This paper aims to provide a comprehensive framework for structuring blended finance funds, which are becoming increasingly important mechanisms for channeling private capital toward impactful projects in developing countries. The paper explores several key dimensions.
First, we clarify the definition of blended finance, emphasizing the strategic use of concessional capital alongside private investment to promote sustainable development goals. We also examine the motivations, roles, and utility functions of various stakeholders, including public investors, asset managers, and private investors.
Second, the paper analyzes the common use of two-tranche structures, in which senior tranches are allocated to private investors and junior tranches are held by sponsoring entities. Specifically, we demonstrate the economic rationale behind this tiered structure and its relevance in blended finance contexts.
Third, the paper presents an analytical framework for calibrating two- and three-tier fund structures, offering detailed insights into credit risk modeling, cash flow generation, and the concessionality premium.
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