Building Markets, Unlocking Capital: The Role of Blended Finance

In a world facing compounding economic, environmental, and geopolitical pressures, the call to scale development finance in emerging markets has never been more urgent. At a recent event hosted by British International Investment (BII) and the Boston Consulting Group (BCG), development leaders and institutional investors explored the vital role of blended finance, a financing approach that combines public and private capital to de-risk investments in challenging markets. Below is a summary of some of the emerging themes.

Why Bother with Blended Finance?

Structuring a blended finance deal is not for the faint-hearted. It can be complex, time-consuming, and at times, may not even lead to a closed transaction. The returns may fall short of what’s achievable in traditional commercial markets. Legal, operational, and governance complexities can further slowdown progress, making it a resource-intensive undertaking for all parties involved. So why persist?

• Because the stakes are too high not to. Blended finance is no longer a niche tool, it's an essential mechanism for unlocking capital in emerging markets where traditional commercial capital either fears to tread or simply fails to reach at scale. If we are to achieve the SDGs, tackle climate change, and build inclusive economic systems, then public-private financial collaboration must be the norm, not the exception.

• Market making is essential. In many developing economies, financial markets are still shallow or unevenly developed. Blended finance plays a catalytic role in creating investable opportunities where none previously existed, whether in water infrastructure, renewable energy, healthcare infrastructure, or sustainable agriculture.

• We need to broaden the investment pipeline. Too often, the same commercial capital flows into the same well-trodden deals. Long-term development requires us to work to mature emerging markets, build pipelines, nurture early-stage projects, and ensuring capital reaches new and underserved sectors.

• For investors, the risk-return profile is shifting. In an increasingly volatile and cautious global environment, emerging markets, particularly when de-risked through blended finance, offer a compelling proposition: diversification away from overexposed developed markets, long-term return potential, and in some cases, lower volatility than expected.

  
  

Lessons from Experience -  What Works in Blended Finance

Blended finance isn't just about stacking capital. It’s a relationship-driven, long-term process. And it’s not for the risk-averse. Key lessons from practitioners include:

• Know your investor. Do the homework. Understand their mandates, risk appetites, and internal rules. What looks like a great development deal may not pass muster unless structured to appeal to commercial incentives.

• Patience pays. Successful blended finance requires building coalitions with shared objectives, aligned incentives, and mutual trust. The process can be slow, but trust-building is a essential to positive outcome and worth investing in.

• Flexibility matters. Seek partners, especially those managing public or philanthropic capital, who have the flexibility to adjust capital structures, terms, and risk-sharing arrangements.

• Measure success incrementally. Don’t aim for perfection on the first transaction. The first deal may not check every box. What’s critical is getting something into the market and building a track record.

• Bad partnerships are worse than no deal. A poorly aligned deal with the wrong partner can damage trust, stall momentum, and burn precious capital. Be selective.

What Needs to Change to Scale Blended Finance

To move from promising pilot deals to systemic change, several shifts are required:

• Greater transparency around public capital. What can public funds be used for? First-loss guarantees? Mezzanine tranches? De-risking? Rules and tools need to be clearer, more consistent, and more widely understood.

• Accelerate project timelines. Many promising ideas languish for years. Development partners and DFIs must move faster from concept to execution. Once funding is approved, projects should start without unnecessary delays.

• Innovate less, replicate more. Not every deal structure needs to be reinvented. There are proven models, like blended vehicles with layered risk, that work. The priority now should be scaling them, not redesigning them.

• Build the right capital matches. Too often, we’re forcing square pegs into round holes. Blended finance needs an ecosystem that connects capital types to the right projects. In time, it should evolve into a recognized asset class with its own norms, tools, and track record.

Turning Potential into Practice

Blended finance is no silver bullet, but it’s a powerful enabler. What’s needed now is more ambition, more coordination, and more realism. Getting the first deal done is hard. Scaling takes persistence. But the prize, mobilising capital at scale for the world’s most pressing challenges, is more than worth it.

BII and BCG report on Scaling Blended Finance can be found here: https://www.bii.co.uk/en/news-insight/insight/articles/practical-guidance-to-scale-blended-finance/?fl=true