Blended Finance: Myths & Realities

Alex Collerton Senior Associate, Banking and Finance, Norton Rose Fulbright LLP

David Milligan Partner, Banking and Finance, Norton Rose Fulbright LLP

Blended finance is widely used but is frequently misunderstood or applied imprecisely across loan markets.

The term refers to the strategic use of public or philanthropic capital to mobilise private investment towards sustainable development objectives by addressing identifiable market failures. When done well, it can bridge the gap between projects generating positive sustainable externalities and the risk-return expectations of commercial investors. This in turn can unlock sustainable investment at scale in under-served sectors and/or geographies. When done poorly, the term is diluted and capital can be invested inefficiently.

This article reframes blended finance through a series of common myths and realities encountered by practitioners structuring such transactions. The aim is not to promote blended finance as a panacea, but to clarify what it can, and cannot, achieve when applied with discipline.

Myth 1: Blended finance is simply cheaper money

Reality

Blended finance is about reallocating risk and addressing investor concern.

Blended finance does not exist primarily to lower the cost of capital for borrowers or conversely to subsidise returns for investors. Instead, its purpose is to address specific risks that prevent private capital from participating on commercial terms. Properly structured blended finance targets discrete barriers, e.g. political risk, currency mismatch, tenor constraints or construction and technology risk, rather than providing across-the-board pricing support.

Where concessional capital is used merely to enhance returns without addressing an underlying market failure, the financial additionality is lost. The result is not mobilisation but substitution, with public capital displacing rather than catalysing private investment.

Myth 2: Any transaction involving a development finance institution is blended finance

Reality

The presence of a public lender does not, by itself, create a blended finance transaction.

A development finance institution lending pari passuat market rates on conventional terms, without mobilising additional commercial participants, is not engaging in blended finance. Nor does the inclusion of a multilateral development bank in a syndicate automatically classify the transaction as blended finance.

This distinction matters. Mischaracterising conventional transactions as blended finance obscures the true deployment of concessional resources and complicates disclosure, subsidy-control analysis and accounting for grant elements. Precision in labelling is therefore not semantic; it is structural.

Myth 3: Concessionality should be maximised to attract private capital

Reality

Effective blended finance applies minimum, necessary concessionality.

The central structuring challenge in blended finance is not how much concessional capital can be deployed, but how little is required to unlock private participation. Excessive concessionality risks distorting markets, crowding out commercial lenders and undermining the long-term development of local capital markets. Insufficient concessionality, by contrast, may fail to address the risks that deter private investment in the first place.

Best practice therefore focuses on precise calibration. Guarantees, first-loss capital, subordinated tranches and concessional loans should be sized and structured to absorb specific, identified risks, not to provide open-ended downside protection.

Myth 4: Blended finance instruments are interchangeable

Reality

Instrument selection must follow risk diagnosis.

Blended finance offers a broad toolkit, but instruments are not functionally equivalent. Guarantees are well suited to addressing credit or political risk; local-currency hedging facilities can mitigate currency mismatch; first-loss capital may be appropriate where portfolio diversification is required; and concessional loans can address tenor or cashflow timing issues.

Selecting instruments without a clear understanding of the barrier being addressed increases the risk of inefficiency and misalignment. A disciplined diagnostic process is therefore a prerequisite to effective structuring, not an optional preliminary step.

Myth 5: Blended finance vehicles are simpler than deal-by-deal structures

Reality

Fund and platform structures trade flexibility for scale.

Blended finance vehicles, including funds, platforms and special purpose vehicles, can achieve diversification, operational efficiency and scale which is otherwise difficult to achieve on a deal-by-deal basis. However, they introduce additional layers of governance and complexity. Clarity around investment mandate, fee alignment and decision-making authority is essential. Without it, the very structures designed to mobilise private capital can become sources of friction.

Myth 6: Intercreditor arrangements can be addressed later

Reality

Clear and robust intercreditor structuring is central to the credibility of blended finance structures.

Given the catalytical and concessional elements, blended finance transactions involve parties with differing mandates, time horizons and return expectations. These differences crystallise most sharply in stress scenarios.

Intercreditor agreements must therefore anticipate and manage the rights and remedies afforded to different investor classes with precision through robust documentation and independent oversight, aligning standstill periods, voting thresholds, cash-flow waterfalls and enforcement mechanics with the intended risk allocation.

A recurring tension arises between the developmental objective of supporting borrowers through periods of distress and the commercial imperative for timely enforcement. Addressing this tension upfront is essential to maintaining confidence among private participants.

Myth 7: Impact monitoring is secondary to financial performance

Reality

Measurement underpins legitimacy.

Providers of concessional capital have a heightened obligation to demonstrate that resources are being used effectively and that catalytic outcomes are being achieved. Monitoring frameworks must therefore integrate financial performance with clearly defined impact metrics, supported by systematic data collection and verification.

Voluntary standards, such as the Operating Principles for Impact Management,1 provide useful reference points, but credibility ultimately depends on discipline in implementation rather than the form of disclosure.

1. International Finance Corporation, 'Operating Principles for Impact Management' (IFC) www.impactprinciples.org accessed 11 March 2026.

Myth 8: Exit strategies can be deferred

Reality

Exit should be planned from inception.

Blended finance is not intended to create permanent subsidy. Its objective is to demonstrate the viability of markets or asset classes and to facilitate a transition to fully commercial financing over time. Concessional providers should therefore structure their participation with clear exit pathways, whether through loan repayment, expiry of guarantees or divestment of junior positions.

A credible exit strategy protects public capital and sends an important signal to the market regarding long-term sustainability.

Conclusion

Blended finance can be a powerful mechanism for mobilising private capital in pursuit of development objectives, but only when applied with discipline and precision. Treating it as a catch-all solution risks diluting its impact and undermining confidence in the asset class.

For practitioners, the challenge is not to deploy blended finance more frequently, but to deploy it more rigorously. This translates into a need for clear risk analysis, diagnostic-based structuring, minimum concessionality, robust governance and transparent measurement. Only then can blended finance deliver both commercial returns and public value at the scale required.