This month, we sat down with our founder and CEO, Richard Lackey, to talk about the role that blended finance plays in emerging markets.
Can blended finance be part of the solution in getting more finance to where it is needed most?
Absolutely. In fact, to build systematic solutions like we propose, the likelihood is that there will be
multiple financial stakeholders with varying risk and return targets in the capital stack, or at least involved
as the phasing of underlying projects are implemented.
What challenges and risks should be considered and mitigated?
While there are the traditional risks of international investing associated with currency risk, infrastructure,
and governance, there does exist the risk of unexpected business practices which may be thought of as
customary in local markets and taken as egregious by westerners. These practices include, but are not
limited to delays in executing or delivering, or not honoring contracts. Countries with robust legal systems
are able to insure accountability and performance of contracts, but that may not be so in many emerging
markets. The solution is typically to design contracts that hedge this risk by limiting initial exposure and
creating incentives for completion within the contract parameters.
How can blended finance be effectively and efficiently deployed, so that projects support national
ownership and generate growth and expansion?
It depends on the project, as infrastructure projects don’t always result in immediate income or GDP
increases that provide high return on capital invested. Those investments require patient capital, and truly
should be matched with private enterprise and institutional investment to support businesses that will
leverage the improved infrastructure to create new jobs and income in the targeted geography.
How can blended finance contribute both to domestic and international investor audience and
development?
If developed with representation from local, regional, and global banks as well as local, regional, and
global business, and with a view of an entire ecosystem, whether it be agriculture or industry, as an
integrated effort, blended finance can be effective. For those who take the time to understand the
nuances of each country and each market segment, creating just enough collaboration to catalyze system
development seems to be the key to well-designed blended finance programs.
Can blended finance demonstrate effects that support commercial replication?
Absolutely. While few have done the work to make it happen, a well-structured and properly integrated
approach should provide the social and economic synergies to motivate others to replicate the model in
other markets.
Why is private capital alone deemed as NOT enough for creating economic change in emerging markets? Why is the blend needed?
I think it comes down to two basic principles, the time value of money and the price of uncertainty. As
many emerging markets have institutionalized bureaucracy (not that we have not in the US) there is a
need for regular oversight and ground work to get through the red tape. This comes at a cost for the time
and effort of the personnel needed as well as the opportunity cost of having investment dollars sitting idle.
This drives many small and medium sized efforts to ruin unless they have built in lean operations through
the initial stages of business startup. Interestingly, these challenges also seem to create a system where
those who are patient are very well rewarded when they get through the process as there are few
competitors with that kind of patience. This means that the capital coming into this space needs to be
patient capital, but the returns for this patient capital may well exceed market rate.
The second reason blended capital is needed is that there is often a premium attached to one or more
areas of the value chain having a measure of uncertainty. This may be a concern of the government
limiting exports or putting market caps on the price of grain. Governments that project clear goals and
regulations to support them without excessive changing or reversing will draw more investment at better
rates. Those that leave institutions wondering will create an increase in the cost of doing business for all
who work within their borders. These risks can be mitigated through insurance programs like MIGA
(Multilateral Investment Guarantee Agency) and through an integrated approach where there are multiple
stakeholders invested in different areas of the value chain. These groups then work together when
untoward regulations arise.