Catalytic
CapitalMARCH 2019

Unlocking more investment and impact

A TIDELINE PUBLICATION WITH SUPPORT FROM THE
JOHN D. AND CATHERINE T. MACARTHUR FOUNDATION

Tideline authored this research report to provide
the impact investing community with greater
clarity on ‘catalytic capital’. This report aims toprovide a broad overview of the state of practicefor catalytic capital and, in so doing, create afoundation for existing and potential investors
to expand and improve on their use of thisimportant tool. The report was commissionedby the John D. and Catherine T. MacArthur
Foundation, a proponent of catalytic capital
both in its own investments and in the field of
impact investing broadly.

TABLE OF CONTENTS

About Tideline
Tideline is a specialized consulting firm thatprovides tailored advice to clients developing
impact investment strategies, products, andsolutions. Tideline’s mission is to help clients excel
in realizing financial and societal value. The firm’sclients include financial services firms, institutionalfoundations, family offices, community development financial institutions, and NGOs. In addition
to helping clients devise investment, organizational, and product strategies, Tideline works withfield builders in impact investing to conductcustom research on market-level challenges.

2

Executive Summary

4

Introduction

6

Deploying Catalytic Capital

11

The Market Landscape for Catalytic Capital

16

Assessing Benefits and Risks of Catalytic Capital

Tideline project team:• Christina Leijonhufvud, lead author• Bryan Locascio, lead author• Andrew Pemberton• Kira Kaur

19

Concluding Thoughts

21

Appendix – Sampling of Relevant Frameworks

27

Endnotes

29

Reference List

About the John D. And Catherine T. MacArthur
Foundation
For more than three decades, the MacArthur
Foundation has used impact investing as one ofmany tools to advance its social and environmental goals. Over this time, the foundation has
made more than 250 catalytic capital investments,
supporting initiatives that deliver valuable
services to low-income communities andfacilitating the flow of patient, flexible, risk-tolerant
financing to promising opportunities that struggle
to attract more conventional capital.
MacArthur project team:• Debra Schwartz• John Balbach• Lori Scott• Urmi Sengupta

EXECUTIVE SUMMARY

The amount of capital in impact investments targeting bothmeasurable, positive impact and market-rate, risk-adjusted
returns has increased substantially over recent years.
This growth has spurred greater recognition that capital isalso needed across a broad spectrum of risk-return profiles
if impact investing is to achieve its full potential in addressing
the world’s most pressing social and environmental issues.
Catalytic capital is critical for enabling impact investing
to continue to drive deep impact, reach new sectors andgeographies, and mobilize the trillions of additional private
sector investment needed annually to achieve the UN
Sustainable Development Goals (SDGs).

• Capital willing to accept disproportionate risk and/or
concessionary returns is in short supply and can havemarket-distorting effects if not deployed appropriately.
Evaluating potential positive and negative impacts ofcatalytic capital (including its built-in financial concession
and the activities it supports) is essential to its effective use.

• The accompanying report aims to provide a broad overview
of the state of practice for catalytic capital and, in so doing,
create a foundation for existing and potential investors
to expand and improve on their use of this important tool.

C ATA LY T I C C A P I TA L : PAT H WAY S T O I M PAC T• We define catalytic capital as debt, equity, guarantees, andother investments that accept disproportionate risk and/or
concessionary returns relative to a conventional investment
in order to generate positive impact and enable third-party
investment that otherwise would not be possible.*• The report introduces the Pathways to Impact framework,
which seeks to guide investors who deploy catalytic
capital in a variety of contexts in clarifying the rationale for
their catalytic investments. The framework builds on
the work of others, including the MacArthur Foundationand the “Impact Investing 2.0” research by Clark, Emerson,
and Thornley (2013), to help investors articulate, on aconsistent and comparable basis, the forms of risk or returnconcession included in the investment structure (e.g., asubordinated position or long/uncertain duration); theroles catalytic capital is expected to play in supporting
the investee (e.g., seeding early-stage innovations or
scaling impact business models); and the specific uses ofthat capital by the investee (e.g., building track record orleveraging additional investment).

• Catalytic capital plays a critical role in filling financing gaps
for impact enterprises that conventional capital cannot.
The report synthesizes prevailing research and practices
and thereby aims to inform and inspire greater use of
catalytic capital globally.

Catalytic capital accepts disproportionate risk and/or concessionary
return to generate positive impact and enable third-party investmentthat otherwise would not be possible.

PRICE

PLEDGEPOSITION

SEEDINGSCALING

FACILITATINGINNOVATIONHELPING
BUILD
TRACK
RECORD

LEVERAGING
ADDITIONALINVESTMENTPURPOSEPATIENCESUSTAINING

SIGNALING
IMPACTPOTENTIAL

SAFEGUARDINGMISSION

Expanding, deepening, or otherwise amplifying
positive social and environmental outcomes.

• Typical catalytic capital investors are driven by their
mission, values, or an investment mandate that requires
them to prioritize impact and include charitable foundations, public development institutions, family offices
and high net worth individuals, and select corporations andcorporate foundations.
*Though grants can also be important catalytic instruments, the focus of the analysis in the report is investment capital.

2

3

INTRODUCTION

In recent years, mainstream investors seeking market-rate,

Increased recognition of the unique roles that such flexible,

come to dominate growth in impact investing.1 However, forinvestment comes at a crucial time.4 Private investment is a key

risk-adjusted returns alongside positive social impact haveconcessionary capital can play in driving impact throughdecades, investors willing to make financial concessions tocomponent of the capital needed to achieve the UN

investment market’s development. The growing appeal of aenabling and de-risking effects of catalytic capital, is unlikely

achieve positive impact have been essential to the impact
2

narrative that emphasizes the possibility of market-rate

returns alongside positive impact carries with it the risk ofobscuring the ongoing importance of the broader spectrumof capital these pioneering investors have helped create.

3

Catalytic capital is a critical financing tool these investors use
to support impact when market-rate returns are not possible
or appropriate, to enable access to additional capital forinvestees, and to increase the opportunity set of impact
investments available to more conventional investors.

Sustainable Development Goals (SDGs) but, without theto flow to those sectors and geographies where it is mostneeded.5 Indeed, without catalytic capital to seed new impact
enterprises, develop market infrastructure, and support theentry of new investors through blended finance, the flow ofneeded capital to some sectors and geographies may takemuch longer, or not happen at all.6 Catalytic capital has been
instrumental in building pathways for private, commercial

investment to support lasting impact and scale in sectors suchas US community development and global financial inclusion,for example.7

P O S I T I O N I N G C ATA LY T I C C A P I TA L I N T H E B R OA D E R S P E C T R U M O F C A P I TA L 8

CONVENTIONALINVESTINGRESPONSIBLE
INVESTINGSUSTAINABLE
INVESTING

IMPACTINVESTING

PHILANTHROPICGRANTMAKING

Seek market-rate, risk-adjusted financial returns
Mitigate Environmental, Social, and Governance (ESG) risks
Pursue ESG opportunities
Contribute to measurable, targeted impact solutions
Catalytic capital: Fill capital gaps for impact
enterprises and facilitate additional investment

4

The term catalytic capital has been employed in different,

nuanced ways over the years. In the interest of building on

those uses and moving the conversation forward, we define
catalytic capital as debt, equity, guarantees, and otherinvestments that accept disproportionate risk and/or concessionary returns relative to a conventional investment inorder to generate positive impact and enable third-party

investment that otherwise would not be possible. The reportfocuses on investment capital rather than grant capital.9

While many publications discuss specific uses of catalytic
capital (for example, at a sector or thematic level, or in

the context of investment intermediaries or instruments), thisreport seeks to provide a broader overview of the stateof practice for catalytic capital and, in so doing, create afoundation for existing and potential investors to expand andimprove on their use of this important tool.
The report covers the following topics:• Deploying catalytic capital• The market landscape for catalytic capital• Assessing benefits and risks of catalytic capital
The Pathways to Impact graphic in the first section introduces
a consolidated framework that incorporates the forms,

roles, and uses of catalytic capital. In addition, the appendix
of this report includes other market frameworks helpful

for both investors and recipients in understanding when andhow to use catalytic capital. An annex to the report includes

a broader bibliography of publications related to the conceptof catalytic capital.10

Much remains to be known about the most efficient andeffective ways to invest catalytic capital. Leadership andcoordination by pioneering catalytic capital investors will beneeded to drive greater adoption of the tool by moreinvestors, along with additional research and clarity on whenand how catalytic capital can be best used.

