News & Insights
Catalytic Capital: 3 Views
How can we spark and amplify social impact? Lately, many mission-driven organizations have been wondering how they can use existing capital to achieve more impact. It seems that "catalytic capital" might be the answer. We highlight three different sectors' approaches to using "catalytic capital" to achieve greater social impact:
1. Catalytic Capital in Impact Investing: "First Loss Catalytic Capital"
The Global Impact Investing Network (GIIN) raised awareness about "catalytic first loss capital" as a form of catalytic capital. It did so by releasing an issue brief that:
- Explains what catalytic first loss capital investments are; and
- Presents five case studies of investors who have used first loss catalytic capital.
The GIIN defines catalytic first loss capital as “socially—and environmentally—driven credit enhancement provided by an investor or grant-maker who agrees to bear first losses in an investment in order to catalyze the participation of co-investors that otherwise would not have entered the deal. [It is] a tool that can be incorporated into a capital structure via a range of instruments [such as] grants, equity, subordinated debt, and guarantees.” Catalytic first loss capital was also a major theme at last month's GIIN Investor Forum (read our highlights here).
2. Philanthropy's Approach to Catalytic Capital: Funding the Roadblocks (AKA Opportunities)
Laurie Michaels of Open Road Alliance, a grant-maker, explains that grant funding can be used as catalytic capital if it:
- is deployed to high-impact projects that are facing unanticipated or unavoidable obstacles; and
- if it is deployed in a quick, timely manner.
Michaels reasons that many well-intended initiatives fail because they hit unexpected roadblocks and need more funding than anticipated. She argues that funding these opportunities keeps worthy projects moving forward. Furthermore, she explains that this approach could help change commonly-held attitudes towards obstacles or challenges in development work; they should be supported rather than frowned upon. Michaels also delves into why nonprofits might need this type of funding in the first place.
As a side note, Michaels has contributed catalytic capital to Global Partnerships' Green Technology Fund. Her grant helped GP and its partners launch an initiative to raise awareness of the benefits of solar technologies in rural Haiti. Awareness-building is key to increasing electrification rates in the area, which would improve families' lives by extending their ability to work and study after sunset.
3. Catalytic Capital in Development Aid: Examining How Existing Development Aid Can Be More Effective
Development Initiatives, a consultancy and research firm, released a report looking at the different sources and kinds of development aid. It explains that development aid can catalyze more impact if it is (1) better understood and (2) used more effectively. For example, the report points out that:
- "There is much misunderstanding about what aid is. [...] Aid is a bundle of different things. Some of it is money. Some of it is food and other goods. Some is people. [...] The type of aid affects the impact it delivers. A dollar spent on food aid will have markedly different economic effects from a dollar spent on debt relief. [...] Getting the most value for poverty reduction from every aid dollar requires deploying different aid instruments for different contexts."
- "Aid can [...] provide catalytic funding, leveraging other resources [such as private investments]."
- Better poverty data is needed. "A Development Data Revolution is needed to end poverty. With timely, forward looking, disaggregated data, resources can be allocated more optimally, progress can be properly monitored, and lessons can be learned about effective and efficient policies and programs."