USAID was a key partner in getting our first Women’s Livelihood Bond (WLB1) off the ground. In partnership with DFAT [the Australian government’s Department for Foreign Affairs and Trade], it provided a 50% guarantee on the loan portfolio’s principal, which was critical in attracting private investors and proving that investing in women isn’t just the right thing to do – it’s an innovative way to combine financial returns with impact. 
USAID shutdown ‘undermines global impact investing ecosystem’
As Donald Trump pulls the plug on the world’s largest aid donor, the impact investing community warns the existing funding gap to meet the SDGs will widen by billions of dollars. But is China now poised to step forward?
Impact investing will miss out on billions of dollars of future investments, experts predict, following the US president’s halt to the work of development agency USAID this week. The movement has also lost one of its most influential partners.
US president Donald Trump dismantled USAID in all but name, with programmes halted, nearly all of its staff put on leave, offices closed and what was left of the organisation becoming part of the government’s State Department, instead of being independent.
The agency was set up six decades ago and is the world’s largest aid donor, disbursing more than US$40bn in the fiscal year 2023, according to a report by the Congressional Research Service updated today. Its activities span all aspects of development, from healthcare to education and famine relief and access to clean water. Last weekend Trump said it was “run by a bunch of radical lunatics”, and since has indicated he intends to close the organisation entirely.
Over the years, USAID funding has helped to mobilise billions of dollars towards impact investing.
Elizabeth Boggs Davidsen, CEO of GSG Impact, says the news was “traumatic. For impact, it means a lot”.
She adds: “USAID is in every market, and it’s a big operator, so I genuinely think it undermines the global impact investing ecosystem, because of the reduction in grant capital, as well as a really weakened US leadership.
“It creates funding gaps, and it makes it harder to mobilise that private capital that we’re all trying to crowd in these markets.”
A blow to blended finance
At a time when the finance gap to achieve the UN Sustainable Development Goals keeps widening, debates around how to mobilise the bulk of the world’s money – private capital – towards positive impact are heating up. The loss of USAID will be a blow to the progress of one of the key tools put forward to drive private investment towards the SDGs: blended finance.
Blended finance deals require concessionary or grant capital from government-backed or philanthropic sources to attract private capital. They usually target the SDGs. To date, USAID has been a major provider of catalytic funding – grants covering guarantees, technical assistance, operational costs or legal and advisory services – without which deals couldn’t happen.
“USAID has been the largest player among official donor agencies in our space,” Joan Larrea, CEO of Convergence, the global network for blended finance, tells Pioneers Post. “This is like the big tree falling in the forest.”
In the 2022-23 year alone, data from Convergence shows that USAID was involved in 63 transactions, which had a total value of more than US$2bn. However, the importance of USAID’s role is not about the amount of funding it gives – it only contributed US$103m across all those deals – but the power of the agency to mobilise large amounts of capital from other sources.
USAID has been the largest player among official donor agencies in our space. This is like the big tree falling in the forest
“They are huge in our world, but not huge inside the deals they’re in,” Larrea says. “They do very small interventions to get things done that otherwise wouldn't happen.”
Since 2014, the total volume of blended finance deals where USAID was involved was US$6.2bn – signalling an acceleration in the organisation’s strategy towards mobilising private capital for impact, which is “unsurprising” as it “figures out how to collaborate with the private sector”, says Larrea.
USAID’s catalytic ‘funding’ (non-recoverable support grants) differs from what is described as catalytic ‘capital’, which refers to repayable loans or equity that accept lower returns or higher risk than commercial investments.
Boggs Davidsen agrees: “USAID has been a very important, relevant, catalytic blended partner in helping to de-risk certain structures.” Losing these partnerships will create a “real challenge” for the impact sector. Larrea gives an example: USAID gave the Water Access Acceleration Fund, which invests in entrepreneurs providing safe drinking water in Asia and Africa, US$760,000 in concessional money – conditional to the structure raising four times that amount from other parties. “It not only did that, but this thing ended up being a $55m transaction,” Larrea says.