5

A LE XICON OF TERMS“Catalytic capital” is closely related to other terms in use,
including concessionary capital11, impact-first capital12,
subcommercial capital13, flexible capital14, and patient
capital15. Each of these terms refers to investments that are
distinct from “market-rate” impact investments in thatthey have expected financial returns that are explicitly“below-market-rate”16 or are affected by the significant
uncertainty of an unproven enterprise, market, or innovation.
The term catalytic capital puts additional emphasis on therole such financing plays in enabling or ‘catalyzing’ investors
that may not otherwise have made an investment but forthe catalytic capital invested and in generating impact thatwould not otherwise have been possible.
For many private foundations in the US, program-related
investments (PRIs) are a common instrument for deploying
catalytic capital, since the tax code allows PRIs to counttowards a foundation’s annual distribution requirement,
provided: (1) the capital is deployed with the foundation’scharitable goals as the primary purpose and (2) financial
return is not a significant purpose.17
Catalytic capital is also an essential component of otherbroader domains of impact investing, including:• Innovative finance, which is focused on raising additional
capital to target positive social and environmental
impacts through introducing new financial products,
extending existing financial products to new markets, and/or bringing in new investors.18• Blended finance, a form of innovative finance focused onusing catalytic capital from public or philanthropic
sources to structure investment opportunities withacceptable risk-return profiles for private sector investment that further the SDGs in both emerging anddeveloped markets.19• Frontier finance, which often makes use of blended financeand is focused on the need for risk capital for small
and growing businesses in emerging markets that often
are “too big for microfinance, too small for private
equity, too risky and lack sufficient collateral for commercial banks, and lack the growth trajectory that venture
capital seeks.”20,21

DEPLOYING CATALYTIC CAPITAL

With growing recognition of the importance of catalytic

capital also comes the need for more clarity and guidance
for investors regarding how and when to deploy catalytic

capital. Drawing on existing literature, including the “Five P’s”

C ATA LY T I C C A P I TA L : PAT H WAY S T O I M PAC T

Catalytic capital accepts disproportionate risk and/or concessionary
return to generate positive impact and enable third-party investmentthat otherwise would not be possible.

previously articulated by the MacArthur Foundation and the“Impact Investing 2.0” research by Clark, Emerson, andThornley (2013), the Pathways to Impact graphic is an attempt
to convey the forms catalytic capital can take, the roles

it can play in supporting enterprises, and the concrete ways it

PRICE

PLEDGEPOSITIONPURPOSEPATIENCE

can be used to achieve its intended impacts. By defining

these distinct forms, roles, and uses of catalytic capital, itaims to provide investors with a structure for clarifying the

purpose and positioning of their catalytic capital investments

SEEDINGon a consistent and comparable basis. It also forms a founda-

SCALINGSUSTAINING

tion for further research and exploration.
FORMS OF CATALY TIC CAPITAL

Catalytic capital can be deployed using any traditional

FACILITATINGINNOVATIONHELPING
BUILD
TRACK
RECORD

LEVERAGING
ADDITIONALINVESTMENT

SIGNALING
IMPACTPOTENTIAL

SAFEGUARDINGMISSIONfinancial instrument, including debt, equity, hybrid debt/
equity instruments, or guarantees. Investors can deploy
catalytic capital directly to an enterprise or project orExpanding, deepening, or otherwise amplifying
positive social and environmental outcomes.

indirectly through a fund or other intermediary. When

traditional instruments are used as catalytic capital, they
are structured to accept disproportionate risk and/or

concessionary (expected) financial returns relative to theconventional requirement of market-rate, risk-adjusted

returns. The motivations behind the concessionary feature

are to drive greater positive impact and enable third-party
investment that otherwise would not be possible.

6

Catalytic capital—sometimes in concert with“ public
subsidies and grants—is often needed to• Hybrid instruments may take the form of debt instrumentswith equity characteristics or equity instruments with debt

make high-impact transactions suitable andattractive for a broader range of investors.

characteristics. Examples include convertible loans,

DEBRA SCHWARTZ, MACARTHUR FOUNDATION22

applicable to debt and equity, a catalytic capital investor”

royalty-based lending, redeemable equity, and preferredshares. In addition to the types of concessionary features

may use a hybrid instrument to offer an investee a growth-or revenue-based repayment mechanism to help it manage
The appropriate financing structure in any given instance will
depend on the specific needs of the investee, the flexibilityof the capital provider, and the requirements of other moreconventional investors seeking to participate.23

The concession built into catalytic capital may take a variety
of forms, as described by the “five P’s” below:24

Price – accepting an expected rate of return that is
below-market relative to expected risk

Pledge – providing credit enhancement via aguarantee

Position – providing credit enhancement via asubordinated debt or equity position

Patience – accepting a longer or especially• Guarantees and risk insurance are common instruments

used by catalytic capital investors to provide assurance ofprincipal repayment to other investors in the case ofdefault.26 Such credit enhancement can be a capital-effi-

cient way for catalytic capital investors to enable

investment by others, since capital is only drawn if a credit
event occurs. Concessions may include a higher loss

coverage ratio than conventional lenders would provide ora reduced fee for the guarantee.

In addition to being deployed directly into an enterprise or

project, catalytic capital can also serve an important purpose
when invested into a fund or other pooled investment

vehicle to align the investment requirements of its investors
with the needs of its underlying portfolio companies or

uncertain time period before exit

other investees. Such blended finance funds use catalytic

Purpose – accepting non-traditional terms to meetto enterprises by providing conventional investors accessthe needs of an investee (unconventional or no
collateral, self-liquidating structures, smaller

investment sizes, higher transaction costs, etc.)
Such forms of concession can be built into traditional
financial instruments:• Debt instruments (loans and bonds) can be concessionary
in various ways, including through below-market

interest rates, flexible repayment timelines or generous
grace periods, relaxed collateral requirements, and/or
less rigid underwriting guidelines than those used bytraditional lenders.

capital strategically to channel greater amounts of capital
to an aggregated portfolio of underyling investments that
otherwise would not meet their target requirements.

Therefore, the terms of catalytic capital invested into a fund,and the structure and terms of the fund itself, depend

not only on the underlying needs of investees, but also on

the risk-return appetite and liquidity requirements of otherinvestors likely to participate.

In these funds, investors of catalytic capital generally accept
higher levels of risk without expectation of commensurate

return in order to attract other investors, typically by taking a
junior or subordinated position in the capital structurewith an equity or debt investment, or by providing guaran-• Equity instruments can include concessions such astees or other insurance to senior investors. Upon exit orintermediaries with limited track records, acceptanceoften be first in line to absorb some or all of any losses

potential return on capital, a subordinated position

share of any financial returns.

willingness to invest in impact enterprises or investment

distribution of proceeds, investors of catalytic capital willof significant uncertainty of return of capital relative toincurred, allowing other investors to benefit from a greater

designed to absorb losses before other investments, and/or longer or undefined exit timing compared to traditional
equity investments.
7

volatility in revenue.25

Blended finance vehicles can also be structured to help alignliquidity and term requirements between investors andunderlying investees by using catalytic capital to fund or

supplement liquidity reserves, or to guarantee other investors
exit rights in the absence of a functioning secondary

market.27 In addition, some catalytic capital investors havesupported other fund structures as alternatives to standard

closed-end funds. Evergreen funds and holding companies,
for example, can provide investors dividends and appreciation on an ongoing basis rather than relying on exits ofunderlying assets.28 Such permanent capital vehicles are one

way for catalytic capital providers to direct more patient,
long-term capital to impact enterprises.

