I attended a session on utilizing blended finance in PPP projects, hosted by WAPPP. The focus was on how public sector funding can expand the pipeline of viable projects and crowd in private investment by addressing early-stage risks.

We talked about strategies to make individual PPP projects more bankable, including risk-sharing mechanisms, credit enhancements, and structured guarantees.

There’s $482 trillion in global financial assets. 88% is owned by the private sector. But once you exclude China, only 4-5% of that capital is reaching developing countries. That means private investors are essentially not invested in 142 developing countries.

76% of low- and middle-income countries are rated B or lower. Investors will continue to stay in the global north if the investments available are single B or triple C. The only way to shift that is by creating a risk-return profile acceptable to institutional investors.

There are two mechanisms to do that.

1. Diversification - Instead of investing in one PPP project, investors can invest in a fund that makes debt investments across multiple projects- within one country or across several. This spreads risk across borrowers, sectors, and currencies. A single borrower defaulting doesn’t move the needle in a diversified portfolio. In fact, diversification alone can lead to a two-notch uplift in risk rating from the big three agencies.

2. Subordination - Subordination in capital structure of fund improves risk for senior investors. Junior and mezzanine tranches absorb losses first, before senior investors are affected. The higher the share of subordinated capital, the more cushion there is. If defaults don’t materialize, those junior and mezzanine investors are repaid with strong returns.