The Next Generation of U.S. Development Finance: A More Effective and Mutually Beneficial Path Forward
- Trekking for Alpha
- Apr 30
- 19 min read
Table of Contents
Revise the Investment Scope and Process to Prioritize American Strategic Objectives
Prioritize and Narrow What Constitutes Advancement of U.S. Strategic Interests
Increase Interagency Dialogue to Align Investment Priorities and Share Information
Adjust Investment Materials to Prioritize U.S. Strategic Rationale
Reassess Funding and Capital Deployment to Hostile Countries
Build Lasting Alliances Through Economic Incentives
Become a Sourcing Leader
Expand the Co-Investment Universe
Create a Creative, Nimble Sourcing Mechanism Outside the Development Echo Chamber (Effective Ground Presence)
Market Building / Support Initiatives
Develop a New Class of Investors – American Dynamism 2.0
Host U.S.-based Investment Summit
Increase and Improve Dialogue (Temperature Checks, etc.) with Private Market Participants
Equip Stock Exchange Leaders in Developing Markets for Success
Fill in the Information / Services Gaps
Problem of Donor-Funded Services and Examples of Private Market Solutions
Improve Metrics and Incentive Alignment
Adjust Deal Metrics to Align with New Agency Priorities
Reassess Employee Incentive Alignment
Rethink Energy Solutions to Work for America and Progress Development
Pragmatic Energy Solutions: Going Beyond the Green Agenda
China’s Dominance of Green Tech Production
Parting Thoughts
We are former investment bankers and private equity investors, America First patriots, and curious travelers. After seven years in NYC, Michelle walked away from her job at Goldman Sachs and Jennifer left her middle-market PE fund to travel the world and meet with investors and market participants along the way (chronicled in our blog Trekking For Alpha). After 100+ meetings in 16 countries everywhere from Iraq to Mongolia to Madagascar with investors, business leaders, government officials, capital market executives, and development finance institution (DFI) employees - we have gathered insights. As discussed, we wanted to share our views on changes we think could reshape the DFC to work as a more strategic and effective tool for statecraft while mobilizing private capital and supporting American business.
This article includes our suggestions related to the investment approach of the DFC and potential improvements to internal operations . While some of this paper includes narrative to demonstrate the issues we observed, we also include thoughts on practical solutions that can be implemented.
Policy experts are also discussing changes to the DFC. We strongly agree with the following points being mentioned already in articles about the reauthorization, but we don’t go in depth discussing these points in this article as they are already on the table: ability for DFC to invest in any country authorized by the DFC board (HIGH PRIORITY), ability for DFC to invest in U.S.-based businesses that support the mission (refining critical minerals sourced abroad, etc.), increased focus on highly strategic assets like critical minerals and mining, and increased use of subordinated capital to mobilize more private capital.
1. Revise the Investment Scope and Process to Prioritize American Strategic Objectives
a. Prioritize and Narrow What Constitutes Advancement of U.S. Strategic Interests
The DFC operates with multiple competing interests – “development impact, foreign policy, and financial performance”. The mission and vision of the organization need to be more clearly defined to prioritize core objectives and focus the scope of what constitutes an investable project.
A snip from the DFC’s 2024 Annual Report is below. The “Mission” includes the three goals of the DFC, but the “Vision” focuses solely on sustainable development and stability more broadly - there is no mention of strategic interest.
Later in the report, the CEO states that the DFC’s work is “guided by a belief that unleashing the power of the private sector is a critical pathway to advancing long-term economic development and promoting stability around the world”. With a guiding belief that is as broad as the above, a case could be made to fund almost any project in the developing world. Keeping the definition broad, the following investments made by the DFC in 2024 could technically “advance U.S. strategic interests” as they could create jobs which could in turn create stability. While we understand the impact of job creation and its role in promoting stability (i.e., fewer unemployed men in Pakistan could lead to less support for radical political groups), it is easy to see how this logic can spiral.