ROLES OF CATALY TIC CAPITAL
Catalytic capital investors, with their willingness to invest for
impact where other investors will not, can fill capital gaps

for investees at various stages of their development. For someenterprises and funds, capital is needed early on as a busi-

ness model is being refined and before a track record can be
developed. For others, catalytic capital is key to supporting

impact-oriented growth or raising capital in greater amounts
than philanthropic dollars will provide. Still others rely on

catalytic capital on an ongoing basis to support businessmodels with important demonstrated impacts that are notfinancially sustainable without subsidy. The section below

summarizes roles catalytic capital can play at different stagesof an enterprise or fund’s lifecycle.

Seeding – Fledgling impact enterprises often
need early-stage capital to fund operations

but may struggle with uneven cash flows anda long runway to profitability. Catalytic capitalcan provide essential support to impact

enterprises that either have not yet achieved
breakeven or have slim operating margins.29

These impact enterprises may need time totest and refine their business models and/or
to adapt to serving new geographies orpreviously underserved populations.30 Grants
are often important for impact enterprises atthis stage, but patient equity and convertible
debt can be useful instruments for overcoming early-stage challenges as well.31

In 2007, Acumen made a $1.5 million32 equity investment(along with technical assistance) to support the early-stage
development and expansion of Dial 1298, a service provided
by Ziqitza Healthcare Limited (ZHL) for low-income customers
in Mumbai. Acumen’s investment assumed “greater risk than
the financial return would justify,” but the long duration of anequity investment afforded the enterprise time to refine its
operating model and gain market traction.33 Acumen
continued to support the firm with equity and debt investments in subsequent rounds of funding (investing $2.6 million
in total) and Dial 1298 has gone on to raise additional debt
investments to fund its growth from financial institutions both
inside and outside of India.34

Scaling – Impact enterprises may have thepotential to multiply their impact with capital

structured specifically to help them scale and/or replicate their business.35 Catalytic capitalcan help impact enterprises realize economies
of scale and reach new geographies andpopulation segments. Concessionary debt,

equity, and hybrid instruments are often used
for this objective.36 Catalytic capital thataims to de-risk and leverage investment fromother investors can also be critical to

In 2017, Norfund approved a $2.75 million loan to Nyama
World, a supplier of high-quality meat in Malawi, helping thecompany expand its domestic business, build exports toneighboring countries, and target markets in the Middle East.
Nyama World’s expansion was intended to reduce poverty in
Malawi by increasing the income of smallholder livestock
farmers, creating new jobs, and bringing in foreign exchangeearnings. The long-term risk capital was provided through a
Sharia-compliant secured debt investment.37

supporting scale.

8

Sustaining – Sometimes catalytic capital isprovided to support an investee that

requires subsidy on an ongoing basis.38

For example, an impact enterprise or intermediary may require this kind of capital topreserve its goal of reaching vulnerable
beneficiaries or to otherwise operate abusiness model not designed to be fullycommercially viable.39 Concessionary debt
and long-term guarantees are instruments
often used to fill this role.40

9

RSF Social Finance provides capital to support impact
enterprises working in food and agriculture, education andthe arts, and climate and the environment. RSF uses an“integrated capital” approach to lending, whereby they
help bring together different forms of financial capital andnon-financial resources to reach and support impact enterprises that might not otherwise qualify for funding. Thisapproach relies on the willingness of various investors thatinvest with RSF (including foundations, family offices,
and individuals) to accept financial returns that explicitly
weigh the needs of impact enterprises and beneficiaries.41

USES OF CATALY TIC CAPITAL
In addition to the Seeding, Scaling, and Sustaining roles

catalytic capital can play for enterprises with various businessmodels and stages of development, investors and investees
need clarity and alignment on the concrete activities suchcapital will support and the targeted impacts associated withthose activities. The list below summarizes some of thespecific uses of catalytic capital at the investee level:• Facilitating innovation – Experimentation is critical fordeveloping ever more efficient and effective solutions tosocial and environmental challenges. However, it is often

difficult to attract capital from commercial markets to fundinnovation given the high risks and uncertain financial
returns.42 Even when an enterprise’s innovation is

successful, benefits might accrue primarily to the market or
society more broadly and not financially compensate thatenterprise for the expenses and risks it undertook.43 The

subsidy built into catalytic capital can be critical for

providing enterprises with the time and flexibility needed
to develop and refine impact-oriented business models.
• Helping build a track record – Though some impact• Signaling impact potential – A reputable investor canincrease the credibility and visibility of an investee

by providing a “first-in” anchor investment for a larger

capital raise, which may lead others to invest.47 Just as

investment by a well-known market-rate investor can signal
to other investors the financial promise of an investment

opportunity, investment by a prominent catalytic capital
investor can signal strong impact potential. Catalytic

capital providers may even share components of their due
diligence to ease the burden for other potential investors.

• Safeguarding mission – Because the disproportionate risk
and/or concessionary return catalytic capital investors

accept can be so essential to a transaction or an investee,catalytic capital investors often wield significant influencethat can be used to to build in social and environmental
requirements and greater accountability for impact

generation.48 In this way, catalytic capital can help protect

impact enterprises from pressure to drift away from theircore mission.

Catalytic capital can support one or more of the above uses,
and this list may not be exhaustive.

enterprises and funds pursue strategies that have demon-

The Pathways to Impact framework that introduces thisexpectations), others invest in newer approaches that canprevailing methods of using catalytic capital to fill capital

strated financial and impact success (relative tobe accompanied by significant financial and impact

uncertainty. Risk is difficult for investors to assess without
any historical information about performance. Catalytic

capital can help investees establish proof of concept of a

new impact-oriented business model and demonstrate theability to both achieve intended impacts and repay aninvestor within both the anticipated timeline and target

section represents an initial attempt to organize and segment
gaps faced by impact enterprises. Additional research could
help further refine how catalytic capital can be deployed
and build on the effort to map forms, roles, and uses ofcatalytic capital to relevant investment instruments, specificinvestee needs, and ultimately, the additional social andenvironmental outcomes supported.

financial return parameters.

• Leveraging additional investment – Some impact investees
require significant sums of capital but have risk profiles

that are either unfamiliar or otherwise unattractive to moreconventional investors.44 Catalytic capital can help

mitigate both real and perceived risks for other investors byblending capital from investors with different risk-return
expectations together to create investment structuresthat work for both the investors and investees.45 Grants,

guarantees, and/or first-loss capital in the form of subordinated debt or equity are common instruments forleveraging capital from more conventional investors and/or
helping impact enterprises access capital on morefavorable terms.46

10

THE MARKET LANDSCAPE FOR CATALYTIC CAPITAL

While the total amounts and types of catalytic capital

impact enterprises ready for investment on conventional

been quantified, this section discusses several indicators

blending together capital from investors with differing

required by and available to impact enterprises have notthat suggest the supply of catalytic capital falls short of

the need and profiles various types of investors most involvedin providing catalytic capital to date.

market terms and fewer opportunities to achieve impact byrisk-return expectations.

