Michael Kubzansky, Managing Partner, Omidyar Network
Rajiv J. Shah, President, Rockefeller Foundation
Julia Stasch, President, MacArthur Foundation
This commentary was originally published in the Chronicle of Philanthropy, on August 6, 2019.
Today’s impact-focused entrepreneurs are in overdrive, developing solutions to an ever-growing list of critical social challenges, including poverty, education, and climate change. Many of these pioneers rely on impact investments to fuel their work, but far too many enterprises and the funds that support them cannot access appropriate financing because they are too small, too risky, or profit-constrained.
Philanthropic organizations can play a critical role in bridging that gap with "catalytic capital." Catalytic capital is neither a grant nor a profit-maximizing investment. Instead, it is an investment structured to be more patient, take on more risk, accept a lower return, or be flexible in other ways that differ from conventional capital.
Without sufficient catalytic capital, investors will be left on the sidelines, enterprises and funds will not receive the capital they need to succeed, and the global impact-investment market cannot realize its potential. This includes missing the opportunity to make significant progress on the Sustainable Development Goals, a collection of 17 urgent calls to action adopted by all United Nations member states to achieve peace and prosperity for people and the planet by 2030.
Consider the innovations that have fueled the growth of financial inclusion, an impact-investing sector that is providing access to useful and affordable financial products and services. Ten years ago, this was a nascent field with little proof that it would succeed and few investors willing to take a chance on financial technology designed to help low- income working families escape the high-cost lending trap.
Some forward-looking investors, however, saw an opportunity for impact and provided flexible capital to support its early development. They were willing to adjust their initial expectations, extend their time frames, and, in some cases, offer expertise and other help. The result: Financial technology is now thriving in developed and emerging markets, finally opening up the formal economy to millions of people who had been left out.
Think about the other solutions—and entire industries—that could take off if they had the proper runway to grow. Already, catalytic capital has been critical to the success of some of today’s most mature impact-investing spheres, including affordable housing, microfinance, and affordable, reliable, clean energy. This success has been fueled by foundations and corporate investors such as the Bill & Melinda Gates, Ford, Kresge, and Packard foundations as well as Prudential Financial and others that have used catalytic capital to drive innovation, build track records, attract additional investment, signal impact potential, and advance important social missions.
To be sure, catalytic capital is not for all investors. Rather, it is one of a range of financial tools needed to supplement traditional grant making and conventional investing.
But catalytic capital must be part of the solution if we are to address the Sustainable Development Goals’ massive funding gap, which is estimated at $5 trillion to $7 trillion. To achieve the goals, a collaborative approach to investing is critical, one that embraces more types of capital. Catalytic capital is well-suited for investors who want to support enterprises or funds that have high-impact potential but need a bridge, whether that is a guarantee to make investment less risky so that conventional investors can participate or a willingness to make early, patient bets on promising ideas, teams, and business models that might not otherwise attract financing.
This is why our philanthropies have joined to launch the Catalytic Capital Consortium. Our goal is to inform, inspire, and empower investors who want to make catalytic-capital investments that unlock, accelerate, and expand impact, working in concert with other forms of investment, including those with market rates of return.
Our organizations have deployed catalytic capital for decades, collectively making more than $900 million in investments of this type. However, given the magnitude of social and environmental issues facing the world, much more is needed. From family offices to foundations to development-finance institutions, we need to find new ways to collaborate and harness the power of catalytic capital.
We also need impact investors to drive more catalytic-capital investment and learning.
Together, we can fuel deeper, more sustainable impact for people and the planet.
Reposted with permission from the Chronicle of Philanthropy.