The withdrawal of USAID has had immediate consequences. Larrea explains that she has had recent conversations with a CEO awaiting a grant from USAID that sees his project entirely stranded. Elsewhere, an organisation had been working on a bond issuance which required some support from USAID – which now won’t be happening. “After two years of work, it’s dead in the water,” she says.
‘USAID’s guarantee was instrumental’
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Its role as a catalytic funder means USAID also acted as a convener, helping collaboration between multilateral banks and development finance institutions from around the world to invest together. “I think without USAID’s involvement, there is going to be a lot less coordination of investment strategies – so it’'s pretty pervasive,” said Boggs Davidsen.
Beyond catalytic funding
USAID dedicated entire programmes to mobilise private investment through catalytic funding, such as the USAID Invest programme, which ran from 2017 to 2024 focusing on development goals.
Other programmes provided direct support to impact-driven enterprises to help them towards investment readiness. Boggs Davidsen says that for those enterprises, “those investment-readiness programmes have been really fundamental to unlocking some of the impact capital opportunities that other investors have been able to build from, because there is that foundational reach through enterprise support”.
Among those was the US$2m Partnering to Accelerate Entrepreneurship (PACE) Initiative, which ran between 2018 and 2021 in partnership with the Aspen Network of Development Entrepreneurs in Latin America, Southeast Asia and Sub-Saharan Africa. The programme supported early-stage, small and growing businesses to become investment-ready by helping them to establish business plans, financial accounts and documents to show their track record to potential investors.
USAID has also played an important role in building the impact investing ecosystem from the very early days of the sector’s development. Fifteen years ago, it was among the original funders of the Global Impact Investing Network, and has supported much of the GIIN’s research since – while also being a member since 2012.
‘USAID’s impact is a lot bigger than numbers’
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How to fill the gap?
Impact investors relying on blended finance for their deals are used to political shifts that change the type or amount of support they may be able to access, but “I don’t think anybody envisioned a total disappearance of such a big player to just go from x to zero”, says Larrea.
Both Boggs Davidsen and Larrea suggest it would be difficult for other funders to step in to plug the gap left by USAID. “Does a new tree grow in the forest?” asks Larrea.
As of now, the presence of philanthropic money as catalytic money in blended finance is pretty small, she explains. As for other development agencies, catalytic investment in blended finance deals is always just a fraction of their budget, which wouldn’t cover what USAID provided.
GSG Impact’s Boggs Davidsen says: “I think there will be more pressure on philanthropy as well as the private sector, but I don’t think organisations like the Gates or Rockefeller Foundations are really able to fill the void left by the huge footprint of USAID. It’s uncomfortable in that sense, because USAID has been very catalytic with its grant resources.”
USAID stepping back is a loss, but let’s be clear – the future of impact investing doesn’t rest on any one country
But funding could come from new actors, as impact investing builds momentum in new countries. “USAID stepping back is a loss, but let’s be clear – the future of impact investing doesn’t rest on any one country,” says Durreen Shahnaz, founder of IIX, an impact investment firm considered one of the pioneers of gender-lens finance in Asia. “While the US has shaped the space, the movement doesn’t stop and momentum for sustainable, inclusive finance continues on, especially in Asia.”
She adds: “We are seeing leadership emerge from countries like Bangladesh and Indonesia and beyond Asia – countries that recognise that inclusive finance is good policy and smart economics.”
Just last month, China became the latest member of the GSG Impact partnership (previously known as the GSG National Advisory Boards, NABs). Boggs Davidsen says: “China is not only entering with both feet very solidly on the floor in impact investing, but China is poised to fill the gap.”
Boggs Davidsen, a US citizen herself, adds withdrawing from the international development scene is a counter-intuitive move for the US as it will lose its influence and soft power around the world. “‘Make America First’ is making us last when it comes to really wanting to have the influence over governance and over democracy and over the things that we've always been for.”
Header photo: A USAID programme, in partnership with Fundación Cervecería Hondureña and INVEMA, which developed the circular economy model in Honduras during 2024. Photo credit: USAID/Honduras Transforming Market Systems Activity
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