By Debra Schwartz, Managing Director, Impact Investments at the John D. and Catherine T. MacArthur Foundation and Matt Onek, President and CEO of Mission Investors Exchange.
We at
MacArthur Foundation and
Mission Investors Exchange (MIE) look forward to gathering at SOCAP later this month to reconnect with our peers and make new connections as we work together to grow the impact investing field. It is inspiring and heartening to be a part of this movement. In the years since we began meeting in San Francisco, more and more individuals and institutions have been innovating, taking greater risks, and committing more capital to address the most significant social and environmental challenges of our time.
Foundations in particular are making unique contributions to this work. How? First, foundations are experienced mission-driven organizations; they’ve been investing in impact long before the term impact investing was coined. Second, because of their commitment to mission, foundations are focused on keeping impact at the heart of the impact investing movement. Finally, foundations are often able to provide more flexible, risk-tolerant, and patient capital than other types of investors. This is known as “catalytic capital.”
The Power of Catalytic Capital
Catalytic capital is critically important because it can spark impactful deals and projects that might not otherwise have been possible. Catalytic capital investors often accept lower returns or higher risk than others to ensure that a deal succeeds. Their investments attract mainstream investment dollars to more high-impact projects or sectors that don’t fit the parameters of traditional investments, because of the economics of the industry, the nascency of the market, or factors unique to the deal. In many cases, foundations can play an important and particular role in investing in this manner.
Consider the story of
NYC Housing Acquisition Fund, which was created to provide bridge financing to affordable housing developers acquiring and preserving rental housing for New York City’s low and moderate income residents.
It was made possible with first-loss capital from its lead housing agency and subordinated, low-cost debt from six foundations, including MacArthur. Together, the catalytic investments laid the groundwork for senior loans from 16 institutions. By blending capital, the Fund was able to offer unusually patient repayment terms and below-market rates, as well as pricing incentives for nonprofits and developers led by people of color and women. As of 2019, $415 million has helped finance 12,359 affordable apartments. To date, there have been no calls on the first-loss capital.
Another great example of catalytic capital comes from
Quidnet Energy, a venture that is pioneering a new method to leverage hydro power as an alternative to batteries. While it held the promise to transform the energy industry, the company was too untested at its early stages to attract traditional venture capitalists.
But when
Prime Coalition stepped in to facilitate a total of $1.5 million in charitable and mission-driven capital from individuals and foundations like
Sorenson Impact Foundation and the
Will & Jada Smith Family Foundation, Quidnet was able to move from computational theories to well-tested, real world models. Building on that initial commitment, traditional venture capital came forward, funding the company with an additional $6.4 million to begin construction on their first commercial plant, which promises energy storage at less than a quarter of the cost of the most innovative technologies in the market today.
In these and other cases, catalytic capital directly influenced the quality of success in the overall deal, de-risking investments and serving as the linchpin holding together stakeholders with different needs and expectations.
Are You a Catalytic Capital Investor?
Although the tools of catalytic capital can be varied, spanning guarantees, debt, equity, and more, you may sense a pattern in the way that catalytic capital investors think. They center on impact — and how their contribution and collaboration with others can amplify it. They are creative. And they think holistically about the purpose of the transaction, rather than on their investment alone.
If you are inspired to make or collaborate around catalytic capital investments, or simply examine how your current investments might already share common traits, considering asking yourself these questions:
Sourcing projects: Can you identify potentially high impact projects that have not gotten off the ground because of their inability to attract investors?
Under-recognized projects are prevalent in every community, where the potential for impact is significant but traditional paths to investment capital might be limited. If these projects have come across your desk, consider them with a new lens. Is it possible that the right combination of partners and capital could activate them in a way that you hadn’t considered?
Crafting collaborations: How might your capital— and commitment to impact— spark other investors to contribute in diverse ways?
Foundations in particular consider where their investment dollars can add the greatest value or provide leverage for additional capital. For example, your agreement to bear first losses might make it more appealing for other investors, like government entities, to participate in a deal. From these initial collaborations, entire funds can emerge.
Diagnosing capital needs: In what ways can your capital be a creative tool that measurably shapes a high-impact project’s success?
Catalytic capital investors look beyond standardized investment tools, thinking outside the box to offer unusual flexibility, risk tolerance, low cost, or patience. This creative thinking substantively affects the quality of the deal, such as increasing the level of impact, accelerating how quickly a deal closes, stabilizing a fund, and more.
From climate solutions, to medical breakthroughs, to providing affordable housing, catalytic capital is crucial for bringing about transformative change. We look forward to partnering with many leaders in the field to bring you more powerful examples and stories.
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Originally posted on SOCAP site as part of the 2019 MIE and MacArthur Foundation's Catalytic Capital event session.
