Much has been written about the power of public and philanthropic capital to catalyze growth and scale in social impact by supporting innovation in approaches capable of attracting private investment. However, as our work with development banks, foundations and other funders has revealed, determining how best to use scarce resources to provide pathways and incentives for private investors is more art than science.

Across sectors and market actors — including in food and agriculture — our team has advised and participated in a number of donor-driven interventions that have successfully used public and philanthropic capital to draw in private sector resources to support socially impactful business models. While no single “right” way to catalyze return-seeking, private investment exists, identifying the context-appropriate approach always starts with a disciplined assessment of the market in question as well as an in-depth understanding of the market failures that impede private sector participation.

Assessing the State of the Market

Market assessment for any sector or strategy begins with an understanding of the general business and regulatory environment and the level of support it affords to building and strengthening businesses. In the area of food security, more specifically, the health and maturity of the agricultural sector — and its ability to access financing — must also be considered, as the availability of products and services along the value chain, as well as the capital to scale them, impacts the growth potential and viability of business models that could improve food security. While many emerging market economies still rely heavily on agriculture, agribusiness varies in sophistication across markets, and most markets face a significant finance gap that cannot be closed without intervention.

Understanding Market Failures

An in-depth assessment of the current state of the market will further reveal where specific gaps exist and catalytic capital is most needed. Market failures typically fall into one of several categories: (1) poor underlying economics (i.e., costs and risks that limit profit potential); (2) the presence of systemic risks; (3) a lack of specialized sector knowledge; (4) low financial literacy or sophistication among the owners and developers of business; (5) poorly functioning value chains; and (6) a weak enabling environment. Many of these failures are related, and where one is problematic, so are others. This knowledge offers the potential for scale in the provision of catalytic support, since the same programs and deployment strategies can be applied in markets that share similar characteristics.

Selecting the Intervention Strategy

With a market assessment and understanding of capital gaps in hand, a strategy for intervening can be designed to maximize what can be achieved against the goals of attracting private investment and scaling impact. These interventions can be organized into four primary strategies, which can be pursued independently or in combination, depending on the market:

• Product and service enhancement: develop and enhance tools and structures that reduce the cost, complexity and risk of operating or financing agribusiness;
• Supply-side capacity building: support partnerships, education and expertise-building to attract developers and financiers of agribusiness;
• Demand-side capacity building: build interest and expertise for agricultural financing and contribute to initiatives that support sustainable, inclusive agricultural market systems; and
• Enabling environment: support more inclusive regulations and policies for agribusiness.

There are several recent examples in the agricultural sector of the different roles catalytic capital can play to attract the private sector, a few of which were highlighted recently in another post from Patrick Starr at USAID's Bureau for Food Security. Each case demonstrates how a mix of the strategies above was successful in attracting private sector investment as a means to drive and scale food security and agricultural impact.

While significant strides have been made in individual transactions to demonstrate effective ways to deploy catalytic capital, its promise is far from being met. The strategic, disciplined approach described above will help to guide future partnerships, but it must also be accompanied by greater collaboration among leaders in the public, philanthropic and private sectors. With a deeper understanding of the needs and preferences of the private sector, alongside the tools and strategies available to donors, catalytic capital can reach its full potential, thereby attracting larger, diverse pools of capital to innovative models designed to change the world.