ESG Investing

Catalytic Capital Gets Boost—and New Attention—from the Catalytic Capital Consortium

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Catalytic capital’s impact can be substantial. As a funding source that may be characterized as a hybrid of a grant and an impact investment, catalytic capital typically offers below-market-rate returns at best. It also frequently involves concessions on the payback period, the degree of risk, collateral, and other terms. Nevertheless, this funding bridges an important gap at the startup stage of a project by assuming the riskiest portion of the financing package—the debt or equity that will be first in line to absorb any losses.

According to the State of Blended Finance 2021 report from Convergence, first-loss debt and equity generally accounted for 5% of project funding completed by multilateral development banks and development finance institutions between 2015 and 2019. By reducing or covering the part of the deal that carries the highest risks, prioritizing impact above investment, catalytic capital paves the way for investors willing to finance the 95% balance with more conventional terms.

Finding Ways to Thrive in a Tough Environment

Given the unique aspects of this niche asset class, finding impact investors willing to shoulder the catalytic role remains a significant challenge. According to the Convergence report, $45 billion worth of such funds were invested between 2015 and 2019. However, during pandemic-hobbled 2020, just $4.5 billion were directed into essential projects such as catalytic capital. In the context of the $510 trillion worth of financial assets held by households, corporations, and governments worldwide, such figures do not even qualify as a rounding error.

To help elevate awareness and participation in these specialized financing opportunities, three industry leaders—the MacArthur Foundation, the Rockefeller Foundation, and Omidyar Network—formed the Catalytic Capital Consortium (CCC) and dedicated $10 million in research grants over three years to analyze catalytic capital worldwide. In October 2021, the CCC awarded $2.2 million to 14 recipients.

During pandemic-hobbled 2020, just $4.5 billion were directed into essential projects such as catalytic capital.

Addressing the Full Spectrum of Need

The need for catalytic funds remains broad and extensive, as captured by the wide range in missions among the recent CCC grant recipients, including:

  • First Peoples Worldwide. This research program from the University of Colorado seeks to expand the awareness and funding of Indigenous nonprofits, which attract 0.23% of philanthropic dollars despite serving a Native population that represents 2% of the US public.
  • Urban Institute. Founded by President Lyndon Johnson in 1968, this nonprofit research firm digs deeper into the nation’s political, racial, and socioeconomic rifts.
  • New Growth Innovation Network. This collection of economic development leaders is committed to developing tools and programs meant to fulfill the ambitious goals of inclusive, quality, equitable, and sustainable growth in the US.
  • Institute for Multi-Stakeholder Initiative Integrity. This nonprofit research firm focuses on developing ties between the catalytic capital community and employee ownership organizations. The group has helped US-based businesses with as many as 200,000 employees convert to an employee-owned model.

Evidence-based strategies are essential to aligning organizations with impact investors’ priorities. By facilitating the development of the “concrete, rigorous data and analyses” that underpin these efforts, the CCC’s grants aim to make catalytic capital investing “effective, efficient, and widespread.” Taking a longer-term view, they also help highlight the pressing need for access to capital from investors to make lasting impacts on ESG issues.

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