Can a new Web platform help facilitate blended finance deals?
If development finance really is a dating game, then in an age of social media it’s only fitting that it has its own dating sites.
Such gathering points can be important hubs for development-minded investors, donors and financiers to meet and mingle before eventually taking their newfound interests offline.
The intent, of course, is to blend together otherwise disparate sources of capital into large-scale projects that advance social good. And to do so in a way that lowers transaction and search costs for interested investors.
For many early investors in nascent markets there are clear advantages to syndicating an investment in order to spread potential risks. But the process of doing so often bears high costs related to finding the right partners, designing a suitable product or simply having insufficient information on hand on where to start.
Virtual platforms can mitigate some of those setbacks. By establishing early connection points, for example, investors can better cope with the problem of flying around the world in search of partners. If private investment is expected to shoulder much of the estimated $2.5 trillion price tag that is required to achieve the Sustainable Development Goals for 2030, then even small savings that reduce the costs of doing business can free up large pools of capital.
A new platform, Convergence, which was launched Wednesday at the opening of the World Economic Forum in Davos, Switzerland, is the latest to service this investor need.
Convergence is a tool designed over the past year by international advisory organizations Dalberg Global Development Advisors and the Global Development Incubator with support from the Government of Canada.
Its goal is to unlock billions of dollars for development by being what it describes as “the first and only platform to help public and private investors find and connect with each other to co-invest in blended finance deals in emerging and frontier markets.”
Citi, Black Rhino, the Bill & Melinda Gates Foundation and other deep-pocketed financial investors contributed some advisory support and have signed on as early adopters of the site.
The platform was designed to respond to the shortcomings in blended finance that investors themselves said they encounter. More than 100 investors interviewed by Convergence’s design team cited high search and product design costs, information asymmetries and general knowledge barriers as common impediments to blended finance transactions.
For Citi, “it wasn’t about a lack of financial structuring capability,” Andrew Stern, the interim chief executive of Convergence, recalled. “They wanted to see some benchmarks and [gauge from] previous knowledge.”
It will be neither the first nor the only platform to mix and match financiers under a blended finance umbrella. Similar exchanges exist such as with the U.S. government’s Overseas Private Investment Corp. or the World Bank Group’s International Finance Corp.
But by drawing in early backing and support from a range of actors — public and private — across the financial spectrum, it is trying to position itself as a middle ground tool that specifically caters to the sweet spot of commercial returns and development impact.
The platform will also be arranged to offer investment opportunities across multiple sectors rather than going too deep into one industry like other blended finance funds, Stern told Devex. And it will be designed to support blended finance deals at different stages of maturity.
The identity and profile of the platform, however, will only take shape as the number of users grows. And while it has the early support of large donors and prominent financial institutions, its user base will ultimately need to expand to smaller niche funds if it is to be truly classified as a resource for blended finance investors.
To attract that group of investors and justify the user fees they will eventually charge, it offers three tiers of services. It will serve as a conventional investment network for public and private investors, have a product design facility to incubate and test ideas for new financial products through grants and workshops on blended finance practices and it will have a market-building tool feature with a historical database of blended finance investments.
A question to consider is whether Convergence and other open collaboration platforms compromise the “art of the deal” — the idea that private networking and proprietary research underpin the best deals in finance. Its supporters contend that the art is still preserved since formal deal structuring still happens offline.
Blended finance is very much a trial and error process that happens to draw on vast pools of capital. When applied for development purposes, the already high stakes increase even further.
Convergence is just one platform to address investor needs. But if the 2030 development agenda is to depend on new financial innovations to fund impactful interventions, then a greater number of platforms that bring transparency to the process will be an important asset for development.
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