How Much USAID Funding is Needed in a Blended Finance Transaction? Ask the Market.

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USAID INVEST

9 min readJul 15, 2024

This story originally appeared on Marketlinks. Read the original piece here.

By Kristin Kelly Jangraw, INVEST Director of Communications

The INVEST initiative was designed to help USAID staff test blended finance approaches to reach their development goals. These approaches use development funding to mobilize private capital in a way that achieves USAID’s social and environmental objectives — with greater scale and sustainability than USAID could achieve alone.

Blended finance activities can take many forms, and they are tailored to a specific problem or development goal. For example, INVEST provided operational support to design and structure the CARICOM Resilience Fund, which finances growth and resilience in the Caribbean in the face of climate change. INVEST also supported the Water Access Acceleration Equity Fund, which invests in safe water enterprises and technologies, enabling the fund manager to create a “first-loss” layer to improve the risk profile and attract investors. And INVEST provided transaction advisory services to SMEs in Haiti to help them secure the private investment they needed to grow.

Ideally, when structuring a blended finance approach, USAID would provide exactly the right amount of financial support to make a transaction or a fund commercially viable — and no more. After all, using blends of 20% when 5% would have been enough would be a waste of scarce resources.

But how can USAID know how much support is truly needed to make a transaction happen? How much is really needed to make a financial vehicle viable?

After seven years, more than 140 closed transactions, 260 subcontracts with private sector partners, and mountains of data, INVEST can finally say: It depends.

What an unsatisfying answer! But please don’t leave yet. Below, we will walk you through two concrete approaches to get to the right number.

1. Ask the Market (Using RFIs, EOIs, and SOOs)

The support needed can range widely from market to market and from sector to sector. For example, while investors might not need much convincing to invest in a solar project in Kenya, their calculation might change for a riskier agriculture project in Uganda or a WASH project in rural India.

In INVEST’s experience, the best way to determine the type and amount of support that is needed to make something commercially viable is to ask the market.

In working with fund managers, transaction advisors, and technical assistance providers, we have found that they can offer accurate and up-to-date information on what is possible and reasonable in a given market. For example, they can provide USAID with valuable information about impactful transactions or funds that are on the verge of commercial viability but require a relatively small amount of donor support to tip them over the edge.

“INVEST has learned that the information derived from these competitive processes is fundamental to good program design, especially in markets where USAID has more limited experience,” says Sharon D’Onofrio, INVEST’s Director of Learning.

In most cases, INVEST has used a Statement of Objectives (SOO) and Request for Proposals (RFP) to solicit input from the private sector. (In some cases, we have also used Requests for Information and Expressions of Interest to help shape our strategy and to get a sense of the players in a market and their capabilities before moving to the SOO and RFP stage). Writing a good SOO to engage the private sector is both an art and a science, but INVEST has identified three key success factors:

(See our recommendations on designing for additionality and impact in this learning resource. You can also find more resources on writing effective SOOs for blended finance activities at the bottom of this blog.)

INVEST typically receives five to ten proposals for a transaction advisory services procurement, and 20 to 30 proposals for a catalytic capital procurement. (We request short proposals in the form of a slide deck to reduce the burden on partners and to make it feasible for us to review so many.)

“These proposals offer country-specific specific and market-specific information from the perspective of firms that are players in the market. They know what is needed, where there are gaps, and what is possible,” says Katie Tilahun, INVEST’s Director of Partnerships. This information helps USAID and INVEST staff determine what intervention would be appropriate and what type and amount of USAID support may be necessary to achieve a specific goal.

There are two key caveats to consider. First, it’s important to make sure potential offerors are aware of the RFP to ensure you receive enough strong proposals to compare. In INVEST’s case, we send procurements out to our network of approximately 600 private-sector partners, and we also research and reach out to additional firms in a given market or sector that have relevant capabilities for each procurement. “If you’ve done the research right and gotten the right set of firms in, they are operating from a place of practical market knowledge, and they know the right approach,” says Tilahun.

