Tell someone in institutional investment you are raising a private equity fund, and they’ll probably know roughly what you mean. A 10-year fund life, with options to extend; a hurdle rate, carried interest, a management fee.
Certainly some terms might deviate from “industry standard”, but at least there is a sense what that standard is, even if it does evolve over time. Likewise, closed-end infrastructure funds or direct lending funds should inspire a similar form of pattern recognition among investors.
Tell someone you are raising a blended finance vehicle, meanwhile, and their mind could wander off in all sorts of directions. The broad concept may be clear: certain investors sacrifice some upside, or assume more downside risk, in order to allow other investors a more attractive risk-return profile. What will not be immediately obvious, however, is how the vehicle will be structured, how many different tiers there will be in the capital stack and how the waterfall might work.
Blended finance is often cited as a potentially vital tool to mobilise capital to solve environmental and social problems. As we have written in this column before, its take-up has been hindered by a lack of standardisation; it is too time-intensive to come up with a tailor-made structure for each opportunity. Use of blended finance for climate impact in particular has been growing, but not at the pace advocates would have liked.
With this issue in mind, two organisations – UK investor British International Investment and consulting firm BCG – have come up with five “archetypes” of blended finance vehicles, breaking down the structure, type of relevant investor, waterfall and possible variations for each.
The archetypes come from analysis of 65 recently launched blended finance funds. They are not “rigid structuring templates”; they are intended to be “a practical reference” for managers and investors to help “design, assess and capitalise” blended vehicles more efficiently, the authors write. The report also outlines a scorecard to help both LPs and GPs assess how well a fund structure aligns and balances stakeholder priorities.
Earlier this month we interviewed the CEO of Altérra, His Excellency Majid Al Suwaidi, for The New Private Markets Podcast. The $30 billion fund has an objective to mobilise $250 billion of capital to climate investments, including to the undercapitalised Global South (one of the topics in our recent climate solutions report). It has a $5 billion sleeve that can sacrifice some return in order to catalyse investment into places that commercial capital does not freely flow.
Al Suwaidi describes Altérra as fitting “quite nicely” into a gap between fully commercial investors at one end and fully concessionary capital at the other. It is by no means the first institution to use blended finance to catalyse impact investment, but its unprecedented size does make it something of a poster child.
When seeding TPG’s Global South Initiative fund, “we used our first-in, capped-out model”, Al Suwaidi explained, describing it as “a unique structure we developed with TPG where we put in our capital, we have a capped return and the other investors benefit from that”.
Al Suwaidi was optimistic about the catalytic effects of Altérra’s first wave of commitments; the overarching $250 billion target is now looking “conservative”, he said.
The report from British International Investment and BCG is a valuable step forward in helping to foster a shared language that will allow blended finance transactions to become more repeatable and scalable. New Private Markets understands that Convergence, a global network for blended finance, will soon be publishing a set of 12 “PIMMs” (private investment mobilisation models) to solicit industry feedback and foster further standardisation.
Blended finance is front and centre for two on-stage sessions at our Impact Investor Global Summit in London on 20-21 May. Between the arrival of a talismanic investor in the form of Altérra and a greater understanding of the various forms blended finance can take, it will likely be part of numerous off-stage discussions as well.
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