New report estimates a catalytic capital funding gap for investment directly into social purpose organisations of around £200m annually.
A new report commissioned by Big Society Capital, Access – the Foundation for Social Investment and the Association of Charitable Foundations reveals the important role that catalytic capital can play in the UK social investment market.
The current annual catalytic capital provision directly into social purpose organisations is estimated to be at around £98m. With an estimated need for £287m to £578m of catalytic capital provision per year, this suggests a funding gap of £189m to £480m, with the report offering a conservative estimate of around £200m per year.
Described as the first in-depth study on the usage of catalytic capital in the UK, the report highlights the opportunities and challenges for improving access to and growing the supply of catalytic capital in the UK to plug access-to-capital gaps faced by social purpose organisations and social investment fund managers.
Produced by The Change Coefficient, a social impact and investment advisory, the report collates the findings of an in-depth literature review and analysis of catalytic capital funds and notable investments in the UK and internationally.
The authors also conducted more than 70 interviews with a wide range of social economy stakeholders, such as foundations, development finance institutions, social purpose organisations, impact investment specialists and local government, including UnLtd, the Greater London Authority, EVPA, Nesta and the Joseph Rowntree Foundation.
In the report’s foreword, Amir Rizwan, relationships director for Big Society Capital, said: “We hope that this report begins several conversations on catalytic capital here in the UK as well as serves as an impetus for cross-sector collaboration on how we can grow the provision of this vital investment.”
Defining catalytic capital
The report defines catalytic capital as “investment into social purpose organisations and/or funds that is patient, risk-tolerant, concessionary, and flexible -or some combination thereof- in ways that can fill persistent capital gaps faced by social purpose organisations and social impact investment fund managers seeking new markets and attracting new capital”.
The 15 case studies included in the paper are categorised using these characteristics, with catalytic capital that is concessionary and risk tolerant seen as the most important requirements for social purpose organisations and social investment fund managers.
Responding to questions from Impact Investor, Rizwan explained that concessionary finance in relation to market rate returns was vital to providing the right investment structure that could fill the funding gaps that existed.
“Concessionary finance is also to do with the way you can structure things in a catalytic way to enable this to happen (such as blended finance structure or the use of guarantees) rather than it just being about the cost of capital on its own,” he said.
Rizwan said that risk tolerance was closely linked to this given that you needed to have an element of concession to be risk tolerant.
“This piece is also vital in order to ensure investors are able to provide this kind of financing to support earlier stage ventures and impact investment funds that have an unproven return profile and require an investor view that is long term and able to tolerate risk,” he added.
Funding shortfall
According to the research, the shortfall in funding includes insufficient provision of investment, limited provision of smaller investments and support for the provision of smaller investments, investment for innovation, research and development, early-stage social purpose organisations, new investment products and new fund managers, affordable investment, and investment that seeks to improve systemic challenges around inclusion, particularly for black and minoritised ethnic-led social purpose organisations.
“This type of capital has an important role in the social economy on many levels including in supporting ventures and impact investment funds in having the right structure of capital to be able to launch new ideas or structures as well as to provide support in growing and scaling their activities,” added Rizwan.
The report spotlights the £700m of catalytic capital investments made by Big Society Capital, described as instrumental in the growth of the social investment market, which grew from £830m in 2011 to £7.93bn at the end of 2021.
