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.
This post originally appeared in ImpactAlpha’s daily newsletter. Get The Brief.
Photo credit: fundera.com