Philanthropic Investors Tap “Catalytic Capital” to Seed Innovation & Scale Progress

by Debra Schwartz Managing Director, MacArthur Foundation 

Often, the most compelling impact investments are made, not found.

I have used that phrase over the years to describe how foundations and other impact-focused investors use “catalytic capital” to support social and environmental progress. These patient, flexible, “catalytic” investments are able to take on more risk and/or accept a lower return than commercial capital in order to finance gains that would not otherwise be possible.

Lessons learned have led to new solutions that fill capital gaps, while also strengthening the overall ecosystem for impact investing.

The timing is particularly valuable at this point in the evolution of impact investing. Today, there is a sense of great excitement about this work, spurred in part by the entrance of mainstream investment firms and asset managers into the arena. But there are concerns as well. Rapid growth might reinforce a binary view of this work as either purely commercial or purely philanthropic, when many impact investments actually fall somewhere in between.

In fact, market surveys consistently point to a lack of appropriate capital across the risk-return spectrum as one of the top challenges facing the impact investing field. Even the entry of the world’s largest financial firms into impact investing will not be enough to fill that gap. The market also needs more catalytic capital — also known as concessionary or sub-commercial capital — to seed innovation, scale up promising enterprises, and sustain organizations that serve impoverished people and places.

The good news is that this increasing realization is leading to deeper conversations about risk, return, and impact — and not just among foundations. The recent series Beyond Trade-Offs, from Omidyar Network, includes insights from influential organizations like the Ford Foundation, the Bill and Melinda Gates Foundation, Goldman Sachs, Big Society Capital and Access—The Foundation for Social Investment, Lok Capital, Elevar Equity and The Rise Fund. The series highlights strategies that are moving some investors beyond their traditional commercial or philanthropic roles.

One contributor, Prudential explains how it segments its impact investing portfolio so that 80 percent of its assets target market-rate or better returns, while 20 percent are catalytic (supporting promising but higher risk enterprises) or philanthropic (supporting nonprofits). And Blue Haven Initiative, a single-family office, discusses why it expanded its market-rate approach so it could operate across a continuum of returns, recognizing that family offices are able to be more flexible in pursuing impact than are many institutional investors.

At MacArthur, we have likewise leveraged our capacity to be innovative and take on risk. Since the mid-1980’s, we have invested $517 million in catalytic capital to directly support enterprise-level progress, as well as drive large-scale initiatives and build collaborations that unlock new investments — all aimed at financing impact that would not otherwise be possible.

Often, that means we anchor blended funds in order to mitigate risk or provide a lower-cost layer of capital; that, in turn helps attract a diverse pool of other investors. We also play a priming role, investing in promising but unproven organizations or markets, and giving them the chance to build financial capacity and proof points so that they may become commercially investable in the future.

Read Debra's full article that includes are variety of links and resources here --  https://greenmoney.com/philanthropic-investors-tap-catalytic-capital-to-seed-innovation-scale-progress