Blended finance shrinks slightly in 2024, but aid cuts cloud its future

As shrinking aid budgets and the dismantling of the U.S. Agency for International Development take a toll on aid flows, attention is turning to funding alternatives, including ways to mobilize more private dollars to tackle development challenges. One approach is blended finance, which leverages catalytic capital from public or philanthropic sources to increase private sector investment. Still, it remains a relatively small market. In 2024, there were 123 blended finance deals worth about $18.3 billion, according to a report out this week from Convergence, a global blended finance network. That’s down from a record $23.1 billion in 2023 and doesn’t yet reflect the aid cuts and shuttering of USAID in the past six months. USAID was the top donor agency supporting blended finance, with 68 commitments totaling $107 million, according to the report. More than 70% of those were in the agriculture sector, with many others supporting the financial services sector. Despite this activity, USAID’s overall funding has been modest — accounting for just 2.1% of total concessional capital in blended finance annually since 2018 — according to Convergence estimates. “It’s not a collapse of the [official development assistance] side of the equation. It’s a collapse of a significant player but it’s balanced by the fact that they weren’t doing large deals in the first place,” Joan Larrea, Convergence’s CEO, told Devex. The effective shuttering of USAID is expected to disproportionately impact sectors — such as agriculture — where USAID played a larger role. And when it did provide grants or other concessional funds for transactions, its impact was “really catalytic” often pulling a large amount of private sector money into the deals. Even as U.S. support wanes, other donors — some nontraditional — are stepping up. The United Arab Emirates, for example, has supported several large blended finance deals in recent years. ALTERRA, its concessional capital platform, committed $1.5 billion to two funds in 2024. Among OECD donors, JICA, the Japanese aid agency, has increased its direct financing of blended deals, nearly doubling last year to $700 million from $400 million, according to the report. There will likely be more non-OECD players participating in blended finance in the years ahead, Larrea said. There may also be more local capital in blended finance deals as ODA declines, including, for example, national governments helping de-risk local financial players, she added. There are also signs of increased efficiency in the use of concessional capital, or aid dollars used to support blended finance. Even as ODA-driven capital to blended finance has plateaued, private sector participation “keeps climbing,” she said. Still, she warned, shrinking aid budgets likely mean a dip in blended finance over the next year or two. Donors are being forced to make difficult decisions about what to do with more limited budgets, including making up for shortfalls in humanitarian aid left by USAID’s withdrawal. Yet that same pressure could make blended finance more attractive, since it can stretch limited resources further by mobilizing additional capital. Another noteworthy trend in the report: The general size of transactions in the blended finance space increased last year, partly due to a trio of $1 billion transactions. The median size went to $65 million in 2024 from $38 million between 2020 and 2023. That’s a sign that more mainstream fund managers are starting to participate in blended finance deals — moving the space beyond small, experimental strategies, Larrea said. Larger funds that blend once and apply it across multiple transactions are helping to drive this shift, as are greater standardization and scale. “Until we get mainstream capital into blended finance and making use of it, we’re not really accomplishing everything we should,” Larrea said. Large blended finance deals — those over $100 million — continue to focus on energy, financial services, and infrastructure through project, fund, or company investments. And nearly half of all blended finance deals were climate-related in 2024, according to Convergence. There has also been a growing number of “whale” deals — those over $1 billion. One such example: Brookfield Asset Management’s Catalytic Transition Fund, which invests in clean energy and transition assets across emerging markets. It announced an initial close of $2.4 billion last year, with $1 billion from ALTERRA, helping crowd in major institutional investors. Most blended finance investments target sub-Saharan Africa, but in 2024, the share of deals in Europe and Central Asia rose to 23% from 10% in 2022. That meant $5.9 billion in 2024, a surge largely driven by increased support for Ukraine aimed at stabilizing the economy and ensuring access to essential services. In fact, last year, Ukraine was the top single country recipient of blended finance — both by number of deals and total invested — Convergence reported.