Catalytic Philanthropy and Private Capital: To Use or Not to Use

by Katie Grace on February 14, 2013

Last week, Living Cities and ImpactAssets released a new issue brief on the role grants and philanthropic dollars play in supporting impact investment. In addition to building on a growing conversation in the impact investing space about the role that philanthropy can play in developing investable products and addressing risk/return concerns (for example, see last year’s Monitor report), this paper coincidentally follows our recent conversation with foundations about mission investing and private capital markets.

The brief focuses heavily on using grants as pieces of collaborative funding models, like the Bay Area TOAH fund, and scaling enterprises and projects to investability. For the authors, philanthropic capital—largely grants and concessionary funds—helps to grow the field by bringing in larger pools of capitals and/or new investors and expanding the availability of products.

Our meeting on January 25th similarly discussed the role foundations play in creating investable opportunities and expanding the impact that philanthropy can have on impact investing—and social outcomes more broadly—to include not only concessionary and grant capital but market-rate mission-driven capital. Foundations have a wide range of tools and assets they can use to entice (or bully) other investors and financial market structures into integrating impact.

But hiding in all of these conversations is a very important question: When are subsidies supporting the development of a new market and greater social outcomes, and when are they just supporting returns for profit-seeking investors?

Impact investing is a valuable tool that can bring private capital (more resources) to bear on problems for social benefit. However, more private capital does not necessarily guarantee better outcomes. The variety of backgrounds that impact investors come from, and the ever present concern of greenwashing, can mean that some investors presented with the opportunity to invest in a project whose returns or risk profile is being ameliorated by philanthropic capital will take advantage of the situation.

Foundations looking to use their resources to support impact investing should think carefully about the outcomes they are trying to achieve, and not just support the expansion of a tool for the sake of the tool. Philanthropic capital can be catalytic, but is limited. Figuring out where the use of subsidized capital by philanthropy to support the engagement of broader private capital markets makes the most sense is the hard work.

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