$56m for SME lending in Gaza and the West Bank with a focus on missing-middle and women-owned businesses, in collaboration with USAID
$250m for securitization of graduate school student loans to international students from DFC-eligible countries
$1m investment in shea-nut processing/distribution company working primarily with rural women groups in northern Ghana
$37.5m to support large-scale planting of native tree species on degraded grasslands in the Amazon, in collaboration with USAID
$96m (seemingly two $48m loans to separate banks) in Serbia to support lending to agriculture SMEs with a focus on women-owned businesses, in collaboration with USAID
$50m in Kenya to expand sustainable tilapia production operations on Lake Victoria, reducing pressure on declining wild capture fisheries
Secretary of State Marco Rubio put it best: “Every dollar we spend, every program we fund, and every policy we pursue must be justified with the answer to three simple questions: i) Does it make America safer, ii) Does it make America stronger?, and iii) Does it make America more prosperous?”. Would the 2024 DFC investments from the bulleted list make the cut when viewed through Rubio’s framework? Likely no, especially when combined with a more constructive framework for assessing strategic rationale.
We came across a few examples of investments that work for both the sponsor and the target country. These are the types of investments we should be trying to do. For example, Cool Port Addis is a project based in Ethiopia designed to facilitate the export of horticultural crops, including flowers, from Ethiopia in a cooled state to the port of Rotterdam. This initiative supports the Dutch flower industry, a core business segment in the Netherlands. It is funded by both Invest International, an impact investor founded by the Dutch government and Dutch development bank FMO in 2021 to support Dutch and Dutch-linked companies that want to do business in foreign markets, and the government of Ethiopia. This sort of investment clearly and directly benefits both nations.
b. Increase Interagency Dialogue to Align Investment Priorities and Share Information
As focus on strategic rationale takes precedence in the investment process, working across agencies will prove beneficial in aligning goals and finding key investment themes that will effectively support durable and strategic alliances. For example, DFC could deploy capital to alleviate pain points / support top-of-mind initiatives for governments we are trying to build favor with - using information received from State Department officials.
This concept is similar to “One Goldman Sachs”, an integrated and comprehensive approach utilized by the Wall Street institution to better leverage internal information and know-hows for their clients (i.e., investment professionals talking to procurement teams for product diligence or subject matter experts within the Investment Bank).
c. Adjust Investment Materials to Prioritize U.S. Strategic Rationale
In order to minimize funding projects that do not directly support America’s strategic goals, “America First” strategic investment rationale should be a top consideration in investment committee memos. Making this a bigger part of investment materials focuses and guides the investment process to orient around this vital investment criteria.
We looked into various Public Information Summaries (PIS) to understand how DFC investments are justified currently. For example, review this PIS for the DFC’s $100 million loan to the Bank of Palestine. This investment is categorized as “Impactful per the DFC’s Impact Quotient” (an ambiguous metric we touch on later in this paper). Luckily, we can also rest assured that the team assessed the environmental and social impact of this loan. Hopefully the American strategic interest part was omitted for classification purposes and was discussed at length in IC?
d. Reassess Funding and Capital Deployment to Hostile Countries
Even just by taking a stroll down one of the wide boulevards in Addis Ababa, Ethiopia’s sterile capital city, anti-American sentiment is palpable. Between the “#nomore” statue - referencing an anti-American and anti-Western campaign started by a former Al Jazeera journalist and activist - in the center of Meskel Square, a main hub in Addis, to shouts of “go home” from locals, American hostility is evident. In all of our travel, never have we been somewhere where we felt less welcome as Americans.
It is clear America has not won hearts, minds, and influence in Ethiopia. This is despite literally throwing money at the country. America is the largest humanitarian donor to Ethiopia. In 2023, Ethiopia received $1.7 billion in aid money from the United States making the Eastern African nation the 5th largest recipient of U.S. aid globally. In the same fiscal year, Ethiopia was the second largest recipient of USAID funding. Second only to Ukraine. Where has all of this money gotten us? It is hard to tell. This is all in the background of the Ethiopia-China relationship which has blossomed over the years despite China spending less on foreign aid. Throwing money at problems in the world of development doesn't work.
Ethiopia is just one example we saw during our travels, but there are many other hostile countries receiving a significant amount of tax dollars. There may be a case to be made that dollars can improve hostile relations, however, evidence around this to the broader extent remains murky.
