What is Catalytic Capital? How Family Offices Achieve ESG GoalsMarkdale
Family office investors are taking an increasingly significant role advancing environmental, social, and governance (ESG) objectives through their investments. One key strategy gaining prominence in this space is the use of “catalytic capital.” Catalytic capital is a dynamic financial tool that combines private capital, pooled investment funds, and charitable capital to drive positive social and environmental impact while achieving financial returns. This post will survey the concept of catalytic capital, its relationship with “blended capital,” and provide three illustrative examples of how it can be employed to support renewable energy development, non-profit community housing, and entrepreneurship.
Defining Catalytic Capital
Catalytic Capital is a form of patient, risk-tolerant capital strategically deployed to address social and environmental challenges. Unlike traditional investment capital that seeks maximum financial returns, catalytic capital seeks to generate social or environmental impact by providing some concessions. It acts as a catalyst for attracting additional capital from other investors by mitigating risk or providing below-market-rate capital where needed. By doing so, catalytic capital helps bridge the financing gap for projects and ventures focused on ESG objectives.
Catalytic Capital vs. Blended Capital
While catalytic capital is a crucial component of blended finance, the two concepts are distinct but closely related. Blended capital refers to the strategic mixing of various forms of capital, such as grants, concessional loans, and commercial investments, to support a project or initiative. Catalytic capital often serves as the “catalyst” within blended capital structures, incentivizing other investors to participate by taking on a more significant portion of the risk or accepting lower financial returns. In other words, catalytic capital can be thought of as a subset of blended capital, with a specific focus on impact-driven investments.
Examples of Catalytic Capital in Action
- Funding New Renewable Energy Development
Imagine a family office investor interested in promoting renewable energy projects. They decide to allocate a portion of their portfolio to a renewable energy fund. However, to attract additional investors and ensure the success of early-stage renewable energy ventures, they provide catalytic capital in the form of patient, below-market-rate debt to the fund. This catalytic capital reduces the risk for other investors and encourages more substantial private investment in renewable energy, thus accelerating the transition to sustainable energy sources.
- Non-profit Housing Development
Another family office investor is passionate about addressing affordable housing shortages in their community. They collaborate with a local charity focused on housing development. By providing catalytic capital in the form of grants from their family foundation and low-interest loans from their private funds, the family office investor helps the charity secure additional funding from impact-focused foundations and other socially responsible investors. This blended capital approach enables the charity to build affordable housing units and revitalize underserved neighborhoods.
- Venture Funds Supporting Entrepreneurs from Diverse Backgrounds
A family office investor committed to promoting diversity and inclusion in entrepreneurship joins forces with a venture capital firm specializing in underrepresented founders. They allocate catalytic capital to the venture fund, which is then used to make early-stage investments in start-ups led by entrepreneurs from diverse backgrounds. This catalytic capital serves as a beacon for other investors. And, not only attracts other impact investors to the fund but also helps mitigate the higher perceived risk associated with investing in diverse-led start-ups.
Catalytic capital plays a pivotal role in empowering family office investors to align their investments with ESG objectives effectively. By strategically blending private capital, investment funds, and charitable foundation capital, family offices can catalyze positive social and environmental impact while pursuing financial returns.
In Canada, there are several catalytic capital funds being formed. Some examples are: the MaRS Catalyst Fund, Northleaf Venture Catalyst Fund(s), and Realize Capital Partners. Contact Us to learn more about how our family office can help you navigate the catalytic capital landscape.