Growing need for blended finance in Asean as investors expect higher returns: BlackRock
While discussions on using this financing mechanism to fund the energy transition in South-east Asia has been gaining traction, analysts cite several challenges inhibiting the scaling up of blended finance in the region
THERE is a growing need for blended finance structures to fund climate infrastructure projects in South-east Asia, given that commercial investors have been having higher expectations on returns, and are therefore deploying capital into the region at a slower pace, said BlackRock executives.
With the spread between developed markets – such as those in the European Union and United States – and emerging markets in South-east Asia getting wider, commercial capital is flowing at a slower rate into markets that need it the most, said Valerie Speth, co-lead in Asia-Pacific’s climate infrastructure group at BlackRock at a recent media roundtable.
“So I think the need for capital in South-east Asia becomes higher and higher, and then the question is, what instrument could you (use to) do this? And there, you go back again to a different structure – which could be a public-private partnership or another structure – how you can mobilise money for the region where it is actually most needed,” said Speth.
Bigger expectations
While investors typically get more leverage for every dollar of investment in emerging markets, the higher returns they are getting now from the EU and the US has led them to have bigger expectations on the premium they can get from emerging markets – given that these markets are perceived to have higher risks.
Blended finance is a capital-raising approach that leans on investors with higher risk appetites, such as development funds and philanthropists or governments, to provide concessional or catalytic capital to pull in more commercial investors.
The main thrust of blended finance is for concessional or catalytic capital to lower investment risks or the costs of capital through guarantees or first loss, thereby attracting more commercial capital.
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Discussions on using this financing mechanism to fund the energy transition in South-east Asia have been gaining traction. The Monetary Authority of Singapore has launched a blended finance initiative known as Financing Asia’s Transition Partnership last year, with the goal of raising US$5 billion.
However, Speth cited several challenges inhibiting the scaling up of blended finance in South-east Asia. “The thing about blended finance is a lot of people need to come together, and all of them have different interests, so you need to have a really good project manager who’s aligning all these things, because we can only do this as a team.”
“And then it takes time to create these (blended finance) vehicles. It’s a risk-adjusted return. So if you have different parties in that vehicle, some are willing to take either fixed returns or lower returns... But you need to find that party first to be able to blend this with institutional capital,” she added.
Investors are also looking for a stable regulatory environment to deploy their funds. Asset managers like BlackRock will not make their investment decisions by taking a risk on regulation, said Speth.
A liberalised energy market, such as the Philippines’, is the most efficient and cheap in the long term.
However, Speth also recognised that governments in South-east Asia are unable to transform their energy markets overnight as energy prices need to be kept at a level where its affordable for consumers.
“I think it’s finding the right balance, and probably we will take some time until you can do that entire shift... All these markets, they have cycles, and they are going to be a 20 or 30-year journey. It’s not going to be one, or two years where energy transition will be our main focus,” she added.
Broader macro themes
Beyond just how the energy market is regulated, Brad Kim, BlackRock’s managing director of global infrastructure fund in Asia-Pacific, said that asset managers also look at broader macro themes as well, such as how governments in the region are aligning policies relating to artificial intelligence (AI), supply chain and energy transition.
“(The region) is so spread out between a very large area – lots of islands, lots of seas, lots of different countries. Everything has to travel, including energy. And so there’s a huge convergence that’s happening,” he said.
“When we look at how do we invest into climate or into decarbonisation or transition, it’s also very important to look at: What’s the step further? Who’s using this green energy? Which countries are investing into AI-enabled data centres as the next theme, and who is then going to be looking for these new green infrastructure – the batteries and the low-carbon (electricity) generation,” he added.
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