While we believe in the greater cause of poverty alleviation and helping fellow man, the U.S. government has a mandate to utilize tax dollars to prioritize the advancement of U.S. policy and global leadership. The next iteration of U.S. foreign development spend should focus on nations where both goals can be attained.
e. Build Lasting Alliances Through Economic Incentives
In a similar vein to our point about rethinking funding dynamics with hostile countries, the DFC could be using its resources to “reward” countries demonstrating the intention of building a lasting alliance with America (i.e., voting with the U.S. in the UN, condemning hostile global events, sourcing from U.S. firms or countering China). This could come in the form of increasing deal flow, improved deal terms, providing connectivity to certain U.S. investors, etc. We have noted previously the short-term, transactional nature of how many world leaders (particularly in Africa) tend to view foreign aid / investment. The DFC needs to make it clear through actions that these relationships should be long-term and mutually beneficial.
2. Become a Sourcing Leader
The DFC has a chance to become a leader in sourcing unique assets and projects that specifically further national investment priorities. With the right work done within investment ecosystems on the ground, it is possible for DFC to source unique and differentiated opportunities. This change is vital.
a. Expand the Co-Investment Universe
The revamped DFC will have a chance to set its own investment agenda that balances its mission. This will likely mean doing more investments with an expanded universe of co-investors including private equity groups, hedge funds, and other investors (potentially a new class of American Dynamism-oriented impact investors discussed below) - not only the same global development apparatus. This will require differentiated sourcing.
Going forward, we believe it could be useful for the DFC Annual Report to include a column identifying co-investors in the list of investment activities (if possible). Who is the DFC investing alongside? The 2024 report mentioned when projects included USAID involvement which was telling - in our view, these were consistently the least “strategic” projects.
b. Create a Creative, Nimble Sourcing Mechanism Outside the Development Echo Chamber (Effective Ground Presence)
A passive attitude that relies too heavily on traditional sourcing tactics (attending the conference circuit, staying in the loop with other DFIs) may be limiting the funnel of investable assets.
When it comes to sourcing truly unique opportunities and partners abroad - the key relationships may not come from “development darlings” but rather members of key family conglomerates or local bankers. We think it’s worth the DFC building the capacity to forge meaningful relationships with these sorts of people. The benefits of this would extend beyond sourcing - leading to more nuanced intel gathering and more lasting relationships with government officials.
In order to execute on this, it would require a more extensive permanent footprint. We have seen how vital ground presence is. We also have felt the vacuum of U.S. ground presence as we have been greeted by “Ni Hao” by locals more and more in countries where the only other foreigners are Chinese.
However, it is important to learn from prior mistakes on how building an extensive ground presence can easily go astray. We have seen how wasteful and expensive a large ground presence can become, especially when the wrong people, without the adequate skills or experience, are placed in offices abroad. It is important to emphasize that having a ground presence just to say “we have an office in xx country” can be worse than not having one at all if it is staffed with an ineffective team. The priority should be on ensuring that teams on the ground are willing to roll up their sleeves and are able to engage with stakeholders in a truly meaningful way - even if this means having fewer permanent offices. We’ve found it takes a few weeks on the ground to meet many relevant market participants and that the network effect (intros to other important figures / organizations) in these markets can happen very quickly.
Having skilled networkers that are able to have conversations with the investors that matter, that are willing to make contacts across many market participants, that are willing to build relationships and go to the ends of the earth to meet on site, that can think outside the development world’s echo chamber - would be highly valuable. We don’t necessarily think building a strong sourcing function would require a large team to facilitate, just a small team of highly mobile, enterprising, and experienced networkers. Giving this team flexibility across regions could be useful here too.
For example, in meeting with various market participants in Mongolia - we were able to connect with independent bankers looking for capital for various mining projects. These bankers expressed they did not have in roads with many western investors. We heard similar statements from other investment bankers around the world that had interesting assets that they were mainly marketing to local investors only because they lacked connectivity. We think building a network amongst these bankers and market participants that exist outside the development ecosystem could be worthwhile.
As another example, we were on the ground for ~2 weeks in Ethiopia living in a neighborhood where we became “regulars” at a higher-end coffee shop. We heard a man next to us say “private equity” and struck up a conversation. It turned out he was part of the diaspora in the U.K. who moved back to start a business that was acquired. Through this conversation, we met a whole network of business owners and entrepreneurs building companies relevant to the development space but that existed outside of it. Investors need to not simply attend the conference circuit - there are many market participants of value outside of that space.
