South Africa’s retirement and pension fund industry holds aggregate assets exceeding R5,84 trillion, yet the country’s small- to medium-sized enterprise (SME) financing gap is put at about R350 billion.
At the 2026 Anglo American Impact Finance Network (IFN) InvestFest, a panel discussion on mobilising institutional capital featured funders from the Industrial Development Corporation (IDC), the Public Investment Corporation (PIC) and the SA SME Fund.
The panellists emphasised that the problem is not a shortage of money. It’s how deals are structured: who absorbs the first loss if things go wrong, and what the loan ultimately costs the entrepreneur.
That is where blended finance comes in. By layering concessional funds, grants and commercial capital, it reduces risk for cautious investors and lowers borrowing costs for small businesses. At the IDC, blending concessional and commercial funding is making loans more affordable for SMEs, while at the SA SME Fund, first-loss capital helped draw in the first institutional investor to its second fund.
But blended finance is not a mechanism that can fix everything. Used well, it’s an advantage. Used badly, it becomes a crutch.
This article unpacks how these structures work, what they mean for the cost of capital, and how SMEs and investors can use them wisely. Whether you are an entrepreneur seeking affordable funding or an investor weighing risk, understanding these layers matters.
The Blended Finance Capital Stack Explained
Think of blended finance as layered capital. At the bottom sits the riskiest layer, where first-loss capital sits. It’s often supplied by governments, grant makers or family offices. Above it sit investors who want commercial-grade returns. This includes mezzanine or junior debt providers. And at the top, debt providers and guarantors. Because the bottom layer absorbs losses first, the layers above become safer to enter. The result is a deal that can satisfy investors with very different risk appetites.
An example of this sort of layered capital is the PIC’s climate fund. The PIC committed about R300 million on behalf of the Government Employees Pension Fund (GEPF) to the SA-H2 Fund, a blended finance initiative managed by Climate Fund Managers (CFM) and Invest International to boost South Africa’s green hydrogen economy.
The reason capital moves in this way is because South Africa is an emerging market. For projects such as clean energy, where bankable long-term agreements are hard to secure, blended finance reduces risk for investors while ensuring the project and its social impact are a success.
“Finding the right mix and getting the right ingredients in play is important, to be able to then keep the three tiers satisfied and give everyone the return that they want,” explained Julian Mixon, Associate Funding Principal for the PIC.
Cheaper Credit: How Blending Lowers the Cost of an SME Loan
For a small business, the question is simple: what will this loan cost me? At the IDC, the answer can be surprisingly favourable. Through its partnership programmes, the corporation manages funds on behalf of government and international partners and blends them with its own commercial funding. Naomi Mtshali, Regional Manager at the IDC explained that in the entity’s manufacturing competitiveness programme, 80% of a loan comes from concessional funds at 2,5%, while the remaining 20% comes from the IDC. That combined rate is far lower than a fully commercial loan.
The IDC formula works because it balances affordability with risk management, making large-scale manufacturing projects viable that would otherwise be rejected by traditional lenders.
Grants as a Bridge to Bankability
Not every business that needs funding is ready to borrow. Many lack the equity contribution a private lender requires, and this is where grant funding can change the equation. The IDC also manages grant programmes, and it has found that the grant portion, once it goes into the business, improves the equity position and gives the funder the structure it needs to say yes. In effect, the grant does not replace the loan. It makes the loan possible.
The mechanics of the grant-to-bankability bridge:
- Collateral substitute: Overcomes the lack of fixed assets required by commercial lenders.
- Balance sheet strengthening: Lowers debt-to-equity ratios by introducing free equity-like capital.
- Track record creation: Funds early proof-of-concept and revenue generation to satisfy bank risk criteria.
- Capacity building: Finances formal financial management systems, audits, and compliance.
“The grant portion goes into the business to actually even provide structure, which, you know, for your equity ratio, it really provides that structure for the business so that we can then fund,” said Mtshali.
Debt or Equity: Matching the Instrument to the Business
Blending is not only about price. It is also about choosing the right tool. For a small business raising R5 million, equity can look attractive until the full cost is counted. Funders typically expect returns of around 15% to 16%, and an exit must eventually be managed. That is why the IDC’s small business unit leans towards debt, reserving equity for its strategic business units and leaving early-stage equity to venture funds built to carry that risk.
The panellists explained that whichever instrument a business ends up with, someone has to be willing to carry the early risk. For a small borrower, that is often a development finance institution (DFI) willing to price the loan differently. But the same question applies one step up the chain, where pension funds decide whether to back the funds that back SMEs. There, the question is not “what will it cost?” but “who takes the first loss?”
First-Loss Capital: The Key that Unlocks Institutional Money
Pension funds ask that question more carefully than anyone. Trustees carry a legal duty, and “unproven” is an uncomfortable word in an investment committee. This is where first-loss capital earns its keep: it takes the first hit if things go wrong, so the investors above it can take a first step.
A great example of how first-loss capital reduces the risk and cost of SME loans is the SA SME Fund. The SA SME Fund is a private sector-led fund of funds created by the CEO Initiative with capital from over 50 large JSE-listed corporations, alongside R500 million from the PIC managed on behalf of the Unemployment Insurance Fund (UIF). This hybrid backing enabled it to take higher risks on first-time and transformation-focused fund managers.
Because these were not traditional allocators of capital, the fund could do things a conventional fund of funds might not. It backed first-time managers and built new funds from scratch, including the University Technology Fund and a biotech fund.
Those were bets that needed proof. So the fund set aside a portion of the endowment from its first fund as first-loss capital. It was enough to bring the Consolidated Retirement Fund (CRF) into its second fund as the first institutional investor. As Fund Principal for the SME SA Fund. Lumka Mlambo explained, “That kind of protective downside protection was really important for them.”
The structure is not free, though. Mlambo was clear that fund managers must be careful about how much blended capital they take on, and she argued that the government should help provide it to unlock senior capital. That is a fair position, but it invites a harder question, and one the panel did not dodge: how long should this support last?
What SMEs and Investors Should Do Next
Blended finance will not fix every gap in the market, but it is one of the most practical tools available for closing the distance between capital and businesses. For SMEs, the message is clear: get investment-ready, prove your market, and ask funders and DFIs about blended or grant-supported programmes.
For investors, it’s time to build structures that reward and share risk fairly, leverage fund-of-funds diversification, and plan for the point where concessional support falls away.
South Africa’s retirement and pension fund industry holds aggregate assets exceeding R5,84 trillion, yet the country’s small- to medium-sized enterprise (SME) financing gap is put… Read More
