Temasek-backed Pentagreen eyes five themes in blended finance
Pentagreen Capital, a 50-50 venture between Temasek and HSBC, is aiming to standardise the due diligence process across five key themes over the next few years to attract capital and to help scale blended finance.
According to Pentagreen Capital's CEO Marat Zapparov (pictured below), investors and stakeholders are keen for more replicable structures, particularly in high-potential sectors like distributed energy.
Founded in 2022, Pentagreen aims to deploy $1 billion in loans to projects lacking adequate access to mainstream finance.
Renewable energy, energy storage, sustainable transportation, circular economy, and emerging sectors including green data centres are its five key areas of focus. Both of the deals done by the firm so far have been in the renewable energy space.
"If we can establish templates for each of these themes, they would represent the holy grail, making them reliable and ready for mainstream implementation," Zapparov told AsianInvestor.
Blended finance involves combining public and private funding to achieve sustainable development goals.
The use of replicable, templated structures that outline key terms, roles, funding mechanisms, and risk-sharing arrangements between different stakeholders such as governments, development banks, private investors would go a long way toward streamlining deals, and make successful models easier to reproduce.
Zapparov said work was underway in the renewable energy space: "The team is investing significant effort into developing a credit scoring methodology for customers that can be consistently applied across similar types of constraints. The aim is to identify where the credit risk cutoff lies." Such a cutoff will determine which projects would not be accepted into the structure.
"While the contracts won't be identical, they will share some minimal features to maintain consistency. Managing FX [foreign exchange] risk is another area where commonality in approach can be achieved,” he added.
Pentagreen anticipates that through several financing deals, particularly through scaling younger borrowers, standardised templates will emerge. This will facilitate the development of a larger investment portfolio, enhancing the appeal of blended finance to institutional investors.
Additionally, standardised structures can enhance returns for commercial providers by making the investment process more efficient and help to ensure that the initial effort and resources spent on deals don’t get wasted.
STATE OF THE MARKET
Following a 10-year low in blended finance deal volume in 2022, Convergence, a global blended finance network providing data and deal flow, observed a rebound in 2023 that reached a five-year high. Financing totals grew by 71% in 2023, increasing to $15 billion from $9 billion in 2022.
ASEAN volumes, however, have remained flat, with very little change between the level five years ago and figures today.
“It is challenging for investors to find good, de-risked exposures in this region,” Zapparov explained. “Aggregators and intermediaries can serve as channels for larger capital allocators to gain exposure in this highly fragmented Southeast Asian market, where each country has its unique jurisdictional challenges.”
Pentagreen is therefore building the right execution resources which are crucial for finding, aggregating, and properly structuring these exposures.
“Ultimately, this helps create a more attractive offering for larger capital allocators, who can then view it as part of a broader portfolio,” he said.
The team has reviewed over 100 individual projects since launching two years ago. About half were unsuitable for private finance. The other half remain in the pipeline, with close to 20 having progressed to term sheet discussions on specific deals.
DUAL RETURNS
According to Zapparov, for private or commercial capital to get involved in blended finance, commercial outcomes of the financing provided need to be shared.
Interest is on the rise. Based on the most recently available data provided by the Development Finance Institutions’ Joint Report published in March 2023, aggregate blended financing in 2021 totalled $13.4 billion, of which roughly a third, or $4.6 billion, came from private sector financing.
“On the deal side, the projects we work with are very commercial. They are businesses addressing the disconnect between risk and reward, particularly in the current fragmented global environment,” noted Zapparov.
“It is crucial for investors to recognise that while blended finance involves philanthropic and developmental funding, its primary goal is to create commercial opportunities by de-risking projects and enhancing their commercial viability,” he added.
Impact assessment is vital in blended finance to ensure investments deliver both financial returns and meaningful social or environmental outcomes.
Pentagreen is also developing a framework for collecting impact outcomes by defining measurable impacts for each deal and consulting with independent advisors on measurement and verification.
“Defining practical expectations for impact in Asia is an evolving process. We are continually learning and refining our approach on a deal-by-deal basis,” Zapparov said.