Credit guarantees, typically provided by philanthropic organizations, are designed to encourage new investors or commercial capital to enter “risky” or undercapitalized investment sectors.
Although not a new tool in impact investing, guarantees are “extremely underutilized,” according to a new report from the Global Impact Investing Network (GIIN).
Recent examples show their promise: A $5 million Kresge Foundation credit guarantee to the Collaborative for Healthy Communities helped bring in $132 million in healthcare investments to low-income communities by easing investor fears about the risks of a new sector and geography. A $12.5 million purchase agreement from the MacArthur Foundation for the Housing Partnership Equity Trust enabled the trust to purchase more than $244 million in affordable housing by guaranteeing liquidity for senior investors.
[See ImpactAlpha’s article on how Gates Foundation’s uses guarantees, “Guaranteed Impact: How the Gates Foundation Cut Prices and Boosted Access to Contraceptives”]
GIIN, which looked at 58 deals, recommends better standardization for guarantee structures and suggests that dealmakers focus on five metrics: objectives of the guarantee, type of risk, coverage level, expectations for financial returns and triggers for the guarantee to pay out to investors.
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