3. Market Building / Support Initiatives
a. Develop a New Class of Investors – American Dynamism 2.0
As the core objectives of the DFC and development finance community shift, a different private market investor base will need to be identified and cultivated. We foresee an opportunity to capture investors interested in deploying capital into international markets while supporting the American Dynamism agenda.
b. Host U.S.-Based Investment Summit
While many governments host investment summits, they are very ineffective and poorly run. Many are organized by government investment agencies which are staffed by local bureaucrats who may have never even met a returns-oriented investor, yet alone seen what an effective investment summit should look like. The result? A facade that something is getting done, glamorous picture opportunities for government officials, a love fest for pie in the sky green energy concepts, millions of dollars wasted, and of course little to no new investment interest.
We have been to some of these investment summits. Take for example the 2024 Nepal Investment Summit (covered here on our website). While it was amusing for many reasons, it was acknowledged by all we spoke with at the summit that it was a waste of time. The Mongolia Economic Forum was not much better. We stopped attending these summits altogether as we realized they were all the same – ineffective and uninformative. Why would busy investors feel any different?
This dynamic creates significant opportunities for the DFC. The DFC should consider hosting a US-based investment summit as it i) can be run effectively and with outcome-driven and impactful events, ii) attract more Western investors given travel ease, and iii) feature panelists from some of America’s greatest financial institutions. It could become a preeminent event and the envy of the development world.
c. Increase and Improve Dialogue (Temperature Checks, etc.) with Private Market Participants
Connectivity with real private market participants - investors, business owners - such as temperature checks should be implemented in order to assess challenges on the ground, potential unintended consequences of innovative development strategies, develop knowledge, and build stronger partnerships. If the intended long-term vision is to phase in private capital, it is important to keep your most important stakeholders happy.
Because DFIs often have sole control of the purse strings, private market participants are skittish to raise real concerns about the ecosystem. This is a problem that will have to be overcome if true concerns of the core stakeholders are ever actually considered. Because of our status as free-floating bloggers, investors were beyond eager to finally have a voice to convey their real concerns to – DFI blindness to the unique challenges of attaining DEI metrics in frontier markets (i.e., women have historically been less educated / integrated in the business community so forcing it now is tough), DFIs crowding out real market participants due to valuation bubble creation, limited understanding of local market realities. Business leaders also expressed deep frustrations with DFIs investment processes – EXTREME slowness, WAY too much paperwork, again too much focus on ESG/DEI in conditions which are not ready to support this.
“Unfortunately, it’s very costly to criticize DFIs. Investing is a relationship business. People are less likely to work with someone who criticizes other people in the industry. Undoubtedly, I will suffer career consequences for writing this [piece raising concerns about an IFC program].”
Somaliland-based Investor, April 2025 LinkedIn Post
d. Equip Stock Exchange Leaders in Developing Markets for Success
Training programs and technical assistance for public market leaders (c-suite at stock exchanges, for example) can serve as a powerful tool to support market liberalization and effective public market development. For example, when we were in Azerbaijan, we met with the leadership team at the Baku Stock Exchange. They had seen our blog post featuring an interview with the COO of the Mongolia Stock Exchange and asked us for an intro as they were seeking advice and guidance. If successful, supporting the development of the public markets, even in a risk-off manner such as training and support, increases the depth of the capital market ecosystem and builds additional exit pathways which could further incentivize true private market investors.
Providing support is an important instrument to foreign government’s working on liberalization efforts. Bolstering public markets has been a core focus of many of our meetings, particularly in former Soviet States.
e. Fill in the Information / Services Gaps
The information and services gap in the frontier and emerging market investment ecosystems is two-fold: i) vital, quality investment services do not exist in local markets and ii) international investors have limited access to dependable, English research and information and international sourcing opportunities. Both problems are critical to solve and likely have different solutions.
Our first stop, Nepal, was one of the most interesting opportunities to dissect the “missing investment services” challenge in the developing world. Nepal is in the early innings of its PEVC journey. The ecosystem is incredibly nascent, however, has been the recent beneficiary of a significant amount of Western DFI dollars that are chasing the development of private capital markets there. Because of this, a bunch, literally 16, PEVC firms have risen from the void. These firms along with the Nepal Private Equity Association are now all scrambling to put in place the proper infrastructure to get deals across the finish line.
