2030 Finance | October 21, 2019

Rockefeller’s $60 million impact fund manager leverages ‘catalytic capital’ for scale 

David Bank
ImpactAlpha Editor

David Bank

ImpactAlpha, Oct. 21, 2019 – On the hunt for innovations able to mobilize at least $1 billion to meet the Sustainable Development Goals, the Rockefeller Foundation in the last several years has spotted more than a few such potential “SDG-finance unicorns.”

In trying to attract investors to the promising products in its “Zero Gap” grant portfolio, however, Rockefeller’s innovative finance team heard a consistent objection: “If this is such a good idea, why isn’t Rockefeller also supporting it?”

Now, in a half-dozen or more deals, Rockefeller is putting “catalytic capital” where its mouth is. The foundation is one of the first to create an impact investment management company registered with the U.S. Securities and Exchange Commission to allow it to manage other investors’ capital. The capital for the new Rockefeller fund management firm come from the program side of the balance sheet, rather than the foundation’s $4.7 billion endowment; under the tax code, they are considered “program-related” investments.

The first outside investor in the Rockefeller Foundation Impact Investment Management LLC was the MacArthur Foundation, which last spring committed $30 million, matched by $30 million from Rockefeller itself, to invest in vehicles such as the 50 promising models, across more than two dozen countries, in the Zero Gap grant portfolio. 

Here come the SDG-finance unicorns

The two foundations, along with Omidyar Network, have formed the Catalytic Capital Consortium to demonstrate the value of such high-risk or low-return investments in crowding in additional investors. Such capital is in the shortest supply, as ImpactAlpha’sBeyond Tradeoffs” series highlighted last spring. Compared to the tens of trillions in commercial capital, and even hundreds of billions in philanthropic capital for grants, capital to de-risk deals, bet on first-time fund managers, and target tough geographies and hard-to-reach customers may total only in the low billions.

“This will be part of what the future of finance looks like,” Rockefeller’s Lorenzo Bernasconi told ImpactAlpha. “ More and more catalytic capital will be deployed alongside commercial capital.” 

Resilient infrastructure 

The investment management firm is flexing its new muscles in other ways as well. The team is working to raise $40 million from a syndicate of other catalytic investors as a way of attracting $1 billion in commercial capital to a large developer of solar mini-grids in India, which has plans for 10,000 mini-grids to bring electricity to 22 million people.

And the fund manager had private-equity investors vying to co-create a “resilient infrastructure” fund in which Rockefeller will be an anchor investor. The fund managers issued an RFP and chose from among three private-equity giants, many of which are spinning up billion-dollar impact and infrastructure fund. Rockefeller’s aim is to leverage the hundreds of millions of dollars in grants the foundation has made in the past decade to programs like “100 Resilient Cities,” which was shuttered earlier this year. 

Particularly urban infrastructure will play a huge role in meeting sustainable development goals for education, health, economic mobility, and climate change. The infrastructure investments of today or going to determine the world’s path dependency for the century, Bernasconi said, All infrastructure must be resilient infrastructure. For the new fund, Bernasconi said, Rockefeller has created a “resilience committee” and a “resilience screen” to help ensure the fund’s “impact integrity.” 

“We know that In the next 50 years, more infrastructure will be built than has been built since the beginning of time. It’s a massive industry,” Bernasconi said. “We want to find investors who are interested in doing this in the best way possible.”

Blackstone’s embrace of impact investing brings new scrutiny

Understanding of the role of catalytic capital in making deals work has become more sophisticated after a decade of impact investing. In that decade, the market has grown beyond the foundation and quasi-philanthropic roots of the practice. “Market-rate” has become the professed benchmark for the bulk of self-identified impact investors. “Concession” became a no-no. 

The consortium’s rebranding to “catalytic capital” reflects the new nuance. MacArthur Foundation has allocated $150 million from its overall $500 million mandate for impact investments to half-dozen or so funds and intermediaries that demonstrate the leverage of such precious capital. The prospect of MacArthur’s $30 million in matching capital for the Zero Gap fund spurred the Rockefeller team to take the steps to register with the SEC. Bernasconi and Mike Muldoon co-manage the fund. 

Innovative finance

Catalytic investments already are demonstrating leverage. The Rockefeller fund last year took a $1 million equity stake and provided another $3 million in mezzanine debt for San Francisco-based Sixup, a student lending platform that helps low-income students finance college with loans based on outcomes, not credit scores. (The Kellogg Foundation had invested $4 million in 2017). The risk-loss guarantee last year helped Sixup secure a $24 million loan from Goldman Sachs. (Sixup founder Sunwoo Hwang, will talk about the next barriers to fall in a Wednesday morning panel at SOCAP).

Beyond Trade-offs: How leading commercial and catalytic investors are managing for impact, risks and returns

Even more wonky was Rockefeller Fund’s $3 million investment in Leapfrog Investments’ $700 million third fund for healthcare and financial services for emerging consumers in Africa and Asia, one of the largest funds yet raised by a dedicated impact fund manager. The Overseas Private Investment Corp. made the largest commitment, but OPIC’s investment came with a hitch. Because the U.S. development finance agency lacked authority to make equity investments, its tranche of debt would be paid off earlier than other investors in the case of a bust. However remote that risk, other development finance institutions were unwilling to be disadvantaged by OPIC. 

With Leapfrog and OPIC, Rockefeller developed a way to treat all investors equally. It agreed to let its $3 million equity investment serve as the insurance deductible for a policy that would only be triggered by a default in which OPIC would otherwise be advantaged. The only investor who would lose money would be Rockefeller. That enabled about $300 million of additional investment into Leapfrog’s fund.

Rockefeller is now looking for other ways that insurance companies, experts at pricing risks and looking for new lines of business, can be integrated into blended-financing stacks. “For these low-probability, high-impact risks in the portfolio, are there other ways to replicate this? Bernasconi says. “We think that capital markets and the insurance industry can be much more effective at underwriting certain kinds of risk than impact investors.”

Other investments in the Zero Gap funds portfolio include Blue Forests, which has issued a $4.6 million forest-resilience bond to demonstrate its financing mechanism for forest management; the second Women’s Livelihood Bond developed by Impact Investment Exchange, or IIX, part of a planned $100 million series of issues with Singapore bank DBS; and the Climate Resilience and Adaptation Finance & Technology Transfer Facility, or CRAFT, which targets the expanding availability of technologies and solutions for climate adaptation and resilience.

“This is the scaling from all the initiatives. This is the scale play,” Bernasconi says. “There is a massive need for this kind of capital and there are very few providing it.”

Updated: Next Generation of Impact Finance Talent Converges on London