Why Blended Finance Underperforms: A Structural Diagnosis of the Catalytic Claim

Blended finance is endorsed across development and impact capital as the mechanism that mobilises private investment toward public goods, using concessional capital to de-risk commercial returns. Yet after a decade of institutional uptake, mobilisation has stagnated and the central catalytic claim remains largely unverified. This paper argues that the underperformance is structural rather than operational: blended finance assembles its instruments from single-cycle, liability-bearing components — tranches, guarantees, first-loss layers — and applies them to objectives that are inherently multi-cycle and relational, realised across a sequence of transactions rather than at the resolution of any one. From that single mismatch three failure modes follow. Horizon collapse consumes concessional capital within the cycle rather than recycling it across cycles. The de-risking paradox biases deployment toward the transactions that least need concession. Measurement at the deployment boundary evaluates the catalytic claim at the point where it is least observable. The paper states the conditions any adequate alternative would have to satisfy, each derived by inverting a failure mode.