Blended finance matchmaking service set to go live
Joan Larrea talks about Convergence Finance, a new platform that will act in part as a matchmaker between public, private and philanthropic investors seeking partners for blended finance structures. Set to go fully live in the next couple of months, it expects agriculture to be a major focus of its efforts.
“Agriculture is going to be a really strong sector for us. It touches on so many things, from climate change to food security and consumer goods, and it is a huge employer in many countries,” Larrea says. “A lot of blended finance transactions are going to be needed to get finance into the hands of farmers, food processors and everybody else in the chain.”
Bringing investors together
To this end, Convergence already has nearly 80 foundations, development banks, fund managers, commercial banks and other private sector investors signed up to its Investor Network, which has what Larrea describes as a “club atmosphere.”
The idea is that deal sponsors in the club will use the network to post details of blended finance deals for which they are seeking funding. Other members will then be able to study the proposed transaction to see if it fits their mission or investment goals.
Currently, “it’s very hard for blended finance project sponsors to find capital,” notes Larrea. However, “If you have a community of institutions who know that everybody else in the club is also serious about participating in blended transactions, you should see some real deal flow. I think the thesis is going to prove out.”
“We are highly motivated to see actual transactions happen,” she adds. “We’re not a broker, we’re not handling people’s money and we’re not a crowd funding platform – we just want to help capital flow toward good blended finance deals that cannot otherwise get done.”
Members are already talking to each other informally and a number of deal sponsors have signalled to Convergence they are ready to post deals the moment the platform goes live, Larrea says.
Convergence is now awaiting regulatory clearance from the Ontario Securities Commission and hopes to be able to start publishing deals on the network before year-end.
Finding common ground
Blended finance is of course not without its challenges. Public and private investors have very different motivations and requirements from a transaction, and aligning these is not always easy.
“It comes down to institutional culture,” Larrea notes. “Their timelines are really different and their idea of right and wrong even is very different, because it’s your duty towards your shareholders in one case and towards your mission in the other.”
“The private sector has a fiduciary duty – they need to maximise returns for their investors. That can mean, for example, making sure management has a free rein to act commercially,” she adds. “A foundation or other philanthropic institution is going to want to ensure the nonfinancial outcome of a deal fits its mission.”
Often, even the words each side uses are different. For example, in one blended finance transaction, Larrea witnessed, “the aid agency was talking about the need to follow procurement rules, and the private sector guys were like ‘We’re not procuring – we’re a company. We’re operating. What do you mean we have to put things out for bids?’”
These issues could [JL1] be just as pronounced when investors look to exit blended finance deals. While financial or strategic players might want to sell to the party offering the highest price and be ready to strike a deal quickly, mission-focused organisations might want to identify a buyer that shares its values, and that takes time.
Convergence itself also has more work to do. Blended finance dealflow from North Africa and the Middle East is still light, says Larrea. Convergence wants to help balance this out by identifying more transactions in this region and in Southeast and East Asia.
One Convergence offering that is already up and running is its design funding window, which has more than $7 million available in grant finance to fund the design of innovative blended finance tools.
“We’re trying to support early-stage blended finance instrument design,” Larrea says. “The grants are intended to allow people to take an idea that would otherwise languish because it is considered too risky or complex to spend time developing.”
Of three grants disbursed by Convergence so far, one is in the agriculture space.
In the first quarter of this year, it awarded the Rainforest Alliance a feasibility stage grant [JL2] .
The Rainforest Alliance will use the money to design a risk-sharing or guarantee mechanism that it believes will encourage financial institutions in Ghana to lend their own capital to blended finance deals supporting smallholder cocoa farmers. Rabo International Advisory Services will support it throughout the process.
“That whole offering is going really well,” says Larrea. “We’re getting great applications and a lot of interest.”
Convergence also offers a knowledge resource that runs blended finance workshops like the one it is hosting at Blending4Ag.
In workshops, Convergence talks new and experienced investors through a range of blended finance structures and instruments, explaining how the process works and providing best practice examples.
The aim is to spread the word about what blended finance is and how it works at its best, says Larrea.
Convergence also produces case studies of concluded blended finance deals, breaking down how the deal worked, what the individual parties wanted to achieve from it, how their different aims were aligned and why that transaction needed to be blended to get done.
“The case studies are getting a lot of attention of our website, so the thesis that people are hungry for examples is clearly correct,” Larrea says. “We’re trying to give people comfort that they are not the only ones trying to work within this unfamiliar structure.”
[JL1] I was speaking hypothetically about what could happen in the future, not about a specific case.
[JL2]We have not published the grant amount, but feasibility stage grants are $50-250K USD; the deleted text was describing our entire grant program, not this single grant.