Debra Schwartz - MacArthur Foundation - GreenMoney

Philanthropic Investors Tap “Catalytic Capital” to Seed Innovation & Scale Progress

By Debra Schwartz, Managing Director, MacArthur Foundation

Often, the most compelling impact investments are made, not found.

I have used that phrase over the years to describe how foundations and other impact-focused investors use “catalytic capital” to support social and environmental progress. These patient, flexible, “catalytic” investments are able to take on more risk and/or accept a lower return than commercial capital in order to finance gains that would not otherwise be possible.

Lessons learned have led to new solutions that fill capital gaps, while also strengthening the overall ecosystem for impact investing.

The timing is particularly valuable at this point in the evolution of impact investing. Today, there is a sense of great excitement about this work, spurred in part by the entrance of mainstream investment firms and asset managers into the arena. But there are concerns as well. Rapid growth might reinforce a binary view of this work as either purely commercial or purely philanthropic, when many impact investments actually fall somewhere in between.

In fact, market surveys consistently point to a lack of appropriate capital across the risk-return spectrum as one of the top challenges facing the impact investing field. Even the entry of the world’s largest financial firms into impact investing will not be enough to fill that gap. The market also needs more catalytic capital — also known as concessionary or sub-commercial capital — to seed innovation, scale up promising enterprises, and sustain organizations that serve impoverished people and places.

The good news is that this increasing realization is leading to deeper conversations about risk, return, and impact — and not just among foundations. The recent series Beyond Trade-Offs, from Omidyar Network, includes insights from influential organizations like the Ford Foundation, the Bill and Melinda Gates Foundation, Goldman Sachs, Big Society Capital and Access—The Foundation for Social Investment, Lok Capital, Elevar Equity and The Rise Fund. The series highlights strategies that are moving some investors beyond their traditional commercial or philanthropic roles.

One contributor, Prudential explains how it segments its impact investing portfolio so that 80 percent of its assets target market-rate or better returns, while 20 percent are catalytic (supporting promising but higher risk enterprises) or philanthropic (supporting nonprofits). And Blue Haven Initiative, a single-family office, discusses why it expanded its market-rate approach so it could operate across a continuum of returns, recognizing that family offices are able to be more flexible in pursuing impact than are many institutional investors.

At MacArthur, we have likewise leveraged our capacity to be innovative and take on risk. Since the mid-1980’s, we have invested $517 million in catalytic capital to directly support enterprise-level progress, as well as drive large-scale initiatives and build collaborations that unlock new investments — all aimed at financing impact that would not otherwise be possible.

Often, that means we anchor blended funds in order to mitigate risk or provide a lower-cost layer of capital; that, in turn helps attract a diverse pool of other investors. We also play a priming role, investing in promising but unproven organizations or markets, and giving them the chance to build financial capacity and proof points so that they may become commercially investable in the future.

In all of this, we have seen the “but-for” additionality of catalytic capital prove its worth many times over. Thirty years ago, MacArthur supported pioneers in microcredit and the once-fledgling field of U.S. Community Development Financial Institutions. We were among early impact investors — including faith-based organizations and other nonprofits — that took a chance on the hopeful power of mission-driven capital. Our early bets helped build strong enterprises and intermediaries that now marshal billions of dollars for the benefit of low-wealth, under-served people.

To preserve and improve the too-scarce supply of U.S. affordable housing, MacArthur devoted over $200 million to the Window of Opportunity initiative. In addition to de-risking blended funds and investing directly in 22 leading nonprofit affordable housing organizations, we used catalytic capital to seed and launch innovations like the groundbreaking Energy Savers program, the largest unsubsidized multifamily retrofit effort in the U.S., created by Community Investment Corporation and Elevate Energy.

More recently, our $100 million Benefit Chicago collaboration with The Chicago Community Trust and Calvert Impact Capital, demonstrates multiple strategies in action. MacArthur provided $50 million in long-term, low-cost capital to help launch the fund and coordinated with partners to raise an additional $50 million from individuals, corporations, institutions and donor-advised funds interested in investing locally. Today, the fund is financing community-focused businesses that create jobs for hard-to-employ populations like ex-offenders and which would not, on their own, be commercially investable.

The diversity of investors speaks to the power of these collaborations. Praxis Mutual Fund, for instance, was among Benefit Chicago’s first supporters, providing $1 million as part of an effort to invest 1 percent of its assets in community development. Praxis, which is part of the faith-based financial firm Everence, focuses on socially responsible investing with products that sit at various points along the risk-return continuum, offering its clients the chance to balance their interests in impact and financial returns in various ways.

Going forward, how much catalytic capital will be needed to fuel innovative efforts like these and bridge global capital gaps? There is no widely accepted number; a handful of foundations like MacArthur are making grants that support market research to better quantify the need.

What is clear, though, is that today’s impact investment market cannot reach its full potential by focusing solely on commercial forms of investment. Catalytic capital must be part of the mix, and MacArthur will soon launch new strategies to inspire and inform its expanded use. By cultivating innovation, scale, and impact, catalytic capital can be a powerful force that improves the lives of millions of people and protects the planet for generations to come.

 

Article by Debra Schwartz, who is the Managing Director of Impact Investments and serves on the Executive Leadership Team of the John D. and Catherine T. MacArthur Foundation – a private, global philanthropy with approximately $6 billion in assets and annual grant making of roughly $250 million. A pioneer in impact investing, MacArthur has dedicated $500 million of its assets to this purpose. Debra’s group serves as a Foundation-wide resource and engages deeply with selected program teams to devise impact investments that advance key goals. Her group also makes investments and grants that advance innovation, knowledge and connection throughout the impact investment ecosystem, with a focus on fostering the use of catalytic capital.

Debra joined MacArthur in 1995, having previously worked as an investment banker at John Nuveen & Co., and as CFO for a nonprofit child welfare agency. A frequent speaker and guest lecturer, Debra was a presidential appointee to the United States Treasury Department Community Development Advisory Board and a founder of the Mission Investors Exchange. She holds a Master’s degree from the Kellogg School of Management at Northwestern University and a Bachelor’s degree from Yale College, summa cum laude.

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Comment

  • Seed capital and yield mean different things to an investor than an organic farmer.

    The investor sees “seed” capital as a way to startup a business opportunity and “yield” is how much money is made in return.

    On the farm, investing “seed” capital means that just one corn kernel can deliver a cob with 800 kernels. That is how a farmer measures “yield”.

    When we combine the investor’s definition and the organic farmer’s definition, amazing results happen.

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