NOTE: The INVEST project closed in September 2024. All data is accurate as of that date, but this page is no longer being updated.
Around the world, USAID is mobilizing private sector resources to help achieve its social and environmental goals. It is channeling private investment into critical areas that need it – like energy, infrastructure, education, agriculture, and healthcare – and ensuring that these resources have a positive impact for people and the planet.
Blended finance is the strategic use of development funds to mobilize private capital for social and environment results. Catalytic funding is a specific type of support that USAID can provide to investment funds to help increase investments into projects, enterprises, and ecosystems with development impact.
INVEST worked with USAID MBIOs and private sector partners to test and refine ways to utilize catalytic funding in alignment with USAID's development priorities and operational capabilities – and to complement the role of commercial banks, impact investors, foundations, DFIs, and other actors. We have captured best practices, case studies, and lessons learned in a learning brief, Mobilizing Private Investment for Development with Catalytic Funding.
What is catalytic funding?
Catalytic funding is funding that mitigates risk and improves an investment fund’s overall viability to attract new investment for development objectives. In the context of USAID, catalytic funding is the provision of resources to an investment fund or vehicle via a contract or grant.
Why catalytic funding?
Catalytic funding has helped spawn innovations in funding vehicles, attracting otherwise risk-averse investors to opportunities with potential for development impact – enabling financing to reach otherwise underserved markets. For instance, these resources can be used to offset startup or operational costs, helping to improve a fund’s overall viability. Alternatively, they might be used to create a first-loss layer – designed to absorb losses in the case that investments don’t yield expected results – within a fund’s capital structure, creating a more attractive risk profile for investors who might otherwise be unrealistic targets.
A quick distinction: the blended finance community often refers to catalytic capital: investment capital that accepts disproportionate risk or concessionary returns to incentivize private investors to make investments they might not otherwise make. This funding is provided by qualified investors like DFIs or foundations and includes debt, equity, guarantees, and other forms of investments. USAID, on the other hand, does not have the authority to lend or to invest in this manner. USAID INVEST has experimented with catalytic funding as a means to support investment funds in a way that aligns with the Agency’s operational processes.
Development Pros: You Don’t Need to be a Finance Expert to Use Catalytic Funding
While investment is a powerful tool, most development staffers are not finance experts, nor do they need to be. For that expertise, they can turn to a deep bench of fund managers and investment advisors who understand the type and amount of donor capital that will get private investors off the sidelines and into high-impact investments. Here are four key considerations for USAID, other development professionals, and partners to catalytic funding wisely.
What Additionality Brings to Blended Finance
Measuring the impact of catalytic funding can be complex. That’s where the concept of additionality is particularly useful. INVEST has identified seven types of additionality - achievement of an outcome that would likely not happen without donor support - to evaluate this impact.
Southern Africa: Using catalytic funding to support SMEs and inclusive growth
In developing nations, the thinking has been that venture capital can provide the funding required for new businesses to succeed, and the success of these businesses will help emerging markets overcome existing challenges, such as fragmented markets, high unemployment, and expensive or unavailable financing.
But investors living and working across Africa have noticed a trend: Silicon Valley styled investment vehicles aren’t producing Silicon Valley results. They’ve started to ask, “Why not?”
USAID support catalyzes new MCE fund focused on sustainable agriculture
"While we have a long and successful track record of being an impact-forward asset manager using our nonprofit balance sheet to make loans, this was technically our first fund structure, and we were eager to partner with organizations like USAID with tremendous experience and an invaluable 30,000-foot perspective on the fund market. We’re keen to share our top learnings from the process in the event that other impact funds might benefit from our experience."
Tools + Resources
Mobilizing Private Investment for Development with Catalytic Funding: Learning Brief
INVEST has worked with USAID MBIOs and private sector partners to test and refine ways to utilize catalytic funding in alignment with USAID's development priorities and operational capabilities – and to complement the role of commercial banks, impact investors, foundations, DFIs, and other actors. This learning brief captures best practices, case studies, and lessons learned. Read the brief
Blended Finance Starter Kit
Blended finance is the strategic use of development funds, such as those from government aid and philanthropic sources, to mobilize private capital for social and environmental outcomes. Here is a quick guide for getting started in designing strategies to encourage the private sector to invest in activities and projects that can achieve both financial returns and positive impact. Download the starter kit
Using Blended Finance to Generate Additionality and Human Impact: Guidance Note
USAID has extensive experience in mobilizing capital for international development and has engaged in a range of donor-supported activities to further its mission. This guidance note aims to serve as a brief overview of how USAID can facilitate blended finance activities to create additionality that can lead to human impacts in low- and middle-income countries. Read the guidance note
This page is made possible by the support of the American people through the United States Agency for International Development (USAID). The contents of this page are the sole responsibility of DAI and do not necessarily reflect the views of USAID or the United States Government.