The Key to Understanding Blended Finance – Definitions and Trends
Background and Purpose
This report was prepared by the Israeli Forum for Impact Economy (IFIE) and IMagine IMpact. The IFIE is a non-profit organization that brings together senior leaders from the business, public, and philanthropic sectors, with the aim of advancing an economy in Israel that generates triple value—social, environmental, and economic—and promotes sustainable growth. The IFIE operates under the leadership of its Chair, Adv. Yael Almog, alongside a senior management team drawn from across the Israeli economy. IFIE serves as Israel’s national partner to GSG Impact, the international organization founded at the G7 under the leadership of Sir Ronald Cohen, representing 52 countries and the European Union.
IMagine IMpact is a strategic advisory firm specializing in the design and development of financing models that integrate social, environmental, and business value. The firm was founded and is led by Omri Boral, a senior expert and advisor in the field, working with corporations, investors, philanthropists, and public-sector stakeholders.
The report is based on an eighteen-month research and implementation process, which included roundtables, interviews, and structured thinking processes with a wide range of stakeholders across sectors. It concludes with practical recommendations for advancing blended finance funds in Israel—whether through direct government support or through independent initiatives led by philanthropy and private investors.
The process was led by the IFIE under the leadership of Vanessa Kacherginsky and Hilly Hirt, together with the IFIE team: Dr. Aya Navon-Worgaft, Matti Israel, and Etm Cohen. We extend our sincere thanks to the many professionals and experts who contributed their insights through meetings and professional forums, and to our partners at JDC-Tevet for their support in the preparation of this report.
In recent years, we have witnessed a clear trend towards integrating economic objectives with social and environmental goals. Issues that were once addressed within separate frameworks—government regulation, corporate responsibility, or philanthropic activity—are now becoming an integral part of economic policy and business strategies. Companies are incorporating environmental and social goals into the core of their operations; governments are acting through partnerships with the business and social sectors; and donors increasingly expect quantitative measurement of impact alongside financial support. Capital markets are also transforming, with ESG considerations and metrics for assessing social and environmental value becoming part of institutional and private capital management. Within these broader trends, we are seeing a growing use of various financial models known as blended financeBlended Finance
The strategic combination of philanthropic, public, and private capital within a unified financial structure, designed to address market failures and support investment in areas that do not attract sufficient private capital on their own. Blended finance enables risk mitigation, enhances investment attractiveness, and generates additional social or environmental value alongside financial return.
Catalytic Capital
Equity or debt provided on below-market terms (e.g., lower return or higher risk) with the aim of mobilizing additional capital from other investors. Its primary role is to “open the door” to transactions that would not otherwise take place. Unlike concessional funding, which focuses on the favorable terms received by invests, catalytic capital focuses on the role of the capital provider—specifically, its ability to unlock further investment.
In Israel, the need for blended finance models has become particularly acute in the aftermath of the Iron Swords war. Alongside the destruction and the severe impact on communities in the north and south, an opportunity has emerged for reconstruction that incorporates social resilience, equal opportunities, and the integration of environmental sustainability principles. Blended finance can serve as a key driver of recovery and generate growth by developing models that promote quality employment, strengthen real economy businesses and manufacturing , and foster innovation and technology.
The purpose of this paper is to establish a shared understanding among stakeholders from government, philanthropy, and the business and financial sectors regarding what blended finance is, how it operates, the potential it offers, the objectives for which it may be suitable, and the limitations it entails. Accordingly, the report aims to:
- Clarify the concept of blended finance, its core components, and its operating mechanisms;
- Present concrete examples from Israel and abroad that illustrate both its advantages and the challenges of its implementation;
- Summarize the advisory work and joint consultations carried out with a range of stakeholders, and propose directions for action tailored to the Israeli context—approaches that can support system-wide progress in recovery and growth.
What Is Blended Finance – Definition and Added Value
Blended finance is the strategic use of public or philanthropic capital to attract large-scale commercial capital for investments in sectors that would not otherwise receive funding due to market failures. This approach brings together different types of capital—public, philanthropic, and commercial (private or institutional)—each of which plays a distinct role, with the whole creating greater value than any single source of capital could generate on its own.
At the core of the blended-finance model lies the use of catalytic capital: public or philanthropic capital deployed with a willingness to assume higher risk, accept lower returns and/or below-market terms, thereby providing concessional funding. This, in turn, creates the conditions for the entry of commercial capital into investments. Catalytic capital may take the form of guarantees, subordinated debt, initial funding, or investments that accept more modest returns than those typically available in the market. Through such mechanisms, catalytic capital reduces perceived risk or enhances the attractiveness of the investment, creating leverage—each unit of catalytic capital may generate significant leverage of private capital.
The need for blended finance arises from market failures: projects that are socially, environmentally, or regionally essential but perceived by private investors as high-risk, long-term, or offering limited financial returns. In such circumstances, commercial capital on its own will not come in; however, when combined with catalytic capital, it becomes possible to construct a financing framework that balances the interests of all stakeholders involved.
The added value of blended finance lies in its capacity to generate twofold value. On the one hand, it opens new investment opportunities for commercial capital—across sectors, regions, and projects that were previously inaccessible. On the other hand, it enables government and philanthropy to leverage their resources and extend their reach. This is particularly important given the limitations of public and philanthropic resources relative to the scale of current social and environmental challenges. Moreover, blended finance enhances the efficiency of public or philanthropic capital by enabling investment in areas that would otherwise struggle to receive funding.
In summary, blended finance does not replace traditional philanthropy or standard commercial investment. Rather, it serves as a complementary set of tools that transforms risk into opportunity, fosters cross-sector partnerships, and enables the mobilization of large-scale resources in pursuit of social, environmental, and economic objectives with measurable impact.
