Blended finance market should brace for impact of development aid cuts – Convergence warning

Cuts in development aid across the world are expected to deal a blow to the blended finance market, according to global network Convergence.

Official development assistance is the main source of catalytic capital for blended finance deals – a type of impact investment where concessional capital (which accepts lower returns or higher risk than a conventional investment) from government-backed or philanthropic sources is used to attract private capital in investments targeting the SDGs. 

But in recent months across the world, traditionally large donor countries have reduced their aid budgets in the face of policy changes, economic hardship, raising debt levels and shifting priorities. 

While most aid funding goes into other areas such as humanitarian aid, the cuts will have a disproportionate effect on blended finance. “Only a couple percentage points of [official development assistance] goes to blended finance, yet it is the primary source of concessional money into blended finance,” said Joan Larrea (pictured), CEO of Convergence, speaking at the online launch of the State of Blended Finance 2025 report on Wednesday. Convergence is a network of investors, businesses, philanthropists and public organisations that are involved in blended finance, and publishes regular research on the sector.

Over the past three years, development agencies and multi-donor pools (where several governments or multilateral banks bring resources together for a certain purpose) have contributed US$5.1bn in concessional capital, accounting for 65% of total concessional commitments, according to the report.

“We do anticipate a drop in transaction volume” as a result of the aid cuts, said Robin Ivory, content manager at Convergence, also speaking at the report launch.

• Read more: USAID shutdown ‘undermines global impact investing ecosystem’

One of the most striking examples of development aid cuts is the dismantling of USAID, as the US government scrapped virtually all of the agency’s programmes and investments in February. Other countries, including the Netherlands, France, Germany and the UK also substantially reduced their aid budget in recent months.

The report, which looks at data for 2024, does not reflect the recent changes in development assistance, but “offers a critical snapshot of the period before, and will be the year against which the future will be benchmarked”, Larrea wrote in the report’s foreword. She added the aid cuts “will no doubt be felt in the market this year and beyond”.

We do anticipate a drop in transaction volume

Ivory said deals that required longer term and ongoing aid capital, or those supporting pilot transactions, were likely to decrease in favour of more “bankable deals”. Aid might also become conditional on how much the donor country would benefit from it itself – something that US president Donald Trump has often expressed as part of his “America first” vision, for example. 

Ivory added: “Over time, we may see the outcomes of this in the form of things like more frequent blended transactions that support the [donor] country's own investors to enter new markets, or that provide access to strategic resources.”

Doing more with less

Development finance institutions (DFIs) – through which much of development assistance money flows – are now tackling the question of how to keep having a deep impact with fewer resources. 

Sarah Marchand, director of capital solutions at British International Investment, the UK’s development finance institution, speaking at the report launch, said DFIs would have to partner with each other a lot more. “We’re going to need to be more intentional about co-investing and sharing experiences and sharing deals,” she said. 

They would also have to be very strategic in what kind of financial instruments they use. “Sometimes, actually, a small grant can be more effective than a larger quantum senior loan in a deal, so I think we really need to ask ourselves questions about what instruments we’re using,” Marchand said. For example, “guarantees and credit enhancement [are] a very effective tool, and we'll probably see more of that going forward”.

Whales remain safe in turbulent waters

The research estimates there were 123 blended finance deals in 2024 (down from 129 the previous year), with an aggregated value of US$18.3bn (down from US$23.1bn in 2023). While lower than a “record breaking” 2023, the numbers remained above the five-year average and indicated growth over time.

Much of the overall investment volumes in 2024 was driven by three “whale deals” (transactions above US$1bn), reflecting a phenomenon that emerged in recent years: while representing only 2.5% of all blended finance deals, whale deals represented 27% of total financing mobilised over the past three years. It was also one indication of a general shift towards fewer, bigger blended finance transactions, as the median deal size increased from US$38m (2020 – 2023) to US$65m (2024).

For the researchers, whale deals are good news. “While outliers, [whale deals] demonstrate continued mainstreaming of blended finance and real progress in scaling,” Ishwari Sawant, content senior associate at Convergence, said at the report launch. 

“The transactions are also more uniquely positioned to attract institutional investors… we’ve seen more institutional investor participation in these whale deals, and this is important for closing the SDG financing gap,” she added.

The whale deals were less likely to feel the impact of aid cuts, she said, because bigger deals tended to require less concessionary capital to raise large amounts of money, as they focused on sectors that were well-established and perceived as less risky, and attract large amounts of capital from institutional investors rather than public-backed ones.

• Read more: Opinion: Blended finance isn’t perfect, but it’s essential

Philanthropies can step in – but they won’t fill the gap

The loss of concessional capital from aid agencies will affect smaller deals in less established markets that are more dependent on catalytic investment to attract private capital – perceived as more risky, they are harder to finance but often highly impactful.

Philanthropy could help fill the gap left by development assistance, according to the report. So far, foundations play a very small role as providers of catalytic capital: in 2024, they contributed  just 3% of catalytic capital committed to blended finance deals. However, “interest is growing and further participation is anticipated in the coming years”, said the report.

Foundations benefit from a higher risk tolerance, longer time horizons, and fewer constraints on which asset classes they could invest in, “attributes that make them well-suited to invest in opportunities deemed high risk”, the report said.

They do not, however, have the ability to fill the gap left by aid cuts, in particular the dissolution of USAID, Iftin Fatah, a senior programme officer at the Gates Foundation, said at the report launch. 

Foundations such as the Gates Foundation can really play a prominent role as providers of catalytic capital in blended finance

But she added that “philanthropy, in particular foundations such as the Gates Foundation, can really play a prominent role as providers of catalytic capital in blended finance” as it was “more critical than ever to leverage scarce concessional capital for maximum effect”.

She added foundations could de-risk early stage investment through grants or first-loss capital, in particular in “impact-first” sectors that tended to struggle to attract private investment like health, education or agriculture. They could also share their experience to help with technical assistance to structure blended finance deals. Philanthropies had a “convening power” to bring actors together to collaborate – and it was a good time for foundations to partner other providers of catalytic capital to complement each other’s strengths.

Top image: Orley Blanquiceth and his father Jose Blanquiceth carry bags of cocoa beans to sell to Ana Almanza, the leader of the USAID-supported APROACA grower’s association in 2015. Photo by USAID.