Articulating the need for catalytic capitalS I Z I N G T H E C U R R E N T S U P P LY O FC ATA LY T I C C A P I TA L

and able to provide such capital are limited and these

supply of catalytic capital is difficult to size without

assets.49 Most of the world’s largest institutional asset owners,

public development institutions, foundations, family

wealth funds, have a fiduciary duty and/or investment

Impact Investor Survey provides one indication of the scalethat target market-rate, risk-adjusted financial returns.

returns relative to market-rate investments. In 2018

Second, the United Nations estimates that achieving theinvestments targeting below-market returns, whichFirst, we know that the types and numbers of investors willing

As with the supply of other types of impact capital, theinvestors control a small share of total global investable

extensive research. Though the investments of some large

such as pension funds, insurance companies, and sovereign

offices, and others are not captured, the GIIN’s Annual

mandate that prevents them from straying from investmentsof impact investments targeting below-market financial

Sustainable Development Goals (SDGs) by 2030 will require
between $5 and $7 trillion annually in global SDG-oriented
investment, and that annual private capital flows to

SDG-oriented projects and impact enterprises would need
to be as much as $1.8 trillion higher than they are today in

82 of 229 (36%) investors reported having allocations tocomprised approximately $11.4 billion (5%) of the $228.1

billion in total impact assets under management reported.54
TOTA L IM PACT INVEST M ENT AUM B Y TA R GET R E T U RN S
(US $ B ILLIONS )developing countries alone.50 How much catalytic capital is$11.4 (5%)

needed to help fill that gap is unknown. However, the tool’s$216.7 (95%)

importance in mobilizing large-scale conventional investment
capital into SDG-oriented investments is widely recognized
in development finance.51

BELOW-MARKET-RATE
MARKET-RATE

Third, impact investment professionals have long acknowledged the mismatch between the types of capital neededby impact enterprises and the types available to them. In fact,
availability of “appropriate capital across the risk-return

spectrum” has been the top market challenge noted byrespondents to the Global Impact Investing Network (GIIN)
annual survey in four of the past five years.52 Respondents
articulated a market need for more catalytic capital using

a variety of terms, including “concessionary capital,” “patient
capital,” “early-stage capital,” and “high-risk capital.”53

Whatever the term used, this unmet need should be aconcern for all investors who care about impact, as it impedes
the development of new impact industries. The result is fewer
11

Primary providers of catalytic capital to date

Catalytic capital investors have greater flexibility, due to their
mission or mandate, than conventional market-rate investors
to consider customizing their investment terms to suit the

specific needs of impact enterprises. The types of investors

that make these investments include charitable foundations,public development institutions, family offices and high net
worth individuals, impact investment wholesalers, andcorporations and corporate foundations. The motivations andmandates for deploying catalytic capital vary by investor typeand furthermore by each individual investor.

Public development institutions include bilateral develop-

ment aid agencies and development finance institutions(DFIs) as well as multilateral development banks (MDBs).55

These institutions have the ability to deploy relatively large

amounts of capital and likely represent the largest source ofrisk-tolerant capital for impact investment, but because they
are reliant on taxpayer funding and many are incentivized to
be self-sustaining, only some of them have flexibility todeviate significantly from market-rate investment strategies.56

DFIs and MDBs often limit investment to more mature sectors
in developing countries, such as infrastructure and financial
services. However, some DFIs do have the ability to use

catalytic capital in traditionally underdeveloped markets to

Set up in 2006 and managed on behalf of the Dutch Ministryof Foreign Affairs, MASSIF is FMO’s financial inclusion fund.
MASSIF enhances financial inclusion for micro-entrepreneurs
and small- and medium-sized enterprises (MSMEs) that are
disproportionately affected by a lack of access to financial
services. The Fund supports intermediaries that reach out to
MSMEs in fragile and low-income countries, MSMEs in rural
areas and those dependent on agriculture, women-owned
MSMEs, and intermediaries providing access to productive
goods and services for base-of-the-pyramid individuals.59

provide seed capital to new fund managers, for example, orrisk capital to impact enterprises.57 DFIs and MDBs may also

facilitate private sector co-investment by providing guaran-

tees and risk insurance, and development agencies generally
have the additional flexibility to provide grant funding.58

Reflecting their mission-driven nature, charitable founda-

tions play a key role in providing catalytic capital. Regulationsin the United States, for example, allow US foundations tocount investments primarily motivated by charitable purpose
toward their annual 5% “payout” (grant-making) requirement.
Though these “program related investments” (PRIs) offer a
flexible financing tool, relatively few US foundations makesignificant use of them due, in part, to lack of clarity on the

The Bill & Melinda Gates Foundation has allocated $2 billion
to PRIs to scale enterprises that serve the poor, often collaborating with other investors and using a range of financial tools,
including direct equity investments, fund investments, loans,credit enhancements, and guarantees.61

unique impacts of PRIs and the different skillsets required offoundation staff to make and manage investments.60

Family offices and high net worth individuals (HNWIs)

enjoy greater discretion and flexibility than other investors
in their decision-making and are often motivated byfactors beyond financial considerations, such as aligningwith their own values, contributing to a community, orbuilding a legacy. Some family offices and HNWIs havesignificant appetite for risk, allowing them to operate

as nimble providers of catalytic capital and consider moreinnovative transactions.

Ceniarth, a family office based in the UK, plans to invest $300
million in direct and fund investments over the next ten years
and target capital preservation rather than market-rate
returns, using a mix of concessionary debt, private credit, realestate and real assets, as well as patient equity.62,63

12

Impact investment wholesalers are an emerging category ofcatalytic capital investors. These entities are explicitly

designed to channel capital into impact intermediaries andenterprises to contribute to market development.

A wholesaler may receive its funding from dormant accounts,
public development institutions, governments, institutional
investors, foundations, individuals, development aid,or some combination, and can be a standalone institution oroperate within a larger entity. They seek “to invest where,

but for the wholesaler’s capital, the investees could not raise
enough money” to deliver impact.64

Big Society Capital, a UK wholesaler managing £585 million,
connects investment to social enterprises and non-profits
creating social change. BSC invests in intermediaries
including property funds, loan funds, venture funds, andsocial banks to help them sustain or grow their operations andreach more people throughout the UK, alongside developing
the market. Increasingly BSC works with development
partners to address specific social issues where social impact
investment could work with other tools to achieve deep andlasting impact.65, 66

A few corporations and corporate foundations makecatalytic capital investments as part of their social responsibility strategies, often motivated by reputational benefits
in addition to social and environmental objectives.

Unless funded out of a corporate foundation, catalytic capital
investments by corporations are generally confinedto activities that contribute to the corporation’s businessobjectives and, even then, may not have flexibility to

Shell Foundation, a leader among corporate foundations inventure philanthropy and impact investing, focuses on accessto energy, transportation, information, and employment by
providing grants for early-stage funding of start-up enterprises followed by patient, flexible financing to build
operational capacity once an enterprise has proven viability.68

compromise on financial terms.67

While additional effort to size the demand for and supplyof catalytic capital would be helpful, the numerous

indicators of significant need, together with the limited andconcentrated sources of catalytic capital, point to amaterial gap.

For those with the flexibility and fiduciary“ responsibility
to pursue direct impact in truly

marginalized and underserved regions andcommunities, it’s necessary to grapple with thereality that these contexts often require concessionary rates of return, an appetite for a rangeof risks (geopolitical, currency, security, etc.), as
well as a need for creative structures andpatient timelines. We find it unhelpful whenadvisors, fund managers and even asset owners
declare that you can have it all, when the reality
is that it depends on what ‘it’ is.

”

GREG NEICHIN AND DIANE ISENBERG, CENIARTH, LLC 69

13

14

ASSESSING BENEFITS AND RISKS OF CATALYTIC CAPITAL

When deciding to make an impact investment, or monitoring

can be even more so for catalytic capital investors, who often(whether they seek market-rate or concessionary financial

underdeveloped markets, and/or less tangible and longer-that investment’s performance over time, all investors

returns) take impact considerations into account, thoughsome may be more rigorous in their methods than others.
In an effort to establish industry consensus regarding thedefinition and components of impact, starting in 2017 the

Impact Management Project (IMP) gathered input from over
2,000 enterprises, investors, and other practitioners.70

The IMP’s five dimensions of impact are a helpful starting

point for ensuring a comprehensive and disciplined approachto deciding when to make a catalytic capital investment.

Investors can use these dimensions to construct an approach,aligned with their specific investment philosophy, to identify
areas of investment need and make use of both qualitativeand quantitative tools for monitoring and assessment:71• What: what outcomes the enterprise is contributing to andhow important the outcomes are to stakeholders.

• Who: which stakeholders are experiencing the outcome

and how underserved they were prior to the enterprise’s
effect.

• How Much: how many stakeholders experienced theoutcome, what degree of change they experienced, andhow long they experienced the outcome for.

• Contribution: whether an enterprise’s and/or investor’sefforts resulted in outcomes that were likely better thanwhat would have occurred otherwise.

