Catalytic Capital: An Essential Impact Driver
By: Urmi Sengupta
In 2019, the MacArthur Foundation teamed up with The Rockefeller Foundation and the Omidyar Network to launch the Catalytic Capital Consortium (C3) initiative. We are encouraged and excited by the dynamic community that has come together over the past several years, building up collective knowledge about catalytic capital and the capacity to use it as effectively as possible.
Why is catalytic capital drawing strong interest and engagement from this fast-growing, global community of investors, advisors, researchers, and social sector leaders? To me, the reason is clear: catalytic capital is a powerful and essential driver of impact, fueling social, environmental, and economic progress around the world.
While many kinds of investors can participate in catalytic capital transactions, foundations and family offices are especially well-positioned to play an outsized role. This comes from their high degree of flexibility relative to many other types of investors, as well as their desire, if not mandate, to take an “impact first” approach.
The recently launched $1.1 billion SDG Loan Fund demonstrates the power of catalytic capital to unlock impact and investment that otherwise would not be possible. Supported by MacArthur as part of our C3 investment portfolio, the SDG Loan Fund was designed to mobilize private, institutional investment for emerging and frontier markets, a major challenge due to regulatory and other barriers. With its large-scale pool of capital fully committed, the fund is providing loans across three key sectors: financial inclusion, agribusiness, and clean energy.
Conceived and managed by Allianz Global Investors and FMO Investment Management (an affiliate of FMO, a Dutch development bank), the SDG Loan Fund has a “blended finance” structure. Through a $25 million unfunded guaranty, MacArthur helped enable a $100 million “first-loss” investment made by FMO. This commitment, in turn, mobilized investments totaling $1 billion from leading institutional investors, including Allianz and Skandia. Ultimately, this result translates to a “leverage ratio” of more than 40x for the Foundation’s catalytic capital guaranty.
The SDG Loan Fund and dozens of other recent examples from the portfolios of the growing C3 community demonstrate catalytic capital’s essential and powerful role. Of course, much more of this type of investment is needed to make progress against the urgent, complex challenges of our times. As we have increasingly seen, the special flexibility and mission-orientation of foundations and, increasingly, family offices positions them to lead the way. For those exploring where to focus a new or growing impact-first, catalytic capital practice, we hope you will consider one or more of the following three areas: climate justice; place-based investing; and, entrepreneurship and small business.
Climate Justice
The recent announcement of the initial federal Greenhouse Gas Reduction Fund (GGRF) awards as part of the Inflation Reduction Act presents a fantastic pathway for catalytic capital investors. This unprecedented public funding program has, for the first time, effectively connected the fields of community development and climate finance at scale. GGRF capital for collaborations like Climate United, Power Forward Communities, Green Bank for Rural America, the Coalition for Green Capital, and the Justice Climate Fund, along with infusions of support for organizations that form the backbone of the field of community development like Inclusiv, the Opportunity Finance Network, and the Native CDFI Network, presents an enormous opportunity for new and complementary catalytic capital investments in historically marginalized communities.
Place-based Investing
In the United States, philanthropic investors have long been on the ground floor of community development strategies, working closely with local leaders and residents to invest in economic opportunity and growth in underserved communities. Benefit Chicago, launched in 2016 as a collaboration of MacArthur, the Chicago Community Trust, and Calvert Impact Capital, has supported funds, intermediaries, nonprofits, and social enterprises that are working to strengthen historically marginalized communities in the region. To date, the fund created to implement Benefit Chicago has committed more than $110 million to impact-focused enterprises, funds and projects.
In addition to Benefit Chicago, Invest Appalachia manages a multi-stakeholder community investment platform that works with Community Development Financial Institutions to offer flexible blended capital financing that accelerates generation of community wealth, local ownership, and quality jobs and also advances climate resilience and long-term sustainability in a historically underinvested region of the U.S.. And the Groundbreak Coalition, which emerged in the aftermath of the murder of George Floyd, is a group of over 40 corporate, civic, and philanthropic leaders committed to raising over $5 billion in capital investments to expand equitable wealth-building opportunities and climate-friendly development in the Minneapolis-St. Paul region—and they've already raised $1 billion toward their goal.
These are just a few examples of many community-centered, place-based investment initiatives that present the opportunity for high-impact, catalytic capital commitments.
Entrepreneurship and Small Business
Investors seeking to deploy catalytic capital will also find opportunities through support for entrepreneurship and small business. This is true in emerging markets, with managers like ALIVE Ventures, which is raising and deploying catalytic capital in support of Latin American entrepreneurs, with an eye toward reducing poverty and improving gender equity. It also is evident through support for Native communities, where leaders like Raven Indigenous Capital Partners are addressing an acute lack of capital for Indigenous entrepreneurs. And it is present with financing platforms seeking to support historically marginalized entrepreneurs like Founders First Capital Partners, which is providing low-cost capital, including revenue-based financing, to underserved entrepreneurs.
Looking ahead, we are excited to know that the growing community of catalytic capital investors, especially foundations and family offices, are poised to make progress in these and other vital areas of work. Through our efforts at C3, we have been fortunate to engage with a number of people that are all working in sync with each other to provide the tools, research, and community forums to support these investors. Together, by harnessing the power of catalytic capital, we can help the field of impact investing realize its full potential to address critical challenges throughout the world.
Please visit www.catalyticcapitalconsortium.org for resources and information about catalytic capital. We look forward to hearing about your own catalytic capital journey and the ways that the C3 initiative and community might be helpful.
Urmi Sengupta is senior program officer at the MacArthur Foundation and chair of the program advisory board for the Catalytic Capital Consortium Grantmaking project at New Venture Fund.