We spent a week on the ground with investors and the Nepal Private Equity Association gaining insights into what it takes to build a durable private equity ecosystem from the ground up. Components we take for granted – law and consulting firms with PE experience, investment bankers sourcing and marketing deals, research and diligence providers, bankers with knowledge – were all missing. They are currently in the process of working with India-based services firms in conjunction with Nepal-based firms, which are providing local expertise and attaining training, to develop this infrastructure.
There is also a large hole with respect to quality, English information. For example, we are working with some private investors in Bangladesh and they feel that one of the biggest hurdles for even getting preliminary investment interest is the huge gap in quality information. Note that most governments have some form of investment website, but they are very weak and are possibly the legacy of a poorly run development program.
Additionally, there is a lack of connectivity between Western private investors and opportunities in the developing world. While there are some banks and services firms trying to fill this space, we have not run across an effective apparatus connecting the two worlds. How can deals get done if the right eyes are not even seeing the deals in the first place? Building a sufficient platform is very tough. And maybe it’s not completely necessary, but understanding the extent of the lack of connectivity is important to keep in mind.
f. Problem of Donor-Funded Services and Examples of Private Market Solutions
In many shallow markets - donor-programs provide nearly all investment ecosystems services including running VC accelerators, educating market participants, lobbying for “better” policy, providing investment banking, investor relations, and equity research services, etc. Private investors in these markets tell us that the donor organization employees are often NOT qualified to fill these roles, do an inadequate job, but still technically “fill” this part of the ecosystem which blocks out better services providers from starting up. These donor-funded programs again create a facade that something is getting done, however, they are often executed so poorly that they are useless or worse.
We have seen a few home-grown financial services firms in frontier markets doing an impressive job of providing information and services to foreign investors and market participants as their markets liberalize. We were impressed with Capital Markets Mongolia (CMM) which is positioned as the ultimate source for investors interested in Mongolian markets. The platform provides market news in English, hosts investor conferences in developed markets (Mongolia Investment Forum in NYC is being hosted this week at the Nasdaq), and helps public companies host investor events / publish results. We believe there is opportunity for firms like CMM outside Mongolia and that these sorts of businesses have the potential to build robust markets in liberalizing countries.
Alongside CMM which focuses on increasing foreign investment and creating connectivity in more developed markets, we’ve heard about new brokerage firms and plans to engage retail investors at home in frontier markets. We think supporting these measures could have a multiplier effect in building free markets around the world. If the DFC cares about supporting robust and self-sustaining markets, these sorts of services providers and infrastructure investment for public markets need to be supported.
We understand that supporting markets in this way is a big lift. We believe it’s better to focus on quality solutions in high-priority markets vs. implementing broad support initiatives across many geographies that ultimately do not work.
4. Improve Metrics and Incentive Alignment
a. Adjust Deal Metrics to Align with New Agency Priorities
Investors are very oriented around hitting certain metrics and currently there are very few metrics that are actually directly linked to American strategic interests. Developing a new set of metrics, while keeping the resulting paperwork headache for market participants in mind, could serve as a vital tool to reorient the mission. Climate metrics should also be reassessed to include metrics addressing cost and efficacy.
As an outsider, it is hard to know with certainty the metrics used by DFC, but the one we have heard the most about is the Impact Quotient.
We have never seen any real mention of metrics or other indicators relevant to strategic interest. Things such as:
How much money have DFC programs brought to U.S. businesses?
Have there been cost savings for U.S. businesses from infrastructure projects?
Amount of increased access to certain raw materials for U.S. businesses
Amount of increased trade between U.S. and XX country
Maybe some of this is tracked. We could see a case for keeping this internal. But if it is not, new strategic measurements should be layered in.
As a taxpayer reading the DFC’s Annual Reports, it is hard to parse out how the agency is working for me.
b. Reassess Employee Incentive Alignment
Many private, returns-oriented investors we have spoken to have expressed questions and concerns around the incentive alignment of DFI employees. While private sector investors are incentivized by carry, DFI investors are not. Private sector players fear DFIs reward those who push the most capital and deals out the door or prioritize some “impact” metric of the moment.
