Clime Capital last month reached a $175 million final close for its early stage equity fund for clean energy ventures in Southeast Asia. Key to its success in a difficult fundraising environment: a first-loss tranche anchored by Allied Climate Partners to mitigate risk for senior investors.
The simple two-tranche equity fund structure is among a handful of fund models that could make it easier to unlock and deploy blended finance, especially in emerging markets, according to a new report from British International Investment and BCG.
“Scaling blended finance: Practical tools for blended finance fund design,” reviewed 65 blended finance funds and classified them into five basic archetypes, with the hope of making it easier for fund managers to replicate them.
“The only way we can begin to meet the world’s development and climate challenges is by mobilizing private capital at an unprecedented scale, and blended finance has a key role to play,” write Leslie Maasdorp of BII and Rich Hutchinson of BCG.
Expensive and complex
Blended finance transactions in emerging markets amounted to $24 billion last year – far below what’s needed for global sustainable development and climate goals. “The main reasons for this chronic shortfall are the same reasons why most people don’t go into a bespoke tailor – too expensive, too complex, too time consuming,” Massdorp and Hutchinson say. Clime Capital’s second Southeast Asia Clean Energy Fund is classified as a “pioneering impact equity” fund for high-risk, high-impact equity investments. Two-tranche structures are common in the category. Concessional capital is primarily used for downside protection.
“This type of fund is generally not relevant to institutional investors due to the high level of risk present even in senior tranches,” the report states.
Clime Capital’s senior investors are all development finance institutions and other impact investors.
Fund archetypes
The report shows that there are more common, and replicable, features in blended-fund structures than the impact community may realize. An example of a “pioneering impact debt” fund is BlueOrchard’sCOVID-19 Emerging and Frontier Market MSME, which invests in high-risk, high-impact sectors and regions where access to affordable credit is limited. Such funds often feature senior, mezzanine and junior debt tiers, and attract institutional investors as well as impact-first investors.
“High-yield mobilization” funds, such as Vivriti’s India Retail Assets Fund, make debt investments in moderate-risk geographies and sectors.
“Targeted mobilization” funds, like Mirova’sGigaton Fund, focus on moderate-risk debt and infrastructure equity opportunities in specific sectors or markets.
“Diversified mobilization” funds, such as Allianz’sSDG Loan Fund, invest across a wider range of geographies and sectors.
Sorting and scoring
The authors offer a tool for “scoring” blended finance funds based on whether there is a compelling rationale for using blended finance; an appropriate structure and waterfall; and sufficient alignment among stakeholders. The goal is to make it easier for investors to determine whether a fund’s structure “aligns with their objectives, balances stakeholder priorities, and adheres to best practices,” the report says.
“Scaling blended finance isn’t just a technical challenge—it’s a systems challenge,” says Hutchinson. “These tools bring structure to that complexity and offer fund managers and investors a shared language to accelerate progress.”
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