The Editor’s Post: USAID freeze reminds us of the importance of catalytic capital

Laura Joffre 7th February 2025

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USAID's near-shutdown is a reminder of the importance of catalytic capital in impact investing – and also of the question of whether access to cheaper money is necessary for impact investing to really work. This week's view from the Pioneers Post newsroom.

Since he was inaugurated as president, every single day (often several times a day, actually) Donald Trump makes a new provocative, scandalous and damaging announcement – turning the world upside down and creating real harm.

Over the past week, the Trump administration hollowed out USAID, the US development agency, which has been supporting people around the world for six decades and is the world’s biggest aid donor. The quasi-shutdown (with programmes halted, staff sacked and offices closed) will have huge consequences in all areas of development, everywhere in the world.

Impact investing – usually seen as fairly resilient to political shocks, since it is supposed to rely on the private sector – will be far from immune, as our lead story this week highlights. USAID was a critical provider of catalytic funding in many impact investing transactions, covering costs such as technical assistance, guarantees or advising, which don’t cost much but without which investment deals wouldn’t go ahead.

No other agency will be able to do that as well as USAID did: the programmes, the networks, the knowledge of each field built over 60 years of operations are irreplaceable. In 2022-23 alone, it was involved in blended finance transactions that mobilised a total of US$2bn; if USAID no longer exists, this is no longer going to happen. Several billion dollars, every year, will not be invested in meeting the world's challenges.

It is a reminder of how essential catalytic capital is to drive impact – and some would argue, necessary. Catalytic capital is money, which can take the form of grants or investment that accepts low returns or takes a high risk. It is invested as part of an impact deal to help attract private investors who would otherwise find the deal too risky or too small for their requirements.

In the past few weeks this theme has come up repeatedly in Pioneers Post’s coverage. First in the context of blended finance: is public money best used as catalytic capital to attract private investment, or on its own? Is it really making a difference? Explore the contrasting views of economist Mariana Mazzucato and Convergence CEO Joan Larrea.

And last week we also heard from critics of Better Society Capital, the UK’s social investment wholesaler. They said the social investor, whose capital is, by nature, meant to be catalytic, is not backing enough high-risk, hard-to-fund solutions with high impact potential. Instead it focuses its money on less impactful investments that are perhaps too safe, the critics argue, and BSC’s money isn’t actually that catalytic. (BSC said it believes it is taking the right amount of risk).

These discussions bring up a bit of an existential question for the impact community: can impact investing that delivers tangible impact really exist without at least some amount of catalytic capital – that is, without some funders ready to lose money for others to “invest in impact with market-rate returns”?

Is it a myth that impact investing can yield the same returns as any other investment, without the help of cheaper money? Or is it a myth that it can’t? I’m sure you have your opinion on that. I’m keen to hear it.