The critical partnership between donors and DFIs
Mobilising private capital has become central to international development policy as official development assistance declines and the financing required to achieve the Sustainable Development Goals continues to grow. Yet private capital flows into the poorest and most fragile economies remain far below ambition. In frontier markets such as Sierra Leone, financial de-risking alone cannot overcome unpredictable regulation, limited market intelligence, thin pipelines of investment-ready businesses, weak intermediation and fragmented relationships among public and private actors. This paper argues that donor-funded programmes are essential to mobilisation in these markets: they perform the market-building functions needed to turn commercial potential into investable opportunities. Close collaboration with development finance institutions (DFIs) strengthens their ability to mobilise such investments.
The FCDO-funded Invest Salone programme and DFI-funded Africa Resilience Investment Accelerator (ARIA) show how collaboration between donors and DFIs is key to unlocking investment that would otherwise struggle to reach frontier markets. Combining Invest Salone’s local knowledge, enterprise support and ecosystem-building with ARIA’s investment expertise, the two programmes have identified more than 200 businesses for engagement, facilitated investor linkages and contributed to GBP 63 million of investment in Sierra Leonean enterprises. Invest for Impact Nepal reinforces the lesson: coordinated donor and DFI support can expand pipelines and deliver market-wide policy and regulatory improvements.
Key findings
- DFIs are essential but cannot mobilise private capital at scale in isolation. Co-investment, guarantees, structured finance, concessional capital and blended finance can improve risk-return profiles and reassure investors. DFI technical assistance can also help firms already within an investment pipeline meet institutional requirements. However, DFI operating models, risk limits, transaction costs and minimum investment thresholds constrain their ability to develop markets or reach smaller and less mature firms.
- The principal constraint in fragile markets is often the quality of the investment ecosystem rather than the availability of finance. Investors require predictable regulation, credible information, capable institutions, trusted intermediaries and investment-ready businesses. Where these foundations are weak, concessional finance alone is unlikely to generate sustained investment.
- Donor-funded programmes are essential to mobilising investment into frontier markets. They fund policy reform, market intelligence, business preparation, stronger intermediaries and ecosystem coordination – functions individual investors have little incentive to support. By reducing costs and expanding pipelines, these programmes enable DFI and private capital to reach otherwise underserved markets.
- DFI technical assistance and donor-funded enterprise support are complementary. DFI support is generally transaction-linked and focused on firms already approaching investment or post investment. Donor programmes can intervene earlier and more broadly, developing businesses that have not yet entered a DFI pipeline while strengthening the institutions and market infrastructure from which future investments emerge.
- Mobilisation and additionality involve unavoidable trade-offs. Larger volumes are easier to achieve in established markets and familiar sectors, while pioneering investments in fragile states may require more preparation and risk absorption and produce lower mobilisation ratios initially. Performance frameworks should recognise both immediate capital mobilisation and longer-term market development.
Implications for donors and DFIs
- Institutionalise collaboration from programme inception. Donors and DFIs should establish formal mechanisms to align market diagnostics, pipeline development, technical assistance, policy reform, investor engagement and transaction support. Shared objectives and information systems would reduce duplication and enable constraints identified during origination to be addressed systematically.
- Treat market development as part of mobilisation. Donor enthusiasm for mobilisation risks undermining the pipeline creation on which it depends. Success measures should therefore recognise not only capital mobilised, but also stronger institutions, market information, policy reform, intermediation and growth in investable pipelines. Without these elements, investment will not take place.
- Use blended finance more strategically and at greater scale. Donors and DFIs should develop simpler, more standardised and replicable guarantees, funds, securitisations and other risk-sharing instruments. Concessionality should be limited to what is necessary, linked to a clear development rationale and designed around a credible route to commercial sustainability.
- Build domestic capital markets alongside international mobilisation. Support should strengthen regulation, financial infrastructure, corporate governance and local-currency instruments so that domestic pension funds, insurers, banks and other investors can channel more capital into productive long-term investment.
- Differentiate mobilisation objectives by market context. More investable markets can prioritise scalable structures that attract institutional capital. In fragile markets, donors and DFIs should accept lower initial mobilisation where investment can demonstrate viability, build pipelines and establish the conditions for future commercial participation.
The choice is therefore not between supporting DFIs or supporting market development. DFIs provide capital, investment discipline and risk-sharing capacity; donor-funded programmes create the businesses, institutions, information and relationships that make frontier markets investable. Donor programmes should therefore be treated as a core component of mobilisation strategies. In Sierra Leone and comparable markets, sustained donor–DFI collaboration can connect market-building to investable pipelines, reduce structural barriers and enable private capital to enter and scale, supporting long-term economic transformation.