• Risk: the likelihood that impact will be different than
expected.

term system-level impacts.72, 73 Notwithstanding thechallenges, identifying and (to the extent feasible) quanti-

fying these fundamental dimensions of impact is foundational
to assessing the potential benefits of catalytic capital.

The fourth and fifth dimensions, “Contribution” and “Risk,”

are the basis for assessing the potential positive and negative

impacts of an investment relative to what would likely happen
absent the investment. The potential powerful effect of thefinancial concession in catalytic capital makes these twodimensions especially relevant for catalytic capital investors
as discussed in the sections that follow.
CONTRIBUTION

Contribution encompasses both “enterprise contribution”
and “investor contribution.” Enterprise contribution

is an enterprise’s effect on a societal and/or environmental
outcome (in terms of the “What, Who, and How Much”)

that would not have occurred otherwise. All impact investments involve an implicit assumption, if not a validation,of positive enterprise contribution. Investor contribution
refers to an investor’s efforts to facilitate an investee’s

impact. For catalytic capital investors, the financial concession in their investment is a key part of their intended

contribution to support an investee’s financial sustainability
and impact on society.74

Investor contributions may be financial (the intent of manycatalytic capital investors, specifically) or non-financial (acommon approach for many impact investors, broadly).75

Examples of financial contributions include offering financing

Understanding the “What, Who, and How Much” of impact iswith built-in “subsidy” in the form of one of the “five P’s”

ment, as these dimensions describe an impact enterprise’s

investee or to mobilize additional capital from other inves-fundamental to the value proposition of any impact invest-

described earlier in order to improve investment terms for an

potential to benefit society.

tors. Non-financial contributions can include providing

However, with capacity and data lacking in many sectors,

ships, or strengthening an investee’s operations and impact

measuring even these fundamental “What, Who, andHow Much” dimensions is difficult for impact investors and15

target untested business models, enterprises operating intechnical advice or capacity building, facilitating partner-

management practices.76 All of these activities can contributeto improved efficiency, effectiveness, and/or scale of theenterprise’s ultimate impacts.

INVESTOR CONTRIBUTION IN PRACTICE

Launched in 2000, the John D. and Catherine T.

MacArthur Foundation’s Window of Opportunity initia-

tive sought to preserve and improve the supply ofaffordable housing in the US by addressing a criticalbusiness model challenge faced by nonprofit affordable
housing developers: the need for enterprise-level(as opposed to project-level) financing to allow for moreagility in the competition to acquire and executeaffordable housing properties. These nonprofit developers were often unable to compete with market-rate
developers due to the significant time and cost ofassembling project-based funding from multiple
sources, often including government subsidies.

By filling a financing gap for organizations with limited

ability to raise equity, MacArthur’s investments of morethan $150 million over a period of about 15 years enabled
dozens of nonprofit affordable housing organizations

and supporting blended funds to attract more than
$9 billion of additional permanent capital fromconventional lenders, improve their internal capacity,
expand into new markets, better execute theiroverall mission, and preserve more than 150,000 unitsof affordable housing.77, 78

Photo provided by NYC Acquisition Fund

While a range of methods exist for assessing enterprisecontribution—including evidence-based research,stakeholder feedback, and experimental methods—

Measuring investor contribution is also challenging, as it canbe difficult to isolate the effect of one investor on an

enterprise. Some evidence of causality linking an investor’s

investors must consider the complexity, cost, and burden

activities to the eventual outcomes for an enterprise isinvestors try to balance rigor with practicality by selecting

contribution.81, 82 Qualitative evaluation can help provide suchon enterprises entailed by various approaches.79 Many

and monitoring output metrics that, viewed together,can serve as meaningful proxies for an enterprise’s material
positive and negative effects on society.

80

essential to a more definitive assessment of an investor’s

evidence and inform answers to the questions of whethera catalytic capital investor’s financial concession is essential
to an enterprise’s growth and sustainability and/or to thedecisions of other investors to invest.

16

17

Photo provided by Gorden Walek, for LISC Chicago

IMPACT RISK

Omidyar Network encourages investors to examine whether

impacts will not be achieved as well as risks of unintended

when deciding whether and how to deploy concessionary

The concept of impact risk covers both risks that intended
consequences. Consideration of impact risks throughout

the investment lifecycle is important for all impact investors.
Catalytic capital investors, in particular, consider the

potential negative, market-distorting effects that could result
from the effective subsidy provided via their financial

concession. This effort helps determine whether the use of

subsidy is appropriate and unlikely to displace conventional
market-rate capital.

they might be unduly influencing competition in a sector
investment capital, and to try to ensure concessionary

capital has clear intended impacts at the enterprise and/or
market level.86

As a result of their ability to prioritize impact over financial
performance, catalytic capital investors play a particularly

important role in setting an example for impact assessment,
measurement, and management for the rest of the impact
investing field. Data for the “What, Who, How Much,

As Omidyar Network highlights, subsidy has the potential toresult in:83• Limited scaling of low-profit (or no-profit) enterprises if they
are not nudged toward sustainability and conventional
market-rate capital sources;84• An unequal competitive playing field that arbitrarily

Contribution, and Risk” of an impact investment may at times
be incomplete or unattainable, and assessing the uniquecontribution and risks of concessionary capital is as muchan art as a science. Despite the challenges, leading

catalytic capital investors make their best effort, balancing
practicality and rigor, to understand these dimensions foreach of their investments.

supports one enterprise over competitors or prevents

potential competitors from entering a market, depriving
consumers of the potential for better service and lower
prices;85 and/or• A loss of credibility for the impact investing industry as awhole if catalytic capital providers use their subsidy

on inefficient enterprises and business models with little
potential for significant impact and scale.

Appropriateness of subsidy is strongly influ“ enced
by the nature of the market being

served: subsidies may be necessary to kick-start
firms serving the very base of the economic
pyramid, but are less essential—and potentiallyharmful—when directed at firms serving thosewith significant disposable income.

”

MATT BANNICK AND PAULA GOLDMAN, OMIDYAR NETWORK87

18

CONCLUDING THOUGHTS

Although it is one of many tools in the impact investing

market, catalytic capital plays a critical role by providing

enterprises with financing on concessionary terms in order togenerate impact and enable additional third-party invest-

ment that would not otherwise be possible. Investors withthe willingness and ability to be flexible on risk-return

requirements are relatively rare in capital markets today but
invaluable for the growth and scaling of impact enterprises

and development of new impact industries. Catalytic capitalhelps impact enterprises overcome barriers to accessing

more conventional market-rate investment, and in blended
finance, plays a critical role in bridging the gap between

the terms required to facilitate investments that contribute toachieving the SDGs and the terms available from conventional market-rate investors.

While some investors have used catalytic capital for a longtime, more guidance and consensus around best practices

could increase investor use of catalytic capital more broadly.
Topics requiring further exploration include: sizing of thedemand for and supply of catalytic capital, including bysector and geography; refined segmentation and mapping of
the forms, pathways, and uses of catalytic capital to instru-

ments, enterprise needs, and impact outcomes; continued
research into financing mechanisms, instruments, andmethods for deploying catalytic capital; and adoption andrefinement of tools and frameworks for assessing the contribution of and risks associated with catalytic capital.

The sheer magnitude of the world’s social and environmental
challenges demands urgency in filling financing gaps for
those enterprises dedicated to contributing solutions.

Leadership and coordination by those pioneering investors
who have long used catalytic capital to fill such gaps, alongwith additional research and clarity on the most effective

ways to use the tool, could promote innovation and adoption
by a broader set of investors.

19

Appendices20

Appendix – Sampling of Relevant Frameworks
FR AMEWORK 1: OMIDYAR NETWORK’S “FRONTIER CAPITAL” SEGMENTATION

In its 2015 Frontier Capital report, Omidyar Network divides
enterprises into the following three categories based on thematurity of their business model and target customer base:• Replicate and Adapt – Proven business models, where thebulk of existing venture capital money is already flowing• Frontier – Unproven business models that are asset-lightand serve both lower- and middle-income populations• Frontier Plus – Unproven business models that may beasset intensive, serve only lower-income groups, and/or

operate in countries with less-developed capital markets
Because they are asset-light and serve a mixed-income base,“Frontier” enterprises are more likely to attract traditional
venture capital funding, according to Omidyar Network.

