Credit rating agencies key to unlocking blended finance, says Allianz GI

Credit rating agencies are too negative on their assessment of blended finance structures, which is hindering the flows of climate finance to the emerging markets, Allianz Global Investors has claimed.

Lucie Bernatkova, vice president and portfolio manager at the asset manager, told Environmental Finance that a lack of investment-grade ratings is part of the reason that blended finance has not scaled as quickly as many had hoped, and private investors are only dipping their toes into the theme.

While credit ratings will assess blended finance structures – for example the Climate Investment Funds Capital Markets Mechanism (CCMM), which earlier this month issued a $500 million bond – Bernatkova argued that they sometimes deserve stronger ratings than they are allocated.

"We would like to see more work done with ratings agencies to get them more comfortable with rating these types of products. Institutional investors want to see investment-grade ratings. It's prudential regulation that is restricting them," she said.

"This goes beyond a cultural preference – it's ingrained in regulation. It's currently very challenging for them to rate these portfolios. If you can structure vehicles where they can participate at investment-grade risk capital charge, it would be huge for unlocking institutional capital."

She cited the publication of the Global Emerging Markets Risk Database (GEMs) Consortium Report last March as being a step in the right direction, as the credit track record of development finance institutions was made available. This revealed statistics regarding the recovery rates of investments with private and sub-sovereign borrowers in emerging markets and developing economies, dating back to 1994.

"This should support mobilising more institutional capital to get more comfortable investing in these markets, as it has shown that the risk of investing in these markets is lower than perceived," Bernatkova claimed.

However, credit rating agencies could give a deeper level of granularity to help get investors more comfortable with understanding these investment opportunities, she added.

Last week, Allianz Global Investors held a final close for its blended finance equity fund with the European Investment Bank, having secured €450 million ($468 million) in capital commitments. The Emerging Markets Climate Action Fund (EMCAF) operates as a fund-of-funds and will invest in 15 funds focused mostly on renewable energy and energy efficiency within the emerging and developing markets. To date, it has invested in nine. (See box below).

The final close came as Germany's KfW, which was an original anchor investor of the fund, topped up its commitment by €20 million.

"They topped up following the endorsement of EMCAF by the G7 as a model blended finance instrument for mobilising private institutional capital into emerging markets," Bernatkova said.

"In fact, every year that we were fundraising, they topped up their commitment."

Where some blended finance funds might look to secure the junior tranches first, as a way to provide private investors with a sense of reassurance that capital has already been committed, Allianz looked to do this the other way.

Instead, Bernatkova explained that, once it received initial interest from public investors, it looked to private investors to commit to the fund. Having launched in 2021, the entire senior tranche was secured by year-end.

She said: "Raising junior capital is a fundraising category of its own and brings a completely different set of challenges.

"It helped that we had the certainty of the senior commitments. Junior investors knew that, as soon as they came into the fund, they would directly unlock the senior commitments. It made it a very attractive proposition for all the public investors coming in after the first closing."

This meant there was already money in the pot, so deployment could begin straight away – as the process of due diligence from that junior tranche means onboarding takes much longer.

"The certainty on the capital mobilisation in the senior tranche was one of the main factors which kept KfW coming back," she added.

By final close, the fund had secured commitments from the Nordic Development Fund, the UK Foreign, Commonwealth & Development Office, EIB Global, plus insurers Allianz and Folksam.

While securing capital for junior and senior tranches each has its own challenges, so too does the juggling act of managing risk-return preferences. The "tension" between the two types of investors places the burden of striking the balance onto the investor.

As a fund-of-funds, Bernatkova explained this means there's two different types of fund managers the vehicle could back.

"One side of the spectrum is financing the proof-of-concept, new business models and perhaps first-time fund managers. On the other side of the spectrum in our strategy is, for example, financing subsequent vintages from more established fund managers," she said.

"As a fund manager, we need to strike a balance between the two, and have transparent communication with both parties, saying that we are doing investments on the riskier end, but are still lower risk than would be the ideal situations for our public investors."

She added that this can lead to fund managers restricting their strategy's focus – in a bid to please both public investors, who want impactful outcomes which can mean investments into low-income countries or new business models which carry higher risk, for example, and private investors, who would prefer to have their capital allocated to lower-risk propositions.

She said: "We've been lucky with EMCAF that it's been kept quite broad with the full spectrum of climate mitigation and adaptation, but we have seen other strategies in the market who have, as a result of onboarding multiple public investors, restricted their investment universe, ultimately leading to a smaller fund size."

Allianz will be speaking at a conference being organised by the OECD and Environmental Finance in Paris on 4 to 5 February. See the agenda here: CoP-PF4SD Conference 2025: Mobilising private finance towards 2030 and beyond.

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