ImpactAlpha, Oct. 20 – The readers have spoken. When ImpactAlpha asked subscribers last year to rank the topics where they wanted to see more coverage, “catalytic capital” topped the list.
Since then, we’ve been diving even deeper into the deals, people and strategies for using patient, risk-tolerant, concessionary and flexible capital. An Agents of Impact call earlier this year featured family-office leaders who see such flexibility as a privilege, not a burden. Next week’s Call will unpack catalytic strategies for bridging persistent gaps in climate finance. Our Catalytic Capital landing page rounds up more than 300 articles.
Our partner (and sponsor) in the effort is the Catalytic Capital Consortium, or C3, a collaboration of the MacArthur and Rockefeller foundations and Omidyar Network. Last week, the consortium greenlit research projects to glean insights from more than a dozen practitioners who are deploying catalytic capital to bridge financing gaps for early-stage climate innovation, smallholder farmers, Indigenous entrepreneurs, employee ownership and other impact strategies.
“What we’re trying to do is to help the catalytic capital investors who have experience, and those that are looking to get into the game, have as much information as possible to be as smart as possible about how to make these choices, and how to calibrate their investments to make sure we’re being efficient and we’re being effective,” MacArthur Foundation’s Debra Schwartz told me in our conversation for ImpactAlpha’s Agents of Impact podcast.
Schwartz, who tweets under the handle @ImpactBanker, manages MacArthur’s $500 million allocation to impact investing. With capital now returning to the foundation, she has overseen more than $110 million in new investments in funds and enterprises demonstrating the efficacy of catalytic capital, including in the Prime Impact Fund for early-stage climate innovation, Social Finance’s UP Fund for workforce re-skilling, Terra Silva for carbon-capture in tropical forests, the Rockefeller Foundation’s ‘zero-gap’ portfolio, among others.
“We’re very excited to see the Impact America portfolio as that is taking shape,” Schwartz said. The fund’s general partner, Kesha Cash, raised $55 million to prove out her thesis that solutions to structural racism represent a series of multi-billion dollar investment opportunities. The fund’s biggest investment, Mayvenn, is opening salons in Walmart stores in Texas and elsewhere. “They are really living out this thesis that if we can get the capital to underrepresented entrepreneurs and underrepresented fund managers, we can really help build agency and economic power,” Schwartz said.
The tools of catalytic capital include program-related investments, or PRIs, which foundations can use to make higher-risk or lower-return investments, subject to the “charitable purpose” provisions of U.S. tax laws. But Schwartz said new catalytic investors also are beginning to step up.
“What’s really exciting are many wonderful partners and colleagues in the family office arena, from Blue Haven, Ceniarth, Candide and others,” Schwartz said. “And we’re seeing corporations creating their own in-house catalytic-type venture funds.” Financial institutions, including those subject to the Community Reinvestment Act, have long been important in financing affordable housing and community development. “We’re seeing lots of creativity across the board.”
Some capital gaps are temporary, as new markets develop and track records are established. Catalytic capital can serve to de-risk investments to make them attractive to institutional investors with strict investment guidelines. “And so we often have to engineer intermediating structures that allow for risk mitigation, that allow for the right-sizing of investments, that allow for the right expertise to be brought to bear and, if necessary, to blend the risk-return profile to a place that might work for different investors along the spectrum,” Schwartz said.
Catalytic capital helped launch fund managers like SJF Ventures, formerly the Sustainable Jobs Fund, and DBL Partners (originally for ‘double bottom line’). “We can come in early, we can help build track records and help bolster scale,” Schwartz said. “But over time, those funds are going to go on to raise subsequent funds, and many of them will be looking to raise much larger amounts of money. And so we’re paving the way for them to make that journey to those other kinds of investors.”
“And then we have other things, like many forms of affordable housing, where if you’re serving very low-income seniors and veterans and the formerly homeless and folks with mental illness, it may not be the case that the enterprise is ever going to completely leave behind the need for catalytic capital,” she continued. “If we take a 1% return on a 10-year unsecured loan, that is a concession.”
“The difference for us as we’re impact-first. So we can say to ourselves, ‘Look, if this is the impact that we’re seeking, we want to be disciplined, we want to be rigorous.’”