“Frontier Plus” enterprises, however, frequently require morecreative and flexible financing from pioneering investors
and grantmakers—or, in other words, catalytic capital.88

21

Figure 1: From Bannick, M. et al. (2015). Frontier Capital: Early-Stage Investing for Financial
Returns and Social Impact in Emerging Markets. Omidyar Network.

Appendix – Sampling of Relevant Frameworks
FR AMEWORK 2: MONITOR DELOIT TE’S TA XONOMY OF FACTORS AFFECTING ENTERPRISESUSTAINABILIT Y AND SCALE

In its 2017 report Reaching Deep in Low-Income Countries,“Pull products” (e.g., food) may be viewed as more desirable

at the Base of the Pyramid (BoP) and organized factors

quickly. “Push products” (e.g., insurance) may require more

Monitor Deloitte examined enterprises serving customers
that affect enterprise profitability, sustainability, and scale(key considerations for conventional investors) into threeoverarching categories:• Asset Intensity (heavy vs. light): The asset intensity of anas they offer the customer a high return relatively

customer education and marketing. Enterprises selling

push products may need to devote scarce resources toensuring the benefits of the product are understood.
• Customer Base (narrow vs. wide): Enterprises may

enterprise can affect its ability to serve customers at thefocus their efforts on a single low-income segment or a

key inputs places strain on the financial health of an

An enterprise may reach a wider customer base by sellingprise for investors. For example, an enterprise requiring

different prices or having a segmented product offeringtransport goods may experience more difficulty inincome levels. Having a wider, more diversified customer

with a product that can be digitized or transmitted throughof an enterprise.89

BoP, particularly if the amount of capital required to financewide range of customers from across income levels.

organization and/or increases the risk profile of the enter-

different customers the same product at the same orphysical infrastructure to manufacture, package, andwith different products at different prices for different

expanding to a new, challenging market than an enterprisebase can facilitate the financial sustainability and growth

the internet.

• Product Preference (push vs. pull): Where a product falls
on the push-pull spectrum depends on the value it

provides to the customer (adjusting for time and risk).

Promising enterprises that have more difficulty attracting

conventional capital as a result of their business model may
be good candidates for catalytic capital.

Figure 2: From Dassel, K.; Cassidy, J. (2017). Reaching Deep in Low-Income Markets: Enterprises Achieving Impact, Sustainability, and Scale at the Base of the Pyramid. Monitor Deloitte.

22

Appendix – Sampling of Relevant Frameworks
FR AMEWORK 3: THE IMPACT MANAGEMENT PROJECT’S DIMENSIONS OF ENTERPRISE IMPACT

The Impact Management Project’s “Five Dimensions of

Impact” is intended to provide a holistic understandingof an enterprise’s positive and negative impact across thefollowing categories:• What: What outcomes to the enterprise’s activities drive,and how important are they to the people (or planet)experiencing them?

• Who: Who experiences the outcome and how underserved
are they in relation to the outcome?

• How much: How much of the outcome occurs? What is its
scale, depth, and duration?

Figure 3: From Impact Management Project. (2018). “How Enterprises Manage Impact.”

23• Enterprise contribution: What is the enterprise’scontribution to the outcome, accounting for what would
have happened anyways?

• Risk: What is the risk to people and the planet that impact
does not occur as expected?

The five dimensions are broken down into 15 categories ofdata to enable more comprehensive and consistentcomparisons of potential impact returns and risks between
potential investments, as in the example below.90 This

framework can help clarify what specific additional enterprise
impacts catalytic capital can help support.

Appendix – Sampling of Relevant Frameworks
FR AMEWORK 4: THE IMPACT MANAGEMENT PROJECT’S INVESTOR CONTRIBUTIONSThe Impact Management Project details various contribu-

tions, often used in combination, that investors may make toenable the enterprises they invest in to have an impact:private equity). This strategy should involve, at a minimum,
significant proactive efforts to improve impact.

• Grow new or undersupplied markets: The investor• Signal that measurable impact matters: The investor

anchors or participates in new or previously overlooked

that—if all investors did the same—it would lead to aliquid investments, or investments in which some perceive

commits to factoring in the impact an enterprise has, suchopportunities. This may involve more complex or less‘pricing in’ of social and environmental effects by the capitalrisk to be disproportionate to return.

markets. Often referred to as values alignment, thisstrategy expresses the investors’ values and is an important
baseline. But alone, it is not likely to advance progress onsocietal issues when compared to other forms ofcontribution.

• Engage actively: The investor may use expertise, networks
and influence to improve the environmental/societal

performance of businesses. Engagement can include awide spectrum of approaches—from dialogue with compa-

nies, to creation of industry standards, to investors taking• Provide flexible capital: The investor recognizes thatcertain types of enterprises do require acceptance of lower
risk-adjusted financial return to generate certain kinds ofimpact and designs a product or offers terms accordingly.
An investor’s intentions and constraints often shape which ofthese strategies is employed. The diagram below illustrates a
few examples of how intentions and constraints drive

different combinations of strategies that investors use tocontribute to impact.91

board seats and using their own team or consultants toprovide hands-on management support (as often seen in

Figure 4: From Impact Management Project. (2018). “How Do Investors Set Impact Goals?”24

Appendix – Sampling of Relevant Frameworks
FR AMEWORK 5: THE IMPACT MANAGEMENT PROJECT’S INVESTOR IMPACT MATRIXThe Impact Management Project’s Investor Impact Matrix canhelp investors map an investment by its impact on people• In addition to acting to avoid harm, enterprises canactively benefit stakeholders, by, for example, proactively

and planet. The matrix classifies illustrative investment

up-skilling their employees, or selling products thatinvestor contribution.92‘sustainable’ enterprises are doing so in pursuit of long-term

products according to intended enterprise impact andIn this matrix, the intended enterprise impact is broadlyclassified into three types, each of which builds on the
one prior:93• At a minimum, enterprises can act to avoid harm for theirstakeholders, by, for example, decreasing their carbon

footprint or paying an appropriate wage; such ‘responsible’
enterprises can also mitigate reputational or operationalrisk (often referred to as ESG risk management), as well as
respect the personal values of their asset owners.

support good health or educational outcomes; thesefinancial outperformance (often referred to as pursuing
ESG opportunities).

• Many enterprises can go further—they can use theircapabilities to contribute to solutions to pressing

social or environmental problems, such as enabling anotherwise underserved population to achieve good

health, educational outcomes or financial inclusion, or
hiring and providing skills training to formerly
unemployed individuals.

Figure 5: From Impact Management Project. (2018). “How Do Investors Classify and Communicate the Overall Impact of a Portfolio?”25Appendix – Sampling of Relevant Frameworks
FR AMEWORK 6: BILL & MELINDA GATES FOUNDATION PRI ASSESSMENT METHODOLOGYThe Gates Foundation Strategic Investment Fund (SIF),

These questions help the foundation consider potential

at the Bill & Melinda Gates Foundation, uses a rubric whenand leverage) relative to potential risks and costs (subsidy,

responsible for deploying program-related investments (PRIs)
it deploys PRIs to consider the following questions related tothe enterprise-level impacts it targets, its investor contribution, and potential risks:• Impact: “Are we achieving program goals?”• But for: “Would this happen without us?”• Sustainability/scalability: “Are we promoting rational

benefits (impact, “but for” additionality, sustainability,
staff resources, etc.) in a consistent way.

The scorecard excerpted below illustrates the SIF team’s useof the rubric when considering an $11 million equity

investment (alongside a $4 million grant) in bKash, an impact
enterprise in Bangladesh that provides mobile banking
services to underserved populations.94

market solutions?”• Risk: “How much risk/subsidy are we absorbing?”• Leverage: “Are we drawing in external capital?”• Portfolio: “Is this within our exposure limits?”• Oversight: “How much burden is it on our portfolio
management?”

