Catalytic capital has a definition problem. And that’s a good problem to have.

By Peter Cafferkey and Gianluca Gaggiotti

Impact investment globally has broken the trillion dollar threshold. This means nothing to the family struggling to afford heating this winter. There’s a promise in catalytic capital, right in the name: that it will catalyse solutions to our greatest social environmental challenges. The idea is that more patient, risk-taking capital can do this. ?It’s an idea, not a definition. Definitions? Those can be tricky. ?

After hosting 5 practitioner sessions to take the temperature of catalytic capital in Europe, we’ve reflected at length on definitions driven by EVPA’s member community. The enthusiasm, interest and engagement of over 40 participating organisations was infectious – and is only growing. ?The time feels right for these conversations between experienced practitioners and debutants to unlock capital to solve today’s greatest challenges, from cost-of-living to climate and every crisis in between.?

And yet… One thing was clear despite the wide level of expertise in our rooms and a desire to move past definitions to actions.?Catalytic capital still means many things to many people.??

As the first step towards a definition, the community we convened focused on identifying current deployment and awareness of catalytic capital – definition by example – and, crucially, discussed the barriers to unlocking more impact-minded capital. While we all shared an instinctive ‘feeling’ of what is catalytic, perspectives varied about what qualified.?Depending on experience and focus, participants found themselves diverging on elements such as the role of grants, the need for unlocking follow-on finance or whether non-financial capital could also be catalytic capital.

We were surprised by this wide divergence of views.?We had mistakenly assumed a clear definition of catalytic capital would be quick to emerge amongst established players in a growing field.??However, ?we quickly learned that lacking a definition is actually a good sign.?

Why a good sign?

First, because debate is healthy.?Not just the passion, but also the deep consideration and commitment that was evident in positions held, reflect the vibrant, engaged and live nature of this space.?The rules are not set, outcomes have not been decreed and experimentation is still possible.??

Secondly, the lack of a set-in-stone definition reflects the variety of forms catalytic capital can take. Catalytic capital operates in different contexts and at different levels. It can take the form of a flexible investment into an early-stage enterprise, allowing pursuit of both social and environmental missions, as well as an accelerator investing into emerging fund managers tackling climate change. Both of these examples are equally needed to address market gaps and, per the community, deserve recognition as valid cases of catalytic capital.

There is a material difference between exchanging expertise and semantics.??When we talk of debating definitions and whether one case qualifies or not, there is a healthy scepticism, especially amongst the EVPA practitioner-based community.?Some may feel that all this debate takes time away from the ‘doing.’??However, we saw first-hand in a room with participants combatting climate change, supporting SMEs in the Middle East or driving youth employment in Europe, the vital role that sharing experiences and reflection can play.?A collaborative and engaged conversation on definition lends itself to an open field where people feel empowered to find their own space.?Our experience showed a wide range of impact actors involved, from foundations to impact funds, corporations to family offices; the debate gave a wider diversity of voices their say.?

A key benefit of a field still developing is the ability to include new actors.?We need all actors at the table and collaborating, calling from along the continuum of capital, philanthropic capital alongside more mainstream finance, to drive the systemic change we need.??Some of the largest philanthropic actors in the world have pointed towards catalytic capital’s role as a bridge between different actors. ??

“By working with today’s dynamic, fast-growing community of catalytic capital practitioners, and with other investors across the capital spectrum, we can use catalytic capital to help unleash additional resources and powerful impact to meet our world’s current and future challenges.”

-Debra Schwartz, MD, Impact Investments at the?John D. and Catherine T. MacArthur Foundation – a private, global philanthropy with approximately $6 billion in assets and annual grantmaking of roughly $250 million.

Yet to answer that natural cynicism that appears when new terminology and definitions are mentioned, there is a real need for clear regionally appropriate definitions. These were the most common elements of catalytic capital that arose from our sessions:

• Impact is the end goal: several investments can be catalytic and attract follow-on funding, but to classify as catalytic capital they should generate an impact that would have not happened otherwise.
• Catalytic capital is not a private subsidy: the role of patient and early-stage investors that de-risk investments and attract follow-on funding is often overlooked and seen as a private subsidy by mainstream finance. It is time we change this dynamic and highlight the importance of catalytic capital providers in addressing market gaps.
• Grants can be catalytic capital: philanthropic institutions play an important role in providing first loss capital, de-risking investments and attracting follow-on funding to scale the impact.

Brand together

Our community (and the wider community of our sister organisations in Latin America, Asia and Africa) is rightly focused on action rather than branding.?Yet good branding, messaging and clear requests are necessary to step into the mainstream.?Those seeking to drive the most impact from catalytic capital stand to benefit from making their activities easier for a non-impact professional to understand, influencing policymakers by speaking their language or providing mainstream journalists with easy copy.

In 2023 EVPA is planning to do exactly that, though proactive consultation with the wider mainstream markets.??We plan to bring the voice of the impact community to policymakers and capital allocators, and build on the common ground that emerged from our membership community.?If you’re a catalytic capital practitioner seeking to join this effort, we’d appreciate the chance to hear from you, whether it’s sharing a case study , engaging at events such as Impact Week or taking part in our open consultation in quarter one of 2023.

Now is the time to learn from the challenges that impact investing and ESG investing have faced.?It is important we make what we do easy to understand, quantifiable and urgent.??Catalytic capital has already had a real impact, but importantly it has also caught the imagination of a diverse set of actors.

Having a definition problem reflects an exciting and expanding space. But, as stated by Thierry Roussin from AguiaLabs in one of our sessions: “The real challenge is to change the mindset, by changing the way we do our job and the way we connect people.” If we can keep questioning assumptions while building new and stronger connections, catalytic capital has the best chance of success at scale.