Second, INVEST has learned that it’s helpful to include a budget range with an RFP and SOO, to give firms some direction on the expected size and scope of the activity. “Usually firms send in a proposal that is pretty close to the budget, and they’re all basically competitive on cost. These are private-sector firms that are used to working in a competitive environment. They’ll give you their best offer,” says Tilahun. “That means we can focus mainly on evaluating the technical approach, the proposed capital raise and the milestones that are proposed, whether they have the right management plan, and whether they have the right partnerships. It lets us make a more technical decision.”

“We have had cases where we have released RFPs with a capital raise target that’s higher than what the market would allow, for example, and we immediately heard in the Q&A process that it wasn’t realistic. Now when we aren’t sure, we include a general target, and we tell offerors that if the target is unreasonable to tell us what is possible and why. Firms can tell you what’s realistic, and generally they agree on it. So that’s another way of doing that market sounding,” says Tilahun.

Asking the market aligns with USAID’s Private Sector Engagement Policy, which encourages Missions to put private-sector actors in the driver’s seat, letting them identify market-based solutions that could be successful with USAID support. “Everything we do on INVEST requires partners,” says Nora Brown, INVEST’s Chief of Party. “In order for the INVEST experiment to work, we needed to reframe the traditional USAID — contractor relationship and in turn, the prime contractor — subcontractor relationship to one of true partnership and collaboration.”

Through the process of competing, negotiating, and issuing 260 subcontracts, INVEST has also learned that award sizes don’t necessarily need to be large to be catalytic. Most catalytic funding awards in INVEST’s portfolio have been under $500,000. When supporting fund managers that provide a first-loss tranche, for example, most awards equate to less than 5% of a fund’s target capital raise, as specified during the period of performance of the INVEST subcontract. In most cases, the sum of catalytic funding, including support for operational expenses, has not exceeded 10% of the targeted capital raise.

2. Do a Landscape Assessment

INVEST’s advice to “ask the market” applies at many moments in activity design. For example, if you do not yet have enough information to write an effective and specific SOO, you can take a step back and work through a landscape assessment. These assessments can often be done rapidly — sometimes in as little as two to four months — and they provide helpful context and market information to shape your thinking. “Assessments can help identify what is available in the market and where there are gaps based on what businesses need. This knowledge can help inform the design of USAID activities to address those gaps in a way that makes sense in the market,” says Tilahun.

As of March 31, 2024, 56% of INVEST buy-ins began with an investment opportunity assessment. For example, as a first step in its work with INVEST, USAID’s Office of Gender Equality and Women’s Empowerment (GenDev) conducted a market assessment of funds, entities, and gender-lens investing opportunities across multiple countries. The assessment allowed USAID to map the landscape of actors and identify opportunities and a range of potential support options, especially those needed by new and less experienced fund managers. This information helped shape multiple future procurements focused on specific objectives.

Some USAID Missions have leveraged market assessments at key moments in the program cycle, especially when they are developing the Country Development Cooperation Strategies (CDCS) that will shape the next five years of their programming. For example, USAID South Africa partnered with INVEST to incorporate a private-sector engagement strategy into its CDCS. USAID Moldova also conducted a landscape assessment to inform its CDCS — and later adapted its strategy through a rapid COVID assessment to determine how to respond to changing market conditions caused by the pandemic.

How Do I Get Started? Resources for Writing Effective SOOs and Conducting Assessments

If you are considering procuring a landscape assessment or scoping a specific blended finance activity, you don’t have to start from scratch. INVEST has developed learning resources to help you get started and a set of models and templates that you can build on.

SOO Database

INVEST’s SOO database contains hundreds of real SOOs and RFPs, which you can filter by sector, region, country, or technical approach. This tutorial video can guide you through the database and how to use its search functionalities.

Mobilizing Private Investment: You Don’t Have to Do It Alone

This two-part eLearning course introduces USAID staff to investment intermediaries such as transaction advisors and investment fund managers, detailing their capabilities and the role they play in emerging markets. Using excerpts from actual INVEST RFPs, course participants learn best practices for writing SOOs that target the private sector and how to ensure that those scopes will lead to the additionality and impact you seek. This course is available only to USAID staff on the internal platform USAID University.

Selected SOO Examples by Topic

1. Catalytic Funding

2. Transaction Advisory Services

3. Investment Opportunity Assessments

For more learning resources from INVEST, visit bit.ly/INVESTResourceGuide.