Figure 6: From Bank, D. et al. (2016). Making Markets Work for the Poor: How the Bill & Melinda Gates Foundation Uses Program-Related Investments. Stanford Social Innovation Review.

26Endnotes

1

The Global Impact Investing Network (GIIN) defines “impact investments” as “investments
made with the intention to generate positive, measurable social and environmental impact
alongside a financial return” (GIIN 2019).

2

Ford Foundation. (1991). Investing for Social Gain: Reflections on Two Decades of ProgramRelated Investments.

3

It is also important to acknowledge that determining what constitutes a “market-rate,risk-adjusted return” is complicated for many kinds of impact investments, given often
short track records, unfamiliar risks, uncertain liquidity, and limited sets of comparable
investments for benchmarking (see O’Donohoe 2013). In some cases, differing perceptions of risk between conventional investors and impact investors targeting market-rate,risk-adjusted returns may justify the latter’s acceptance of a lower financial return (seeSwan, Looney, Walker 2018).

4

Bannick, M.; Goldman, P.; Kubzansky, M.; Saltuk, Y. (2016). Across the Returns Continuum.
Omidyar Network.

5

United Nations Conference on Trade and Development (UNCTAD). (2014). World
Investment Report 2014.

6

Bouri, A.; Mudaliar, A.; Schiff, H.; Bass, R.; Dithrich, H. (2018). Roadmap for the Future of
Impact Investing: Reshaping Financial Markets.

See “Clarify the Roles of Various Types of Capital” as one of the goals identified for investors.
7

US National Advisory Board on Impact Investing. (2014). Private Capital, Public Good: How
Smart Federal Policy Can Galvanize Impact Investing—and Why It’s Urgent.

8Adapted from Barby, C.; Pederson, M. (2014). Allocating for Impact: Subject Paper ofthe Asset Allocation Working Group. Bridges IMPACT+ and UBS for the Social Impact
Investment Taskforce established under the UK’s Presidency of the G8.

9Each investor may have different thresholds for the extent to which their catalytic capitaltakes on higher risks or lower returns. Some investors may be willing to accept varying
degrees of below-market-rate financial returns as long as the returns are expected to bepositive in absolute terms, while other investors targeting more pronounced catalytic
effects may be more willing to accept the risk of a likely loss on principal.

24 These “five P’s” were first articulated by the MacArthur Foundation’s Debra Schwartz in apresentation and were written up in Brest and Born (2013).
25 Armeni, A.; Ferreyra de Bone, M. (2017). Innovation in Financing Structures for Impact
Enterprises: Spotlight on Latin America. Transform Finance.
26 Schiff, H.; Dithrich, H. (2015). Scaling the Use of Guarantees in US Community Investing.
Global Impact Investing Network (GIIN), supported by the Kresge Foundation.
27 Armeni, A.; Ferreyra de Bone, M. (2017). Innovation in Financing Structures for Impact
Enterprises: Spotlight on Latin America. Transform Finance.
28 Topping, M. (2014). Evergreen Alternatives to the 2/20 Term-Limited Fund. White & Case
LLP published by Emerging Markets Private Equity Association (EMPEA).
29 Clark, C., Emerson, J., Thornley, B. (2014). The Impact Investor: Lessons in Leadership andStrategy for Collaborative Capitalism.
30 Ogden, T. (2016). The Case for Social Investment in Microcredit. Financial Access Initiative(FAI) at NYU Wagner.
31 Echoing Green and Enclude. (2017). Echoing Green Portfolio Segmentation: Accelerating
Capital to For-Profit and Hybrid Enterprises.
32 All dollar ($) amounts are in USD unless otherwise noted.
33 Brest, P.; Born, K. (2013). “Unpacking the Impact in Impact Investing.” Stanford Social
Innovation Review.
34 Bayrasli, E. (2015). From the Other Side of the World: Extraordinary Entrepreneurs,
Unlikely Places.
35 Koh, H.; Karamchandani, A.; Katz, R. (2012). From Blueprint to Scale: The Case forPhilanthropy in Impact Investing. Monitor Group in collaboration with Acumen Fund.

10 See Tideline. (2018). “Catalytic Capital Resource Library” at https://tideline.com/wp-content/uploads/Tideline-Catalytic-Capital-Resource-Library_March-2019.pdf

36 Ogden, T. (2016). The Case for Social Investment in Microcredit. Financial Access Initiative(FAI) at NYU Wagner.

11 O’Donohoe, N.; Leijonhufvud, C.; Saltuk, Y. (2010). Impact Investments: An Emerging
Asset Class. J.P. Morgan Global Research, in partnership with the Global Impact Investing
Network (GIIN) and Rockefeller Foundation.

37 Norfund. (2018). Development Impact Case Study: Nyama World Malawi.

12 Bridges Fund Management. (2015). The Bridges Spectrum of Capital: How We Define theSustainable and Impact Investment Market.

39 Some market participants would not include capital provided with the expectation of aneed for ongoing subsidy in a definition of ‘catalytic capital’, which they view as intentionally temporary and time-bound (for an example, see Goldman et al. 2016). For the
purposes of this report, this role of providing ongoing subsidy is described as catalytic
because of its importance in supporting ongoing investment from an investee’s otherfunders and investors.

13 Bannick, M.; Goldman, P.; Kubzansky, M.; Saltuk, Y. (2016). Across the Returns Continuum.
Omidyar Network.
14 Impact Management Project (2018). “How Investors Manage Impact.”
15 Novogratz, J. (2016). “Making the Case for Patient Capital.” Acumen.
16 Global Impact Investing Network (GIIN). (2018). Annual Impact Investor Survey. Supported
by United States Agency for International Development (USAID) and Department forInternational Development’s Impact Programme (DFID).
17 Internal Revenue Service. (2018). “Program-Related Investments.”
With impact investments deployed out of a foundation endowment (commonly referred toas mission-related investments, or MRIs) financial return is a significant factor, but even with
MRIs, foundations are not obligated to maximize risk-adjusted financial return as long as
they “support, and do not jeopardize, the furtherance of the private foundation’s charitablepurposes.” (IRS Notice 2015-62)

38 Clark, C. et al. (2014). The Impact Investor: Lessons in Leadership and Strategy for
Collaborative Capitalism.

40 Goldman, L. et al. (2016). Inflection Point: Unlocking Growth in the Era of Farmer Finance.
41 Clark, C.; Soriano, J. (2014). Impact Investing 2.0 Case Study: RSF Social Finance’s Social
Enterprise Lending Program.
42 Ogden, T. (2016). The Case for Social Investment in Microcredit. Financial Access Initiative(FAI) at NYU Wagner.
43 Kubzansky, M.; Breloff, P. (2014). “On Innovators and Pinballs: Five Paths to Scale in EarlyStage Impact Investing.” In Stanford Social Innovation Review. Fall 2014.
44 Clark, C. et al. (2014). The Impact Investor: Lessons in Leadership and Strategy for
Collaborative Capitalism.

18 Guarnaschelli, S.; Lampert, S.; Marsh, E.; Johnson, L.; Wallace, S. (2014) Innovative
Financing for Development: Scalable Business Models that Produce Economic, Social,
and Environmental Outcomes. Innovative Financing Initiative, an initiative of the Global
Development Incubator.

45 Bouri, A.; Mudaliar, A. (2013). Catalytic First-Loss Capital. Global Impact Investing
Network (GIIN).

19 Adapted from Convergence. (2018). The State of Blended Finance 2018.

47 Clark, C. et al. (2014). The Impact Investor: Lessons in Leadership and Strategy for
Collaborative Capitalism.

20 Hornberger, K.; Chau, V. (2018). The Missing Middles: Segmenting Enterprises to Better
Understand Their Financial Needs. Dalberg Advisors, supported by the Collaborative for
Frontier Finance (Omidyar Network/Dutch Good Growth Fund).

