2026: Blended Finance – where performance meets purpose

AllianzGI is one of the very few large asset managers with a dedicated Development Finance team. Since 2017, the team has raised more than USD 4.2 billion in commitments across development finance strategies, typically focused on mobilising capital towards private debt investment strategies that support economic development across emerging markets – including blended finance.

How do we select the investments in our blended-finance funds? First, we apply environmental, social and governance (ESG) analysis as the base screening to all portfolio investments. The goal is to identify and assess potential environmental and social risks from the outset. Robust ESG due diligence is essential and requires far more than simply applying an exclusion list.

Second, we evaluate the potential positive impact of an investment, in terms of measurable social or environmental benefits, in the form of its contribution to the UN Sustainable Development Goals (SDGs).¹

While regulatory safeguards have intensified, concerns remain in the market as to which managers and strategies are properly incorporating ESG and impact due diligence. At AllianzGI, we have a dedicated impact team that supports development finance strategies with ESG due diligence as well as impact assessment (ex-ante and ex-post), in a way that is transparent for investors.

From AllianzGI’s perspective, we consider that consistently implementing robust ESG standards throughout the investment process is essential to drive portfolio performance. This, coupled with a thorough impact screening, is key for the success of Blended Finance vehicles. 

For investors entering emerging markets, challenges often include regulatory constraints, limited ability to assess risks accurately, and a lack of familiarity or on-the-ground presence. Perceived risks – which do not always materialise – can relate to political context, credit quality, capital convertibility and transferability, tax regimes and other market factors.

To overcome these barriers to entry and manage the risks, close collaboration with development finance institutions (DFIs) and multilateral development banks is crucial. These institutions are pioneer emerging-market investors and still represent the majority of the capital flowing into many of these markets. Investing alongside the DFIs enables investors to leverage their local presence, expertise in sourcing impactful projects, and the privileges that are derived from their the halo effect from the “Preferred Creditor Status”, including withholding tax exemptions and currency convertibility and transferability waivers.

As a result of this expertise, DFIs have a proven track record in emerging markets with very limited credit losses even through challenging economic cycles. This means that even before blending, the target assets can perform better than many investors new to emerging markets might expect.²

To mitigate credit risk concerns, we work closely with institutions that provide us with credit enhancement either commercially (eg, via credit insurance) or by raising public sector capital, which provides first-loss protection in a blended vehicle.

For insurers, the former method may be particularly attractive when solvency risk capital is scarce and spreads are tight.

In blended finance structures, public sector agencies typically take a junior position to de-risk senior investors. This enables senior investors to hold a low-volatility position with returns commensurate with the risk. This is possible because the junior investors are prepared to bear a bigger share of the potential risk. Furthermore, the vehicles have a defined cashflow allocations such that senior investors have priority over underlying portfolio cashflows. Together, these features provide senior investors with downside protection on both return and capital.

For institutional investors and, in particular, insurance companies, these various de-risking measures are essential to achieve an investment grade credit profile and, potentially, reduce capital consumption under the Solvency II framework.

Consider a large-scale blended fund with 85% of capital coming from senior investors, ie, private sector institutions. Junior investors provide 10% of the capital with the remaining 5% covered by an “unfunded guarantee”. Until seniors are fully redeemed, 100% of principal repayments from the underlying debt investments will be distributed to them. We have modelled an illustrative target portfolio of 45 investments to be executed during an investment period of four years, assuming no extensions.

In this example, the senior investors will, at inception, benefit from a firstloss protection of 15.8%³ of invested capital, given their share in the fund structure. As debt repayments come in, the level of protection will increase since the junior capital is not redeemed. At the projected peak of invested capital (after around five years), the first-loss protection would already represent approx 25% of invested capital. Therefore, even if one-quarter of all investments made were to default, senior investors would not bear any realised losses on their portfolio share. After around 10 years, the protection level would have further increased to more than 50%, eventually reaching full protection once the remaining (senior) principal outstanding is fully covered by the first loss guarantee.

Priority of cashflows: on average, the protection is about double the initial protection level.

Although Solvency II standard model investors may not necessarily benefit from the risk mitigation in their solvency capital requirement (SCR), it is worth noting that the protection levels described above exceed the one-in-200 year event the SCR formulas are aiming to capture. If necessary, there are ways of structuring these vehicles such that the risk mitigation can be accounted for even by standard model insurers.

To summarise, blended-finance funds can provide investors with a risk-adjusted way to access emerging markets. Investing in sectors and geographies that are underrepresented in public emerging-market indices can be a portfolio diversifier with higher yields. Despite the significant financing needs, capital markets in many of these jurisdictions remain underdeveloped: this is where DFIs and blended finance vehicles come into play. For certain investors such as life insurers, with “illiquid” balance sheets, private markets are the perfect spot to harvest additional illiquidity and in this case complexity premia. Blended Finance can be an attractive investment proposition. From the perspective of geographical diversification alone, one can already foresee a low correlation to investments in traditional developed markets. Combined with the significant downside protection mentioned above, the benefits from the preferred creditor status of DFIs, and a yield pick-up versus comparable securities, blended finance can enhance the risk-return profile of the strategic asset allocation of long-term investors. This can be especially true for highly regulated investors like insurance companies, given the increasing risk mitigation over the life of the fund as well as the return targets that aim to generate a meaningful and considerable spread pick-up versus comparably rated securities. 

¹ cf. AllianzGI, “Bringing impact investing into private markets“, 2023.

² cf., Global Emerging Markets Risk Database (GEMs), “New statistics from GEMs Consortium Show Risk of Investing in Emerging Markets Is Lower than Commonly Perceived”, Press release, Oct 7, 2025.

³ 15% protection over 95% total invested capital.