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