Sarah Kearney Explores How Nonprofits Can Leverage Catalytic Capital in Inside Philanthropy

Prime’s Executive Director, Sarah Kearney, explores how nonprofits can leverage catalytic capital in this Inside Philanthropy article. She writes:

A tidal wave of catalytic capital is gathering. Let us not squander its force. Since 1969, when program-related investments (PRIs) were first written into the U.S. Tax Code, U.S.-based private foundations could make investments that count as grant distributions whenever there was a case to be made that those investments would not have been made by mainstream investors. The tax language that defined PRI-making in American philanthropy also forms the basis of the broader trend of catalytic capital investing in global philanthropy, an approach that often deploys charitable capital — in the form of grants, recoverable grants and PRIs — as well as noncharitable, impact-seeking capital, into investments that prioritize impact and address important capital needs neglected by mainstream investors. 

Catalytic capital programs are built to alter the risk/return profiles of high-impact companies, projects or funds to bring mainstream, economically motivated investors to the table (whether at the same time or in subsequent investment rounds) to support solutions that would otherwise remain overlooked. Writ large, this global trend gives us hope of addressing the world’s most pressing problems at a scale unattainable by nonprofit programming alone. 

These days, philanthropists are expanding the toolkit they use to give, including catalytic capital, at an accelerating pace. For example, a decade ago, you could count on two hands the number of PRIs that had ever been directed toward any area of science and engineering innovation globally. In contrast, today, the Catalytic Capital Consortium has started to mainstream the vocabulary of catalytic investing. Foundation Directory Online reports hundreds of millions of U.S. dollars being deployed annually as PRIs from 2019 through 2021. Additionally, billions of U.S.-based philanthropic and deeply mission-motivated dollars teeter on the threshold of deployment into for-profit solutions that aim to advance a social or environmental goal (and would otherwise struggle to raise sufficient financial support). 

The tax code does not require that the firms receiving and managing catalytic capital have any particular tax designation. They can be nonprofit, for-profit or other less frequently used forms (e.g., low-profit limited liability companies, public benefit corporations, etc.). This means that recipients’ corporate governance systems are often not purpose-built to steward catalytic capital toward philanthropists’ missions. As history has shown over and over, good intentions can easily erode in the face of the Goliath of private benefit, especially within programs using market-based tools, intended to attract economically motivated actors, and where few would notice compromises on impact-first priorities on a day-to-day basis. 

To read the op-ed, please visit Inside Philanthropy.