Legal Considerations and Mechanics in Blended Finance
Martina Brandli at EBRD captures the key insights from the EBRD, BII, and GAIL Event
At our November event, the final of the Collective’s series of 2024 learning and networking events, we welcomed a diverse group of blended finance and legal professionals to discuss key legal considerations and mechanisms in blended finance.
Hosted at the European Bank for Reconstruction and Development (EBRD), the event was framed around The Global Alliance of Impact Lawyers’ (GAIL’s) recently published report: “Unlocking Legal Pathways for Blended Finance: Case Studies and Global Insights”.
Kaylyn Fraser, Principal in the EBRD Blended Finance team, kicked off the event by defining blended finance – referencing key groups such as the OECD, Convergence, the DFI Working Group for Blended Concessional Finance, and the UK social finance sector. She explained that common best practice principles guiding the governance and contracting of blended finance include the concepts of additionality, minimum concessionally, crowding-in of private capital, promoting commercial sustainability, reinforcing rather than distorting of markets, and deploying concessional resources in line with high standards of transparency, accountability, and environment and social governance.
Naomi Sander, Senior Legal Counsel & ESG-Impact Lead at Asset Green, as well as UK and Global Board Member at GAIL, introduced GAIL - a global community of legal leaders using the practice of law to drive positive impact and accelerate the just transition - and the above-referenced report. She highlighted the establishment of a Blended Finance Working Group to explore the unique positioning of lawyers in advancing change in the blended finance landscape. As a key author of the report, Naomi described blended finance as “legal advisor bread and butter” due to its focus on contractual and structural risk re-allocation. She then presented the report, which leverages the expertise of more than 40 lawyers from 13 jurisdictions, along with in-depth case studies, to understand regulatory challenges and find key legal pathways to unlock the potential of blended finance. Specifically, it aims to accelerate capital flow to support the Sustainable Development Goals, by identifying and mapping legal and regulatory barriers to blended finance and sharing global lessons and learnings.
Following Naomi’s presentation, the Blended Finance Collective hosted a dynamic panel of five legal experts moderated by Melissa Manzo, General Counsel at AgDevCo and Board Secretary to the GAIL Global Board.
Inna Gretchka, Director and Chief Counsel of the EBRD’s Corporate and Donor Partnerships team in its Office of the General Counsel, explained her team’s role in advising on legal aspects of donors co-financing operations, ensuring the EBRD meets its market development mission while navigating complex, multijurisdictional legal and regulatory frameworks. Inna explained that the EBRD raises concessional finance from a range of bilateral, multilateral, and philanthropic donors, each with its own set of legal and policy requirements. She highlighted that increasing crises and fragility in emerging markets have led to greater demand for blended finance structures, resulting in Inna’s team being busier than ever. Thus emphasising the need to balance flexibility with efficiency in fundraising for concessional finance, stressing the importance of securing maximum flexibility upfront to ensure rapid deployment of funds, enabling time-sensitive blended finance structures to meet the needs of fragility. Inna also pointed out the importance of collaboration with various internal teams to ensure fundraising priorities and requirements across the Bank are well understood by all. Ultimately, flexible, well-coordinated and well-understood donor agreements will unlock concessional finance that is more likely to be quickly deployed and easily replicated in the future.
The next panellist was Louise Ollier, Deputy Chief Legal Officer at British International Investment (BII), who leads BII's legal team handling fund and intermediated investments across markets, including issues related to ongoing ownership of fund interests.
Louise discussed the complexity of blended finance structures in equity funds, emphasising that no two funds are alike, and each requires a tailored legal approach. She explained that the legal structure of a fund is driven by its underlying commercial factors, posing the need to balance simplicity with diverse investor requirements. Different investor classes, geographical restrictions, and the need for attractive returns to mobilise private capital all contribute to this complexity. She emphasised the importance of ensuring that capital contribution order and distribution waterfalls work properly, particularly in debt funds where income treatment and principal repayment can differ. Louise also stressed the need for alignment – both among investors, as well as between investors and the manager. Geographical or other investment restrictions can limit investor access to the same investments, and differing risk profiles across tranches may create challenges in a single investment advisory committee. Further, at the management level, it is essential to ensure proper incentives for timely fund wind-down. Louise's insights underscored the delicate stakeholders balance required to structure effective blended finance deals.
Matt North, Deputy Chief Legal Officer at BII, leading BII’s lawyers team working on the development finance institution’s corporate and financial services debt transactions, was the third panellist. Matt provided a compelling case study making use of “flexible debt” provided to one of BII’s investees.
The investment aimed to support an investee to encourage uptake of climate mitigation technologies among its agricultural clients. Once taken up, the investee’s clients were able to sell carbon credits via the investee, the revenue of which was used to reduce the cost of the climate mitigation technologies. BII supported the investee with a corporate debt instrument: at its core, the debt was in the form of a senior loan but with a number of unique features to mirror the innovation of the investment. While options like repayable grants, cash-settled instruments, and structured equity were considered, the team chose a "contingent loan" structure. This approach effectively reflected the nuanced bet on carbon credit prices, as repayment occurred only if the carbon credits were sold, with an upside share triggered if specific price thresholds were met.
While the deal leveraged an innovative finance structure, the simplicity and familiarity of the underlying loan allowed for quick and efficient implementation, contributing to its success. Further, clear communication with stakeholders and its relatively non-bespoke nature, were also essential to drive the success of the project. The project also served as a valuable reference point for similar initiatives, illustrating how flexible legal structuring can foster both innovation and scalability in blended finance.
To wrap up the presentations, the audience heard again from Naomi Sander, who is also the Senior Legal Counsel at Asset Green, a strategic private equity firm that invests in projects aimed at addressing food and energy security issues in economies around the world.
Naomi discussed key regulatory barriers for blended finance transactions, particularly in the European Union (EU), relating to compliance with the Alternative Investment Fund Managers Directive (AIFMD) and the EU Securitisation Regulation. In the context of debt funds with layered capital structures (both equity and debt), AIFMD may create legal or regulatory obstacles at the level of the fund’s capital structure owing to new requirements around leverage limits and fund’s syndication activities - this new regulation is the focus of a key chapter in GAIL’s report. Naomi concluded by announcing that GAIL plans to continue its 'Blended Finance Project' (the source of the GAIL report) and may release additional publications in the future, encouraging interested to reach out for potential collaboration opportunities.
The panel closed with remarks from Sarah Marchand, BII’s Director of Capital Solution, who highlighted the key themes that emerged throughout the discussion, including the importance of balancing donor requirements with flexibility and simplicity, aligning investor interests, and navigating complex regulatory requirements. She underscored the critical role of adaptable, efficient, and transparent legal structures in scaling blended, finance solutions, emphasising that these frameworks are essential for unlocking the full potential of blended finance in driving impactful, sustainable projects.
The Blended Finance Collective thanks Melissa Manzo for her expert moderation, and each of Inna Gretchka, Louise Ollier, Matt North, and Naomi Sander for their valuable insights and discussion. This event marked the end of the Blended Finance Collective’s 2024 programme of events. Member events will resume in 2025.