What Is Blended Finance?
Definition
Blended finance is the strategic use of concessional capital (from governments, multilateral development banks, or philanthropic sources) to attract private investment into projects that would not otherwise be commercially viable. The concessional layer absorbs first-loss risk or offers below-market returns, changing the risk-return profile enough to make the overall structure investable for commercial capital.
How It Works
A standard blended finance structure has three layers:
First-loss / concessional capital: Government donors, MDB concessional windows, climate funds. Takes the highest risk, accepts the lowest returns.
Mezzanine / catalytic capital: Development finance institutions (DFIs), impact investors. Takes moderate risk, accepts below-market but positive returns.
Senior / commercial capital: Pension funds, insurance companies, commercial banks. Takes the lowest risk, expects market-rate returns.
The blended structure works because the concessional layer absorbs enough risk that the commercial layer’s required return becomes achievable within the project’s cash flows.
Who Uses It
Real Examples
Application: Capital Stack Analysis
Juncture’s Capital Stack Analysis framework maps exactly how blended finance structures allocate risk and return across tranches. The framework identifies where concessional capital is most catalytic and where it is being used to subsidize projects that would have attracted commercial capital anyway — a key policy question for DFI accountability.