Unlocking the potential of blended finance in Asia
A conversation with Nandini Chaudhury, CrossBoundary Advisory's Head of South and Southeast Asia Advisory
A conversation with Nandini Chaudhury, CrossBoundary Advisory's Head of South and Southeast Asia Advisory
Blended finance is a powerful tool for addressing funding gaps and driving sustainable development in regions like Asia.
The Money Meets Mission podcast, brought to you by AVPN, the largest social investing community in Asia, features business, philanthropy, and impact investing leaders sharing stories of tackling some of the largest and most complex social and environmental issues facing Asia today.
In this Q&A excerpt, we highlight their recent Impact Investing Musings conversation with CrossBoundary Advisory’s Head of South and Southeast Asia Advisory, Nandini Chaudhury, who breaks down blended finance as a concept and how it can be structured to mobilize private capital and support sustainable development goals (SDGs).
Read on for the interview and listen to the full podcast below.
Disclaimer: This interview has been edited for length and clarity.
Taimur Nabili, AVPN: Let’s begin by discussing your definition of blended finance in the Asian context.
Nandini: Blended finance is essentially a structuring method in which catalytic capital or development funding from various public or philanthropic sources is utilized to increase private sector investment in sustainable development goals. The essence of blended finance is to help organizations, sectors, or countries move from an early stage to a matured, able-to-absorb commercial capital stage.
The Asia Pacific region is geographically and economically diverse, with a fair mix of developing, developed, and transition economies. The region is considerably exposed to climate and macroeconomic risk, and quite often, the gap between the perceived and the actual risk is very high.
The UN estimates that for the Asia Pacific region to realize its Sustainable Development Goals by 2030, an annual additional investment of about US$1.5 trillion is required. So here we are dealing with a region of considerable perceived risk that needs this massive capital inflow to realize the Sustainable Development Goals. And we are faced with a classic chicken and egg problem.
Does capital flow in first to create a demonstration effect for these markets to reduce the perceived risk? Or do we spend time intelligently crafting risk mitigation solutions and exploring them first to crowd in private capital? Well, the answer lies in balancing both. Blended finance is one of the best tools available to create that balance.
AVPN: You talk of perceived risk, but you’ve also said it’s an extraordinarily diverse region. The perceptions in each country within that region must be somewhat different.
Nandini: Yes, exactly. It is not only about country perception, right? Even if you look at the sectoral perception within these countries, it is different. For example, if you look at the commercial and industrial solar market or the solar rooftop market, it is perceived as a very safe market in India. At the same time, if you look at neighboring Bangladesh, there are barely two years’ worth of projects that you can look at to see how they have performed. So, there is a layer of country-level risk and sector-level risk.
AVPN: Are there some fixed principles that guide your work in blended finance? What imperatives do you keep in mind when you’re structuring a transaction?
Nandini: When considering a blended finance transaction, you overarchingly examine a few concepts. Number one is leverage—how much of your philanthropic or development capital can mobilize private capital? Typically, we talk about 3x leverage, 7x leverage, and 10x leverage. This means that if you pool US$1 of philanthropic capital, you can mobilize 7 times or 10 times the amount of commercial capital.
The second is impact. It has to be measurable. It has to be additional. And unless you have a measurable impact from the transaction, the blended finance intervention can fall through.
Third, we look at returns. Ultimately, the goal is to deliver market-based risk-adjusted returns to the private sector, which is achieved by allocating the risks in part or full to the development finance tranches on non-commercial terms.
AVPN: Give me a sense of some models that have worked in real life in your experience.
Nandini: I can give you an example of one of CrossBoundary’s investment platforms, CrossBoundary Energy—which focuses on commercial and industrial renewable energy in Africa. When CrossBoundary launched this fund in 2013, we were able to pull in commercial capital by using a junior tier of funding through USAID. This transaction created a pioneering demonstration effect for the sector that these projects can be commercially viable in a geography that investors are not generally comfortable with. It has grown into a multi-million dollar investment platform that owns and operates renewable energy assets across Africa.
AVPN: What are some examples of challenges and barriers to implementing policies and plans like this?
Nandini: I can give you an example from a blended finance transaction in Bangladesh. The first and foremost challenge is understanding the concept. Many are unfamiliar with blended finance. In this case, we were working with a financial institution and helping them understand the methods of structuring the transaction, monitoring, and evaluating.
Another challenge we typically face is tailoring blended finance to the local context, and this was particularly true in the Bangladesh case. When we were applying the typical blended finance archetypes to Bangladesh, we had to consider country-level idiosyncrasies.
Another point to keep in mind is the monitoring and evaluation of the blended finance transaction. Quite often, we have seen insufficient attention paid during the structuring stage. What happens in that case are outcomes that are not measurable, impactful, and, most importantly, additional.
The idea of blended finance is to pool development capital so that it has a mobilizing effect on commercial capital. It should demonstrate additionality for the sector. But if you do not structure it correctly, the additionality concept can sometimes be lost.
AVPN: How much explaining do you have to do to investors to let them know that the solution you implement is appropriate to their needs?
Nandini: That depends on the class of investors you are reaching out to. Right now, blended finance is mainstream in the Western world. Most understand the concept. If you can translate the opportunity into clear investment terms, it is not an uphill battle. The major challenge we have seen while executing transactions, especially in Asia Pacific, is socialising the concept for the regional actors.
For example, regional donors and family offices have significant pools of capital that can be mobilized for such interventions in the region. Most of our effort goes into helping these players understand how to shift from their traditional impact investing or grant-making mentality to a more holistic blended finance approach.
AVPN: Where is the interface between the needs of a country where blended finance is the answer and then the process of generating interest amongst those players who need to get involved in the deal?
Nandini: The answer lies in structuring the transaction effectively. On the structuring side of things, first, it needs to be robust. It needs to be aligned with the development principles of the non-commercial funders who will be contributing to the transaction. It needs to be aligned with their ultimate goals. And then it also needs significant marketing. If considerable time and effort is spent to pool in the necessary resources and maybe advisors to structure it correctly, they will be able to market it correctly to the necessary partners.
A lot of this requires considerable understanding of the nuances of the transaction. If you go to a traditional commercial investor or a pension fund and say, hey, will you invest in a solar project in Bangladesh? The answer will be no.
But suppose you can numerically and theoretically explain how you’ve secured development actors into the transaction and the significant names anchoring the transaction and mitigating the risk. In that case, the transaction becomes interesting to this commercial player. A lot of the effort also goes into translating this development or impact angle, translating this concept into a language that commercial investors will understand. And that language is essentially the language of risk and return: What am I doing at a transaction level to reduce the risk? What am I doing at a transaction level to increase the returns? It’s as simple as that.
We must simplify it and ensure the commercial investors understand that concept.
Listen to the full podcast:
