rights and geopolitics. In the past he acted as an advisor to OurCrowd's director of investment community as well as having consulted a variety of fintech and equity level crowdfunding platforms.
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