Catalytic capital and blended finance are subsets of social finance and impact investing. Blended finance structures that integrate public funding can often be classified as public-private partnerships (PPPs)
“Catalytic capital” is closely related to other terms in use, including concessionary capital, impact-first capital, sub-commercial capital, flexible capital, and patient capital. Each of these terms refers to investments that are distinct from “market-rate” impact investments in that they have expected financial returns that are explicitly “below-market-rate” or are affected by the significant uncertainty of an unproven enterprise, market, or innovation.
The term catalytic capital puts additional emphasis on the role such financing plays in enabling or ‘catalyzing’ investors that may not otherwise have made an investment but for [counterfactually] the catalytic capital invested and in generating impact that would 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 count towards a foundation’s annual distribution requirement, provided: (1) the capital is deployed with the foundation’s charitable goals as the primary purpose and (2) financial return is not a significant purpose.
Catalytic capital is also an essential component of other broader 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.
Blended finance, a form of innovative finance focused on using catalytic capital from public or philanthropic sources to structure investment opportunities with acceptable risk-return profiles for private sector investment that further the SDGs in both emerging and developed markets.
Frontier finance, which often makes use of blended finance and 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.”
Catalytic capital in blended finance structures is an example of venture philanthropy. Prominent case studies of