Enabling truly innovative social investment - is catalytic capital the answer?


Written by

Melanie Mills, Head of Social Sector Engagement

Back in June we held the second Solutions Collective, a series of roundtable events which aim to make the conversation around social lending more inclusive. This session focused on the role of catalytic capital within social lending. The Solutions Collective is an invaluable opportunity for us to listen to our partners and colleagues in the social lending space. The feedback will inform our social lending strategy going forward, helping to make more capital available which meets the needs of social enterprises and charities.

We have set ourselves two significant targets by 2025:

Diversity: 50% of social loans to be to be taken from underrepresented groups

Reach: 50% of social loans to be available in the most overlooked communities in the UK

These goals challenge both ourselves and our market system to increase the diversity and reach of social lending. To make this happen we will need concessionary capital using levers such as guarantees, tax reliefs, catalytic capital and other government backed schemes. It may sound complex but understanding how these different levers work is essential to developing the market: who they affect and most importantly the role they can play in making available capital best suit market demand. This is why the power of a collective is so important.

What is catalytic capital?

Amir Rizwan, Relationships Director at Big Society Capital, led the first session which focused on the definition and role of this type of investment. Whilst it can be used as another way of bringing concessionary capital into play, the fundamental difference is that catalytic capital seeks to ‘address capital gaps’ particularly where the risk-return profiles are outside ox editing or conventional investment norms.

Amir explained that this type of capital can play a role in investing, seeding, scaling and/or sustaining impact and that whilst concessionary terms come into play (for example cost of capital etc.), the most important point is how flexible the capital can be to effectively meet the profile and demand and reach sectors and communities that mainstream investment won’t.

Rarity or scarcity?

Suppliers of catalytic capital go beyond the usual suspects of grant making trusts and foundations. It’s important to address the preconception that this type of capital is always from philanthropic providers. Other sources include:

  • Government/public money (e.g DLUC - previously MHCLG and DFIID)
  • Wholesalers (e.g. Big Society Capital - Charity Bonds /The Access Foundation for Social Investment)
  • Private High Net Worth Investors (HNWI) and family offices (e.g Ceniarth)

Understanding the opportunity

The Association of Charitable Foundations (ACF) and Big Society Capital have commissioned a report by The Co-Efficient Consultancy which will be published in September and which aims to explore the opportunities around Catalytic Capital in more detail.

Catalytic capital in action

Denise Holle, Head of Social Investment at Joseph Rowntree Foundation (JRF) shared real examples from JRF’s portfolio where the use of their capital played a catalytic role. This included examples where equity like, sharia compliant, blended finance, concessionary rates and flexible finance (conversion of debt to equity) and brought to life the variety of capital gaps that exist. The examples further highlighted how tailored and flexible capital should be to each business model and to the impact the organisation receiving investment is trying to achieve.

The more the merrier

The Solutions Collective is open to any individual or organisation that has an active interest in the area we are exploring. This session saw representation from fund managers, sector membership bodies, local authorities, individual consultants, policy shapers, mainstream investors and researchers. What was clear was that regardless of our starting interest, our shared goal was to better understand how we can shape and influence systems and networks to improve access to finance. The range of perspectives made for a fascinating discussion.

Sharing learning

Jamie Broderick, Director at the Impact Investing Institute and part of the Adebowale Commission on Social Investment, commented ‘Personally I find these sessions invaluable for two reasons; I learn lots and I get the opportunity to meet and hear from participants whom I might not otherwise have exposure to. I have a much better grasp of what this frequently used term means and a better understanding of where it might play a role within our own social lending and in the wider supply of more ‘enterprise-centric’ supply.’

Jamie’s words really resonated with me and gave me real clarity on the challenges and tensions that are tangible between investors (supply) and investees (demand), focusing on how investors in particular consider making investment concessions:

  • Return - return is well understood but under challenged particularly in proportion to risk, with focus often being on an investment offering ‘too little return’
  • Risk - poorly understood and as a result of lack of familiarity, it can be used as an excuse to cite that investing is ‘too risky’
  • Effort - often within the risk and return profile but being seen as ‘too much trouble’, we need to be bold and not just accept the norms

To ensure we are making the most out of sessions, we are committed to sharing key takeaways and any resulting updates and progress in Insights Papers for this and previous sessions which you can find below.

Up next

Future topics include the use of tax reliefs and as an output of these sessions we are also exploring with partners potential roundtables on sharia compliant lending and the use of non-government guarantees. You can register your interest for future sessions and suggest discussion material to inform our social lending work here.

At times I feel we are making headway and at others I realise there is still so much more to do. I am reassured by the collaborative will and the commitment to impact. It may be baby steps, but we are moving forward together.

Find out more

To discover more on insights from the event, read the summary document here