Blended Finance Waterfall: Climate Fund Capital Stack

Capital Stack

Public first-loss tranche 10%

Concessional mezzanine 20%

Portfolio Risk

Project default probability 15%

Loss given default 60%

Live Readouts

Expected portfolio loss

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Catalytic ratio

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P(senior/private tranche breached)

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This year: defaults / loss / private hit

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First-loss (public / donor) Mezzanine (concessional) Senior (private capital) Project performing Project defaulted this year

How it works

Blended finance uses public or philanthropic capital to absorb losses first, so private investors sit in a safer, senior slice of the same portfolio. This lets a small amount of concessional capital "mobilize" a much larger amount of private capital toward climate projects that would otherwise be too risky.

The portfolio holds N = 30 projects of equal size. Each defaults independently with probability p, so the number of defaults k follows a binomial distribution:

P(k defaults) = C(N,k) · p^k · (1-p)^(N-k)
Portfolio loss  L(k) = k · (100/N) · LGD   (% of committed capital)

Losses then cascade up the stack — a waterfall — absorbed bottom-up:

First-loss absorbs   min(L, Lf)
Mezzanine absorbs    min(max(L − Lf, 0), Lm)
Senior(private) hit  min(max(L − Lf − Lm, 0), 100 − Lf − Lm)

Because private capital is only hit after both junior layers are exhausted, its expected loss is far below the portfolio average — which is exactly what lets it accept a market-rate return. The catalytic ratio = Senior size ÷ First-loss size measures how many dollars of private capital one dollar of public first-loss capital mobilizes.

First-loss / mezzanine sliders — resize the junior tranches; the remainder is automatically the private senior tranche.
Default probability / LGD sliders — set the underlying project risk that feeds the binomial model.
Simulate Year — draws one random realization of defaults, lights up the defaulted project cubes, and animates the loss level rising through the capital stack.

Real-world relevance: this is the structuring logic behind vehicles like the Green Climate Fund's co-financing facilities and MDB-backed climate blended-finance funds — concessional first-loss capital from public sources catalyzing private institutional investment into adaptation and mitigation projects.

Left: capital stack (loss fills red from the bottom). Right: 30 individual climate projects.

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