Catalytic Capital in Impact Investing: Forms, Features, and Functions

Maoz (Michael) Brown, Riya Kadam, and Katherine Klein. 9/1/2023. “Catalytic Capital in Impact Investing: Forms, Features, and Functions”. Publisher's Version Abstract

Catalytic capital describes equity investments, loans, and other financial instruments that are designed to stimulate impact and attract third party investment that would likely not be possible otherwise. By accepting disproportionate risk and/ or concessionary returns, and by attracting more mainstream investors into high-impact deals, catalytic impact investors can play an important role in tackling the formidable social and environmental challenges the world faces and in building the field of impact investing.

Despite this importance, relatively little is known about how catalytic capital works, how catalytic investors view their role in creating impact, and what distinguishes catalytic capital from the broader impact asset class. We aim to fill that gap in knowledge by presenting a comprehensive analysis of catalytic capital. Drawing on data from the Impact Finance Database and a series of interviews, we offer both a descriptive overview of catalytic capital and an analytical assessment of its distinguishing features.

We begin by reviewing the various forms and purposes of catalytic capital, demonstrating substantial variety in the ways in which investors deploy it. This section also reveals that catalytic capital is not a binary feature of how impact investors work—rather than having just catalytic and non-catalytic impact funds in our sample, we find that many funds blend catalytic and non-catalytic capital.

We then provide an overview of catalytic capital, demonstrating that it is associated with smaller fund size, greater use of debt, more focus on emerging economies, and less support from traditionally returnsfocused limited partners such as insurance companies and pension funds. Following this overview, we explore financial performance goals among catalytic funds, showing that these funds often exhibit less emphasis on market-rate financial performance in ways that go beyond simple return metrics (e.g., internal rate of return). Next, we explore how catalytic impact funds differ from other impact investing funds, highlighting the challenges that catalytic fund managers report they experience in sourcing potential investments, attracting and securing investors, meeting financial targets, and exiting successfully. In the final section, we present findings on the impact of catalytic capital, highlighting the importance of additionality in how catalytic impact investors conceptualize their impact.

Contracts with (Social) Benefits: The Implementation of Impact Investing

Christopher Geczy, Jessica Jeffers, David K. Musto, and Anne M. Tucker. 7/12/2020. “Contracts with (Social) Benefits: The Implementation of Impact Investing”. Publisher's Version Abstract

contracts_with_benefits.pdf

We draw on new data and theory to examine how private market contracts adapt to serve multiple goals, particularly the social-benefit goals that impact funds add to their financial goals. Counter to the intuition from multitasking models (Holmstrom and Milgrom, 1991), few impact funds tie compensation directly to impact, and most retain traditional financial incentives. However, funds contract directly on impact in other ways and adjust aspects of the contracts like governance. In the cross-section of impact funds, those with higher profit goals contract more tightly around both goals.

Keywords: impact investing, venture capital, private equity, socially responsible investment, sustainable investing, corporate social responsibility, contracts

Great Expectations: Mission Preservation and Financial Performance in Impact Investing

Jacob Gray, Nick Ashburn, Harry Douglas, Jessica Jeffers, and Christopher Geczy. 9/2016. Great Expectations: Mission Preservation and Financial Performance in Impact Investing. Edited by David Musto. Publisher's Version Abstract

Given the pressure to find liquidity, GPs may face tradeoffs between maximizing financial returns and ensuring the preservation of portfolio companies’ missions, and therefore, many wonder if GPs will sacrifice mission in exchange for financial returns.

Impact Finance Research Consortium

Launched by:

The Consortium

Our Mission

Words From Our Leaders

“To fulfill the promise of impact investing, we need hard data, independent analysis, and evidence-based insights. That’s the promise of IFD and the power of this collaboration.”

-Dr. Katherine Klein, Edward H. Bowman Professor at the Wharton School and Faculty Director, Impact Investing Research Lab

-Dr. Shawn Cole, John G. McLean Professor of Business Administration and Faculty Lead of The Social Impact Collaboratory at Harvard Business School

-Dr. Jessica Jeffers, Associate Professor of Finance at HEC Paris

Catalytic Capital in Impact Investing: Forms, Features, and Functions

Contracts with (Social) Benefits: The Implementation of Impact Investing

Great Expectations: Mission Preservation and Financial Performance in Impact Investing

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