27

23 Though often grant-funded, market-shaping mechanisms (including mechanisms toestablish market demand for a product or service where it does not exist) are other toolsthat can be used in combination with catalytic capital to help enterprises overcome thepersistent challenges of market failure (see Lin, A.; Wilson, J. (2014) from USAID as one
resource for more information on market shaping mechanisms).

21 Bannick, M.; Goldman, P.; Kubzansky, M. (2015). Frontier Capital: Early-Stage Investing for
Financial Returns and Social Impact in Emerging Markets. Omidyar Network.
22 Schwartz, D. (2017). “Catalytic Capital: An Essential Tool for Impact.” MacArthur
Foundation.

46 Ogden, T. (2016). The Case for Social Investment in Microcredit. Financial Access Initiative(FAI) at NYU Wagner.

48 Convergence. (2018). The State of Blended Finance 2018.
49 Brigandi, T.; Ortel, S. (2018). “The Seven Kinds of Asset Owner Institutions.” CFA Institute.
50 United Nations Conference on Trade and Development (UNCTAD). (2014). World
Investment Report 2014.

This $1.8 trillion figure is a portion of the total $2.5 trillion estimated annual public and private
funding gap and represents the upper end of the $0.9 to $1.8 trillion range for potential
participation of the private sector estimated in the report.
51 Convergence. (2018). The State of Blended Finance 2018.
52 J.P. Morgan & Global Impact Investing Network (GIIN). (2014 and 2015). Annual Impact
Investor Survey; Global Impact Investing Network (GIIN). (2016, 2017, and 2018). Annual
Impact Investor Survey.
53 Global Impact Investing Network (GIIN). (2018). Annual Impact Investor Survey.
54 Data from Global Impact Investing Network (GIIN). (2018). Annual Impact Investor Survey.
The GIIN survey, which surveys asset owners and fund managers deploying impact investments, covered 229 impact investors (including both asset owners and fund managers) in2018. Respondents included a significant portion of the fund managers, foundations, banks,family offices, pension funds, insurance companies, and development finance institutions(DFIs) active in impact investing.
55 Convergence. (2018). The State of Blended Finance 2018.

75 See Framework 4 in the Appendix for more information on the Impact Management
Project’s classification of various investor contributions.
76 International Finance Corporation. (2018). Investing for Impact: Operating Principles for
Impact Management.
77 Schwartz, H. et al. (2016). Preservation of Affordable Rental Housing: Evaluation of the
MacArthur Foundation’s Window of Opportunity Initiative.
78 Schwartz, D. (2017). “Catalytic Capital: An Essential Tool for Impact.”
MacArthur Foundation.
79 For more information, see Clark and Rosenzweig et al. (2004); Olsen and Galimidi (2008);
Tuan (2008); Best and Harji (2013); Reeder et al. (2014); Hehenberger et al. (2015);
So and Staskevicius (2015); and Graham and Anderson (2015).
80 See Impact Management Project & Nesta. (2017). How Do We Know If Impact Has
Occurred? Understanding and Using Evidence of Impact.
81 UK Aid Network. (2015). Leveraging Aid: A Literature Review on the Additionality of Using
ODA to Leverage Private Investments.

56 Koenig, A.-N.; Jackson, E. T. (2016). Private Capital for Sustainable Development:
Concepts, Issues, and Options for Engagement in Impact Investing and Innovative Finance.
Social Impact Markets and E.T. Jackson and Associates, supported by DANIDA Ministryof Foreign Affairs of Denmark.

82 Henrich, M. (2014). Demonstrating Additionality in Private Sector Development Initiatives.
The Donor Committee for Enterprise Development (DCED).

57 Kleiterp, N. (2017). “How Development Finance Institutions Can Play a Catalytic Role in the2030 Agenda.” Development Finance.

84 One challenge faced by catalytic capital investors is determining whether an organization should only be supported if it can be nudged toward financial self-sufficiency or
supported on an ongoing basis with “sustaining” catalytic capital.

58 Convergence. (2018). The State of Blended Finance 2018.
59 MASSIF fund information provided by FMO. More information is available in the fund’sannual report (FMO 2017).
60 Henriques, R.; Nath, A.; Cote-Ackah, C.; Rosqueta, K. (2016). Program Related Investments:
Is There a Bigger Opportunity for Mission Investing by Private Foundations? The Center forHigh Impact Philanthropy at the University of Pennsylvania.
61 Bank, D. et al. (2016). Making Markets Work for the Poor: How the Bill & Melinda Gates
Foundation Uses Program-Related Investments. Stanford Social Innovation Review.
62 Ceniarth, LLC. (2018). Portfolio Review: Strategy and Holdings.
63 ImpactAlpha. (2018). “Ceniarth’s $200 Million Shift, Branson’s Climate-Smart Accelerator,
Warren’s Mandate for Stakeholder Capitalism.”
64 Global Steering Group for Impact Investment (GSG). (2018). Building Impact Investment
Wholesalers: Key Questions in Design of an Impact Investment Wholesaler.

83 Bannick, M.; Goldman, P. (2012). Priming the Pump: The Case for a Sector-Based Approachto Impact Investing. Omidyar Network.

85 Big Society Capital is a notable example of a catalytic capital investor with a “Displacement
Policy” designed to inform investment decisions and guide financing toward investeesthat cannot access similar financing on appropriate terms from more conventional sources(see Big Society Capital 2012).
86 Bannick, M.; Goldman, P. (2012). Priming the Pump: The Case for a Sector-Based Approachto Impact Investing. Omidyar Network.
87 Ibid.
88 Bannick, M. et al. (2015). Frontier Capital: Early-Stage Investing for Financial Returns andSocial Impact in Emerging Markets. Omidyar Network.
89 Dassel, K.; Cassidy, J. (2017). Reaching Deep in Low-Income Markets: Enterprises
Achieving Impact, Sustainability, and Scale at the Base of the Pyramid. Monitor Deloitte.
90 Impact Management Project. (2018). “How Enterprises Manage Impact.”

65 Ibid.

91 Impact Management Project. (2018). “How Do Investors Set Impact Goals?”

66 For more insight into how Big Society Capital views the uses and roles of its catalytic
capital, see Elsworth and Zanuso (2018).

92 Impact Management Project. (2018). “How Do Investors Classify and Communicate theOverall Impact of a Portfolio?”

67 Big Society Capital; Oliver Wyman. (2016). Corporate Social Investment: Gaining Traction.

93 Impact Management Project. (2018). “Why Do Enterprises Manage Their Impact?”

68 Shell Foundation. (2018). “Approach.”

94 Bank, D. et al. (2016). Making Markets Work for the Poor: How the Bill & Melinda Gates
Foundation Uses Program-Related Investments. Stanford Social Innovation Review.

69 Neichin, G., Isenberg, D. (2017). “Sorry, ‘Feel Good’ Investors: Deep Impact Requires
Concessions.” Ceniarth, LLC, published by NextBillion.
70 The Impact Management Project (IMP) is facilitating a global network of standardsetting organizations including the United Nations Development Programme (UNDP),
the Global Reporting Initiative (GRI), the Global Impact Investing Network (GIIN),
the Principles for Responsible Investment (PRI), the International Finance Corporation(IFC), the Global Steering Group for Impact Investment (GSG), Social Value International(SVI), the Organisation for Economic Co-operation and Development (OECD), and
the World Benchmarking Alliance (WBA). More information available online athttps://sdgimpact.undp.org/
71 Impact Management Project. (2018). “What is Impact?”
72 Tuan, M. (2011). Impact Capital Measurement: Approaches to Measuring the Social
Impact of PRIs.
73 Omidyar Network, for example (Bannick et al. 2016), describes three ways in which investors deploying “subcommercial” capital can target broader market-level benefits throughinvestments in individual enterprises: (1) pioneering a new model and causing otherenterprises to follow suit; (2) providing industry infrastructure that addresses a challengecommon to many or all enterprises in an industry; or (3) influencing policy by sparking
debate and reform in a particular industry.
74 Brest, P.; Born, K. (2013). “Unpacking the Impact in Impact Investing.” Stanford Social
Innovation Review.

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