Who is the Private Sector?

Blended finance aims to make the financial sector more sustainable and more responsible by unlocking private investment in unprecedented scale to achieve the SGDs – as a matter of good conscience, but also of good business. Financial investments from Development Finance Institutions (DFIs) and the private sector in form of blended finance are critical to build more inclusive businesses. DFIs have a key role to play to influence the participation of institutional investors in blended finance.

Key recommendations

• Engaging with institutional investors
• Designing appropriate products and scaling successful solutions
• Building off DFI capabilities and experience
• Disseminating blended finance return and impact data

Importance of the publication for businesses

• Gives insights about new increased funding opportunities for inclusive businesses

Importance of the publication for policymakers  

• Provides valuable strategies for mobilising private sector investments for national, regional, and local development objectives

The Business & Sustainable Development Commission’s (BSDC) report “Better Business Better World” found that the SDGs have the potential to create at least $12 trillion in opportunities for businesses. However, the realisation of these opportunities requires significant investment. Blended finance plays an important part in contributing substantially to the required investments. BSDC launched the Blended Finance Taskforce in 2017, which sought to analyse the leverage of blended finance and to develop an action plan to bring about the systemic changes necessary for scaling the market. With frameworks and incentives established, directing institutional investments to blended finance, the annual funding needs for the SDGs could potentially be met.

Blended finance is “the strategic use of development finance for the mobilisation of additional commercial finance towards the SDGs in developing countries” (OECD). The main financial objective is to create investment opportunities in the global south with risk-adjusted returns that are adequate for institutional investments. DFIs can act as a partner of institutional investors and de-risk investments.

Institutional investors are often falsely perceived as a homogenous group; in reality, different segments of institutional investors have differing mandates, regulatory constraints, investment motivations, requirements, and risk-adjusted return preferences. Who is the Private Sector? analyses these aspects for: I) pension funds, II) insurance companies, III) sovereign wealth funds, IV) commercial and investment banks, V) private equity firms, and VI) asset/ wealth managers.

Five key considerations determine the participation of institutional investors in blended finance: i) communication and messaging, ii) policy and regulation, iii) mandate, iv) allocation and capacity, and v) transactional factors. Drawing from these considerations, the report recommends eight actions (in four broad categories) for scaling institutional investment in blended finance:

• Engaging with institutional investors: institutional investors are obligated to fulfil their investment mandates (meeting financial return thresholds), therefore, the public and philanthropic funders must focus on credible, commercial investment opportunities brought forth by the SDGs. Adjusting their communication to the context of institutional investors, blended finance should be framed in recognised asset classes.
• Designing appropriate products and scaling successful solutions: private sector investors, public and philanthropic funders should collaborate on scaling up well-proven blended finance solutions, promote standardisation and reducing complexity. More mainstream assets should be created.
• Building off DFI capabilities and experience: DFIs should increase their transactions (volume, number) in order to transfer participation in aggregated portfolios to institutional investors. DFIs should also communicate their historical return metrics, to overcome varying institutional investors’ risk perceptions.
• Disseminating blended finance return and impact data: past performance is key in investment decisions therefore, reporting on blended finance return data and impact metrics is crucial. In order for institutional investors to justify their participation in the blended finance market, there must be greater transparency. An industry intermediary could contribute by collecting return data and impact metrics, reporting trends and benchmarks to the market.