Blended finance should be seen as a success

The consulting firm Gartner coined the idea of a “hype cycle” for new technologies. Early proof-of-concept stories and media interest lead to a “peak of inflated expectations”, only to be followed by a “trough of disillusionment” after reality falls short of the hype. But then, as benefits start to crystalise and products mature, comes the “slope of enlightenment”, followed by “the plateau of productivity”. In February 2025 the OECD held its Private Finance for Sustainable Development conference, and, from panel to roundtable, conversations about blended finance and mobilizing private finance started with the same question: why are we failing? Such despondency is unwarranted. It is time for the conversation around blended finance to escape the trough of disillusionment and turn towards enlightenment.

Blended finance is already helping development finance institutions (DFIs) have an impact on an ever-greater scale. DFIs exist to increase the quantity and quality of investment in private enterprises in low- and middle-income countries. That is because economic and social development, the eradication of poverty in all its forms, and the transition to environmental sustainability all need private investment (among other many things). Blended finance succeeds whenever it is used to deliver additional private investments with positive social impacts efficiently. The most recently available data (from MDBs and DFIs), showed a 12 per cent annual increase in mobilized private longterm finance in 2022, to $63bn. Under the headline numbers will be numerous examples of blended finance being used successfully to achieve impact.

But blended finance aspires to something more than co-investment between DFIs and private investors. When DFIs support an infrastructure project in a frontier market that includes some long-term lending from local banks, the hope is that those banks will take something positive from the experience and want to take on similar projects. The anticipated result should be an increased supply of long-term capital from the local financial sector. When DFIs create financial structures tailored to the needs of regulated institutional investors from OECD countries, the hope is also that those structures will be replicated and scaled, increasing the supply of capital in markets where it is lacking. DFI’s want to push back the frontiers of where global capital will go. It is here that progress has been slower. There are successful examples, but these efforts generally have not scaled as rapidly as might have been hoped for. The optimistic view, however, is that the groundwork has now been done, and we have begun to climb the slope towards the “plateau of productivity”. Building on pioneering efforts such as the IFC’s managed co-lending portfolio platform, the Emerging Africa & Asia Infrastructure Fund, and the Danish SDG fund, 

DFIs have created several structures that should now start to deploy private capital at increasing scale. Examples include the Asian Development Bank’s “Innovative Finance Facility for Climate in Asia and the Pacific”, a multi-donor financing partnership with the ambition of mobilising over $12bn, the $1.1bn SDG Loan Fund created by FMO, Allianz, and Skandia, and the “Scaling4Impact” $1bn securitisation of IDB Invest’s portfolio, involving Newmarket, Axis and AXA. The ILX Fund, a private debt fund that offers B-loan participation in investments originated by DFIs – which launched its first fund in 2022 with the backing of Europe’s largest pensions fund manager, APG – launched its second fund in 2024. BII has recently launched a competition for asset managers to bring forward their best ideas to leverage concessional capital from a new Mobilisation Facility, for scalability and impact.

This is a story of what Hans Peter Lankes, Managing Director of the think tank ODI Global, calls “micro success amid macro failure”. The big picture, as seen in data on cross-border capital flows, does not show investment volumes rising rapidly, as accelerated progress towards the SDGs requires. Blended finance can push against macroeconomic forces, such as global monetary tightening and the “polycrisis”, which have done such damage to emerging and frontier economies, but it cannot overpower them. The idea that supply-side interventions, such as blended finance, could simply “redirect” the trillions of assets under management in rich countries towards the developing world was always misconceived. Private finance needs businesses that want to raise capital to finance investments. It is the demand side that ultimately constrains how much investment blended finance can facilitate. That is why we need more resources for “upstream” policy work and project development. 

At the same time as some are lamenting the failure of blended finance to scale, at the FFD4 conference in Seville, we will hear concerns that too much attention is being paid to scale and not enough to impact. Those concerns are misplaced. It is hard to think of investments that have a greater impact on mitigating global heating than those which decarbonise the big emissive economies of middle-income countries. This is where blended finance is mainly being deployed at scale today. But mobilising private finance in markets where a shortage of suitable capital is holding back development is not the only function of blended finance. DFIs also use concessional capital to make high impact investments that they otherwise could not have made. Most DFIs are required by their shareholders to stay within agreed financial parameters. Some have credit ratings to protect and must comply with regulations.

By blending their main balance sheet with more concessional pools of capital, DFIs can push further into frontier markets. Those investments are often smaller, and they do not always involve private investors in the initial transaction, so they are less evident in reported mobilization statistics. But they bring firms and markets closer to the point where they can attract private investment. Mobilization at scale, and capital market development more broadly, is an important objective. But there is no question about what comes first – it is impact.