Private sector development (PSD) is back on the donors’ agenda. In Norway, PSD aid and aid funded loans have increased more than five-fold during the last decade and the government has promised further expansions. To guide the efforts, a new White Paper was submitted to the parliament mid-2015. This report discuss the literature on the most relevant topics and instruments for Norad’s PSD aid and discuss their likely effectiveness. Moreover, the report also discuss which are the most suited instruments for this part of Norwegian aid. The conclusion provides a set of principles and instruments for Norwegian PSD aid to be effective in poverty reduction. One key recommendation is to set up a challenge fund to stimulate recipient country companies to search for innovative profitable investment opportunities.