By Callum Thomas, Junior Policy Analyst, OECD
As concessional public finance comes under pressure, policymakers are increasingly turning to private capital to close financing gaps in emerging markets and developing economies. Yet investors remain cautious in high-risk environments, particularly where markets are shallow, project pipelines weak, and risks difficult to price. Tackling this is not only about deploying more subsidies but making better use of them.
Structured funds, also known as collective investment vehicles, are among the most powerful tools in blended finance. By pooling capital and allocating risk across different investor risk-return profiles, they allow public actors to absorb specific risks while crowding in private investors who might otherwise not invest.
A structured fund works a bit like a game of Jenga. The bottom blocks — the junior or first-loss tranche — sit at the foundation to support the entire structure and absorb shocks. Above them, mezzanine tranches take on some risk but benefit from the protection below. At the top, senior investors rest on the most stable part of the structure, facing the lowest risk and accepting lower returns. By carefully deciding which blocks sit where, public actors can stabilise the tower, encouraging cautious private investors to participate.
Well-designed structured funds can mobilise private finance at scale while limiting concessionality and supporting long-term market development. New OECD analysis complements this Jenga analogy, showing that fund design — and not just the amount of concessional capital involved — is critical to mobilisation outcomes.
Junior tranches punch above their weight
New OECD data on private finance mobilisation highlights the importance of junior (or first-loss) tranches in high-risk markets. In Africa, one of the highest risk markets, members of the OECD Development Assistance Committee (DAC) made 598 commitments to blended finance funds, mobilising USD 13.9 billion in private finance. While only 93 of these commitments went to the riskiest junior tranches, they generated over USD 6.8 billion in private capital — the largest mobilisation contribution across all tranche types. To be sure, other factors contribute to a fund’s attractiveness, such as stronger pipelines or more experienced managers. But this finding underscores a consistent pattern in the association of junior tranches with high mobilisation outcomes in higher-risk markets.
In contrast, 455 donor commitments to common shares in flat funds (where, unlike structured funds, all investors hold the same share class and face identical risk/returns) mobilised USD 5.7 billion, while 50 commitments to mezzanine and senior tranches mobilised just USD 1.4 billion in the same period. In other words, though junior tranches are used less frequently (partly due to structural deployment constraints) they are associated with higher private finance mobilisation per dollar of public capital spent.
This is not coincidental. In markets with low investor confidence and scarce local capital, layered fund structures bridge gaps that would otherwise prevent deals from being made. By absorbing the first layer of losses, junior capital gives senior investors enough reassurance to participate without relying on blanket subsidies.
Structure, not subsidy alone, drives mobilisation
The findings challenge a common idea about blended finance: that more concessional capital automatically leads to greater mobilisation. In fact, oversized concessional tranches can not only dilute mobilisation numbers but lock public capital into low-risk positions, distorting markets.
As a matter of fact, research by the International Finance Corporation (IFC) finds that 42% of total blended finance deployed by development finance institutions (DFIs) as of 2021 went to senior debt – among the least effective instruments for mobilising private capital – while only 11% went to subordinated debt (in junior or mezzanine tranches). This suggests that public actors are under-utilising their balance sheets by prioritising low-risk senior positions over risk-absorbing junior positions – in contradiction with their mandates to build markets, particularly in frontier and early-stage contexts.
It also suggests that mobilisation depends less on the volume of concessional capital and more on where it sits in the capital stack. This is why the OECD 2025 DAC Blended Finance Guidance emphasises minimum concessionality, ensuring that public resources are used only to the extent necessary to address market failures and avoid crowding out private investment.
Why getting concessionality right is hard
While the importance of structured funds may be clear, how to build them effectively is less straightforward. Designing them is a complex task: fund managers and donors must navigate bespoke legal terms, intricate waterfall structures, differing governance arrangements, and often-inconsistent reporting requirements. As such, the related transaction costs make it harder to set the right concessionality level.
Data limitations compound the problem. While aggregate-level transparency has improved, fund-level information on risk pricing, tranche-specific returns, and concessionality remains scarce. This makes it difficult to assess whether junior tranches are truly additional, appropriately sized, or deliver demonstrable effects over time. Because of this, structured funds are often tailored deal-by-deal, limiting replicability and scalability – the opposite of what is needed to mobilise private finance at pace.
The good news is that there are ways to improve replicability without imposing a single, rigid blueprint. Policy makers should aim for solutions that fall between fully bespoke and one-size-fits-all: a range of models with the flexibility to adapt to local markets.
Several innovative funds already illustrate the range of what is possible. The ILX I Fund shows how a flat, non-concessional structure can mobilise institutional capital by using strong DFI pipelines and credit quality to overcome perceived risk. PIDG’s Emerging Africa and Asia Infrastructure Fund demonstrates the power of the traditional three-tier model, with a carefully calibrated junior tranche that helps crowd private investors into high-risk infrastructure markets. The GAIA climate fund combines a layered capital structure with targeted risk-mitigation tools such as foreign-exchange hedging, technical assistance and guarantee facilities. It highlights how smart design, and not just subsidies, can unlock private finance in underserved regions.
The bigger picture
As development finance shifts to system-level mobilisation, structured funds will only become more important. But their success requires using concessional capital cautiously, positioning it strategically, and grounding decisions in robust evidence.
The message from the data is unmistakable: junior tranches work, but only when they are used with precision. Getting concessionality right is not just a technical exercise; it is central to ensuring that blended finance delivers scale, sustainability, and genuine market transformation.
To go deeper, read the OECD report on which this article is based.