A recent survey from the Global Impact Investing Network (GIIN) highlights the important role catalytic capital, a key element of the impact investing landscape, plays in addressing critical social and environmental challenges. In a rapidly growing marketplace, the data make clear what we at MacArthur have seen in our work: the market needs more catalytic capital if it is to meet the financing needs of high-impact enterprises and attract investors to the world’s most promising opportunities for progress.
First, a definition: Catalytic capital is financing that accepts higher risk, more flexible terms, longer time frames, and often concessional returns compared to conventional investments. Over the last three decades, MacArthur has deployed more than $517 million of this type of support to advance affordable housing, economic development, energy efficiency, and climate solutions.
The significance of catalytic capital should be considered in the context of the impact investment market’s dramatic expansion in recent years. The bulk of this growth has come from market-rate investors, who are increasingly broadening their focus to consider environmental, social, and governance impacts (ESG) alongside financial returns. According the US SIF Foundation, U.S.-based funds that consider ESG grew 14-fold between 1995 and 2016; at $8.7 trillion, such funds now account for more than one out of every five dollars under professional management.
This trend is expected to accelerate as millennials and women—both growing groups among investors—show a much higher awareness of, and interest in, impact investing. According to a 2017 survey by Morgan Stanley, 86 percent of millennials are interested in aligning their investments with their values, and 61 percent have taken at least one sustainably oriented investment action in the last year. The same survey found that 84 percent of women investors of all ages are interested in impact. A report from the Economist Intelligence Unit is also telling, with more than twice as many younger, high-net-worth investors incorporating impact in their giving goals compared to their older counterparts.
How does catalytic capital fit within that narrative? It responds to the biggest market challenge. The GIIN report identified “appropriate capital across the risk/return spectrum” as the most commonly cited challenge facing the growth of the impact investing market. In other words, the market needs more catalytic capital. When combined with more traditional financing—a form of investment called “blended finance”—catalytic capital fuels transactions that would not otherwise have been possible.
More than half the GIIN survey’s 229 respondents said they participated in blended finance deals, demonstrating the broad deployment of catalytic capital across a range of investments. Respondents most frequently noted two key roles for catalytic capital: to help “de-risk” transactions so that mainstream investors (including those that actively consider ESG factors) can participate and to attract funding for large-scale, high-impact investments.
We currently support these and other types of investments as part of our Board-authorized allocation of up to $500 million to impact investing, working to support the Foundation’s program strategies and fuel the ongoing development of the impact investment market. For example, our $10 million equity investment in the Housing Partnership Equity Trust (HPET) catalyzed the launch of an innovative real estate investment trust, which invests in affordable housing on behalf of nonprofit community organizations focused on local needs.
We then made a follow-on investment in the form of a $12.5 million liquidity facility, which reduced the risk for commercial investors. As a result, HPET was able to attract another $50 million from Citigroup, Morgan Stanley, and Charles Schwab. To date, HPET has acquired approximately 3,000 units of housing affordable to families earning only 60 percent of the area median income.
These creative uses of catalytic capital are essential. They will fuel the further growth of the impact investment market and will expand the reach of the financial markets. In that way, catalytic capital supports social impact that would not otherwise be possible.