Catalytic capital is scarce and becoming scarcer with declining Official Development Assistance (ODA). As a result, many donors are leaning into models that use this catalytic capital to unlock private investment to support sustainable development. This reality is amplifying the importance of a critical question for any blended finance funder: how to allocate catalytic financing in the most efficient and impactful manner.
I’ve spent much of my career on this allocation question — leading USAID’s flagship climate finance program previously and now as a principal consultant at Magnitude Global Finance. For the past four years, I have helped design and manage several open, competitive calls (“windows”) through support to the Investment Mobilization Collaboration Alliance, most recently the Adaptation Finance Window for Africa (AFWA). AFWA is a joint tender process through which 56 asset managers applied, seeking support from a pool of €40 million in catalytic financing (first-loss and TA support) with the objective of mobilizing €100 million or more in private capital for adaptation and resilience in Africa.
Here’s what I’ve learned about where open competitive processes help, where they strain, and how we have applied these lessons.
What competitive processes do well
Competitive processes provide the benefit of greater transparency and, where relevant, compliance with public regulations. However, open competitive processes also offer a series of other benefits that funders often overlook.
- Bird’s-eye view of the market. Competitive processes surface a wider field than relationship-driven sourcing. This bird’s-eye view gives funders a comprehensive map of the landscape, surfacing critical market intelligence (see the AFWA dashboard) and greater confidence that they are selecting the best of the best. This reduces the risk of overlooking asset managers who are positioned to deliver, but lack an extensive global network. This is particularly important given that asset managers based in emerging markets are often best positioned to deploy capital effectively for commercial returns and impact.
- Discipline on catalytic capital. When asset managers know they’re being compared with peers on the same terms, they’re less likely to over-ask on first-loss or other concessional features. An unnecessarily large subsidy quickly becomes a liability in evaluation, which pushes the whole field toward right-sized concessionality and better leverage of scarce dollars.
- Sharper development theses. A clear, public set of criteria pushes managers to refine concepts and deepen their focus on impact, additionality, and mobilization. This sharper approach leads to greater alignment with the objectives of the catalytic capital provider. When structured feedback is built into the process, even managers who aren’t selected can leave the process with a tighter impact strategy than they entered with.
- A framework for joint collaboration. Tenders convening multiple DFIs, donors, and philanthropic partners let institutions sit at different points in the capital stack and back concepts that sit slightly outside any one mandate. They also lower the search cost for fund managers who reach several potential funders through a single submission. Strong proposals that don’t fit one window can still benefit. DFIs may see alignment with a different strategy, sparking partnerships that wouldn’t have happened otherwise.
Where the model strains
- Hard to design well. Building a process that is efficient and private-sector-friendly, yet deep enough to surface candidates ready for due diligence, is a real tension. Create an unduly complicated and time-intensive process or layer too many eligibility criteria or restrictions, and the most promising asset managers won’t engage. Lean too far toward speed and simplicity, and you risk selecting an investment concept based on insufficient information that is poised to fail. Likewise, without careful design, open calls can still favor better-resourced applicants with stronger proposal-writing capacity, fluency in donor/DFI impact priorities, and experience navigating funder processes.
- False efficiency at the finalist stage. Across IMCA finance windows, there has been a deliberate focus on speed of selection and deployment. This must be managed carefully. Quickly narrowing a large pool of applications to a shortlist feels like progress, but that early speed turns into frustration if several finalists fall out later during due diligence. This is particularly challenging when working with early-stage, pioneering investment vehicles or first-time fund managers. Recognizing that due diligence takes time and that finalists are selected with limited information, it is critical to expect some asset managers to fall out during due diligence. This requires closely managing expectations (both of the asset managers and the catalytic capital providers) and maintaining a “long list” of finalists that can be supported in the event some of the initial finalists fall out.
- High cost to the unselected. Public calls consume significant time and energy from a cross-section of managers. For AFWA, we deliberately designed a tender process to be simple and with minimal opportunity costs for asset managers. Yet, we also recognize that these applications take time and effort and that many impact-oriented asset managers have small teams. Even with €40 million, AFWA could only support a few asset managers — and without deliberate management of communications, feedback, and downstream introductions, the unselected majority can be left frustrated.
For a closer look at how we’ve put these ideas into practice, the AFWA window — though now closed — remains online at afwafrica.com as a reference for catalytic capital providers thinking through similar processes. The lessons we have gleaned through these processes over the years are far more than can be summarized in a short blog. I’m always happy to compare notes with philanthropic partners, DFIs, and donors seeking to allocate scarce catalytic capital so that it mobilizes the greatest possible private investment toward sustainable development goals.
Isaiah Oliver is a Principal Consultant at Magnitude Global Finance, where he advises funders on the design and management of blended finance initiatives. He is the team leader for MGF’s support to IMCA’s Adaptation Finance Window for Africa (AFWA), implemented in partnership with the World Climate Foundation. He previously served as Deputy Team Leader and Head of Partnerships for the Climate Finance for Development Accelerator (CFDA), USAID’s flagship climate finance program.
This is the first in a two-part reflection on lessons from the Adaptation Finance Window for Africa (AFWA). This piece focuses on what funders can learn from using open, competitive windows to allocate catalytic capital; the companion piece shares practical recommendations for fund managers navigating similar processes.