Honestly, we are not quite sure how the DFC views employee performance metrics and realistically government organizations are handcuffed from rewarding employees with carry. However, employee performance metrics should be reassessed and revamped to better incentivize those carrying out the mission of the agency. Employee incentive alignment tactics are a powerful tool in the private sector, and this should be utilized better by the DFC.
5. Rethink Energy Solutions to Work for America and Progress Development
a. Pragmatic Energy Solutions: Going Beyond the Green Agenda
The development community must provide capital to the most practical power projects, including fossil fuels, in the name of economic development and poverty alleviation. Investors must assess realistic project costs and time to complete, probability of completion, reliability, and scalability for power projects. We cannot continue investing in risky projects that may help hit climate goals agreed upon at a conference far away. We believe this simple change has the biggest chance of genuinely spurring growth and all that comes with it. Secondarily, investment in fossil fuel projects is mutually beneficial - increasing energy access in partner nations while simultaneously acting as a new market for U.S. output.
This broad green energy delusion has gripped the entire development and impact world for the past decade. Starting with the passing of the UN Agenda in 2015 and then the Joint Multilateral Development Bank Action Plan in 2016, capital allocation from DFIs shifted at scale. We were shocked by the pervasiveness of this green energy doctrine - how it was prioritized above all else, and also by how many fraudsters it spurred. Beyond that, we were told repeatedly by business owners in Africa that the biggest hurdle to scaling was access to power. This climate delusion has kept millions in poverty, businesses subscale, and nations dependent on imported goods as they cannot fuel production on their own (check out this piece that discusses this problem in further detail).
Below are two examples we encountered that demonstrate how deeply the green energy delusion has distorted policy and investment priorities:
Ethiopia, a country with 55% electricity access, with a mere 43% in rural areas, and a GDP per capita of $875 ‘bravely and boldly’ became the first nation in the world to ban the import of non-electrical vehicles. This policy was implemented in 2024.
At the Mongolia Economic Forum in Ulaanbaatar, the coldest and one of the most polluted capitals in the world, we attended a panel titled “Green Energy & Financing, Energy Transition”. After many optimistic speeches from various representatives from renewables businesses and the IFC, the moderator asked if the renewable energy sources discussed could warm the city during winter. The panelists, shocked that capability and efficacy were questioned, stammered through attempts at answers; however, all had to concede that their technologies would fail under the harsh conditions. When the moderator asked the IFC representative about providing financing to improve Ulaanbaatar’s existing, failing coal plant (making it cleaner, greener, more efficient), he noted his hands were tied due to restrictive mandates.
Below is a table showing the 30 countries with the lowest electricity access rates. Many of these nations have extremely ambitious green energy plans in place thanks to Western development investors. These plans are in lieu of a path to more practical solutions.
Development experts preach the vitality of Africa moving up the value chain into value-added processing - as if the hurdle to this next stage of industrialization was having the realization that this was the development problem all along. But how can this be done if there is not access to dependable power? What manufacturers would want to operate in a place where the assembly lines flicker on and off?
b. China’s Dominance of Green Tech Production
Most concerningly, China dominates production of green technologies. “China’s share in all the manufacturing stages of solar panels (such as polysilicon, ingots, wafers, cells and modules) exceeds 80%... In 2021, the value of China’s solar PV exports was over $30 billion, almost 7% of China’s trade surplus over the last five years” according to the IEA. According to the Center for European Policy Analysis “China is currently the world’s largest wind turbine manufacturer, accounting for 60% of global production capacity. Europe and the US, which long dominated the wind market, stand at 19% and 9%, respectively. China dominates the wind supply chain, providing between 70–80% of the core components and refines almost 100% of the critical minerals required to build turbines.”
President Xi has made industries like EVs, solar, and wind a key part of China’s industrial growth strategy. This should really make you question who the Green Revolution is actually helping.
As demonstrated below, you can see the monstrous growth of China’s solar PV manufacturing from 2010 to 2021.
6. Parting Thoughts
One of America’s greatest competitive advantages is the strength and depth of our financial system and we should be capitalizing on this. For far too long we have been neglecting this powerful tool. With a revitalization of America’s greatest financial foreign policy apparatus, we can utilize one of our greatest strengths to truly Make America Great Again.