Blended Finance Worldwide and the Israeli Context
Blended finance has been in use since the 1990s, at first primarily as a tool for financing infrastructure in developing countries. Over the past decade, it has gained momentum as a strategic, creative, and flexible financing mechanism also relevant to developed markets. Gradually, blended finance has become one of the key instruments for addressing market failures, mobilizing capital at scale to achieve inclusive-growth objectives, and supporting recovery following crises such as wars or natural disasters.
According to Convergence—the leading global body collecting and analyzing blended-finance market data—the cumulative volume of committed blended finance capital exceeds USD 261 billion across more than 6,800 transactions. Since 2020, the market has shown a consistent upward trend, with an average annual increase of approximately USD 1.7 billion in transaction volume.
Transactions are executed through a variety of financial vehicles, foremost among them investment funds (USD 5.1 billion in 2024), projects (USD 4.6 billion), and financial institutions (USD 3.2 billion).
In 2024, a notable trend was the increasing use of blended finance in conflict-affected areas and economic-recovery frameworks. The most prominent example is Ukraine, which in that year became the country receiving the highest volume of blended-finance capital globally—USD 2.2 billion across 16 transactions. Investments focused on economic stability, business lending, and maintaining essential services. Initiatives such as the Ukraine Recovery and Reconstruction Guarantee Facility illustrate how the model operates: mobilizing guarantees from Western governments and international institutions to enable local banks and insurance companies to resume activity, while partially hedging war-related risks and providing a measure of certainty in the financial sector[1].
At the same time, there has been significant growth in transaction volume in more developed countries. For example, Europe and Central Asia increased their share of global transactions from 10% in 2022 to 23% in 2024. These transactions are no longer limited to post-crisis recovery, but also include investments in the transition to a low-carbon economy, industrial innovation, and housing solutions. Alongside these areas, large-scale transactions are also taking place in transport and water infrastructure.
The effectiveness of blended finance is now viewed not merely as a promise but as a proven model. Convergence data show that catalytic capital leverages, on average, four times its value in private capital for every philanthropic or public dollar invested. These successful initiatives, originating largely in developing markets, have in recent years expanded to developed countries as well. Blended finance is thus becoming an effective, flexible instrument with substantial economic and social value across diverse and complex contexts.
In Israel, the need to apply blended-finance models has intensified particularly in the aftermath of the Iron Swords war. The severe economic, social, and infrastructural impact—especially in the north, the south, and frontline communities—necessitates investment that enables not only immediate reconstruction but also sustainable long-term growth. However, the challenge extends beyond the areas directly affected by the war; there is an opportunity to rethink the country’s economic and social infrastructure nationwide, in the centre as well as in the periphery, with the aim of building an inclusive and resilient economy:
- The need to rebuild physical, economic, and social infrastructure- The effects of the war were strongly felt across Israel’s physical and economic infrastructure. In 2024, GDP contracted by 0.9%, GDP per capita declined by 0.4%[2], and business-sector output shrank by 0.8%. At the same time, direct government expenditure on the war is estimated at NIS 141.6 billion—approximately NIS 98 billion for defense, with the remainder, tens of billions of shekels, allocated to civilian recovery. These figures illustrate that extensive reconstruction is required not only in the security sphere but also across critical civilian systems.
- Strengthening a diverse real economy- Beyond infrastructure reconstruction, the crisis underscored the need to reinforce a diverse real economy that does not rely solely on the high-tech sector. Manufacturing industries, agriculture, tourism, and local services were significantly affected: 54% of self-employed people reported a decline of over 50% in business activity since the outbreak of the war3, and medium-sized businesses struggle to access financing on favorable terms, as they are perceived as high-risk and low-return.
- Mobilizing substantial capital from private and international sources- The limitations of the public budget are clear: the cost of the war is estimated at USD 66 billion—USD 58 billion in direct expenditure and USD 8 billion in lost tax revenue[4]. These figures demonstrate that state resources are limited, highlighting the need for financial mechanisms that leverage public and philanthropic capital to attract private and institutional investment—both domestic and international—at scale.
Investment in the periphery- While the free market tends to concentrate investment in central Israel and in high-return sectors, the national mission of recovery and growth requires directing capital to the north, the south, and frontline communities. - An opportunity to rebuild long-term investment mechanisms- The current crisis is not only a challenge but also a strategic opportunity to reconstruct long-term investment mechanisms. Israel has significant recovery potential, but realizing it depends on the establishment of stable financial frameworks capable of attracting long-term capital and ensuring the measurement of economic and social value.
In the face of this reality, blended finance makes it possible to bridge public resource constraints by leveraging public or philanthropic catalytic capital to attract private and institutional investment. In this way, it creates frameworks that promote sectoral and geographical diversification, strengthen social resilience, and facilitate access to finance for businesses while mitigating risk. Blended finance can therefore provide the foundation for establishing long-term funds involving government, philanthropy, and private and institutional investors—thereby generating inclusive growth and strengthening the capacity to cope with future crises.
In conclusion, the Israeli context highlights the unique potential of blended finance—not merely as a targeted intervention, but as a strategic mechanism for recovery, inclusive growth, and strengthening national resilience.
- Convergence (2025) The State of Blended Finance – Spring 2025. Convergence. Retrieved September 16, 2025.
- Bank of Israel (2024). Bank of Israel Annual Report 2024. Retrieved from the website on September 16, 2025 (Original in Hebrew).
- Israel Democracy Institute (2024). Survey: The financial status of employees approximately a year and a half after the outbreak of the Swords of Iron War. Retrieved from the website on September 16, 2025 (Original in Hebrew).
- Jefferies (2024). Israel Economic Retrospective, October 2024. נאסף מהאתר בתאריך 16 בספטמבר 2025