In essence, catalytic capital is investment capital (debt, equity, guarantees, etc) with which the investor accepts reduced financial expectations in order to bring about a greater social or environmental impact. Lowered financial expectations refers to not only higher risk or lower return profile, but also a longer liquidity window or subordinate position in the investment structure than a more conventional investment. Other terms for this type of capital include concessionary capital, patient capital, and flexible capital, among others.
Catalytic capital fits in the middle of the spectrum of capital, which demonstrates a gradation of investor return expectations, from 100% loss (a grant) through commercial returns at rates set in accordance with conventional financial benchmarks that do not price in “externalities” (conventional equity investments). It can work to fill critical gaps for social entrepreneurs, particularly in early stages of development. It can also encourage third-party investment that may have not been otherwise possible (e.g. a development finance institution taking a subordinated position to entice private investors).
Tideline, an impact investing consulting and research firm, warns: “Capital willing to accept disproportionate risk and/or concessionary returns is in short supply and can have market-distorting effects if not deployed appropriately. Evaluating potential positive and negative impacts of catalytic capital (including its built-in financial concession and the activities it supports) is essential to its effective use.”
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- Tideline – Catalytic Capital: Unlocking more investment and impact
- MacArthur Foundation – Catalytic Capital Consortium