3 ways to increase blended finance investment

LPs should start investing alongside DFIs even it it means a smaller ticket size, according to L&G portfolio director Michael Klaster.

Mobilisation ratios, smaller ticket sizes and sharing data are the keys to increasing private capital flows into blended finance models, according to Michael Klaster, portfolio director at Legal & General.

Klaster was speaking on a panel at this week’s RI Europe conference in London, hosted by affiliate title Responsible Investor. In his role at L&G, he manages the £5 billion shareholder fund portfolio of Legal & General Insurance.

Mobilisation ratios

There is currently insufficient focus from development finance institutions on mobilising private capital, Klaster said: “The focus is much less on private capital mobilisation than it should be. If you look at the private capital mobilisation ratios that you could achieve if you look at certain structures, [they are] easily five, six or even seven. If you then look at the average of what is achieved, which is below two, then you can see there is a lot of scope for improvement.”

The average private sector mobilisation ratio currently sits at 1.8, according to recent data from blended finance network Convergence, meaning that less than half of the financing mobilised by each dollar of concessional financing has come from the private sector, with the rest being provided by DFIs and philanthropic investors.

Private capital mobilisation ratios should be “the main KPI for the DFIs”, Klaster added.

Start small

LPs have a responsibility to change their attitude towards blended finance. “A lot of large institutions, they simply have discussed it but have never invested in it, because there are all sorts of reasons not to do it,” Klaster said.

Rather than wait for the perfect opportunity to materialise, investors should instead “just do the first deal, learn from it, maybe a smaller ticket than you’re used to, and then build it up.”

Data sharing

DFIs have a responsibility to share the knowledge they have to allow investors to properly assess the merits of blended finance opportunities. “They have been in this space for multiple decades,” said Klaster. “By sharing that data with the rating agencies and making it possible for them to rate these instruments much much better, it will really be a game changer.”