Interest in impact investing is growing around the world. Recent studies from the Global Impact Investing Network, US SIF Foundation, and others speak to the market’s potential to help address difficult challenges at meaningful scale and in ways that have never been tried before.
But the reality is that there is no straight line from increased interest to increased impact. While there are proven and pioneering enterprises capable of dramatically improving health, reducing poverty, expanding education, or tackling the challenge of climate change, many have unconventional investment profiles that leave billions of dollars in potential investment on the sidelines.
The many reasons for this mismatch are well known. Risks may be too high relative to modest projected returns. Timelines to profitability and eventual investor exit may be long, with no alternative liquidity option in sight. The investment “ticket size” may be too large or too small, depending on the investors involved. And the need for customized underwriting and transactions with novel terms and conditions can make many impact investments both costly and time-consuming, deterring even highly motivated individuals and institutions.
In the absence of impact investment products and platforms that efficiently mobilize capital, mitigate risk, and improve liquidity, many investments stall, and opportunities for deep and lasting impact are lost.
That is why impact investing needs more market makers. I do not mean that only in the conventional sense of standing between buyers and sellers to facilitate transactions. I am talking about institutions that work globally across multiple sectors to raise, structure, and deliver flexible capital to high-impact enterprises and funds. The field needs players who understand what investors and capital seekers need, and how to bridge even the most challenging capital gaps. They can unlock and accelerate investments with an eye toward maximizing impact, not just profit.
Think of it as market making for mission. That is what we are doing at the John D. and Catherine T. MacArthur Foundation. In addition to our traditional grantmaking of about $250 million each year, we have expanded our impact investing strategy, working in new ways and tapping a dedicated pool of $500 million to help make the global impact investment marketplace more inclusive, efficient, and effective. Our goal is to drive impact well beyond what we can achieve with our capital alone, and to create high-impact investment opportunities for other investors who are unwilling or unable to engage on their own.
We think there is tremendous power in this type of market making, and are excited to see and partner with others taking on this work in various ways. For us, it means going beyond the day-to-day program work of a traditional foundation. We will continue to use impact investments to support MacArthur’s program priorities, like fighting climate change. But now, we also use our assets and our expertise to help build the impact investing marketplace as a whole.
Achieving this, of course, is easier said than done. Over the last two years, we have taken our first steps into market making, working on both sides of this complicated problem.
First, we are making it easier for investors to participate in high-impact investments. One way to do this is to take the lead in syndication or create a managed fund. An example is Benefit Chicago, our new collaboration with The Chicago Community Trust and Calvert Foundation that is mobilizing $100 million from individuals and institutions (including MacArthur) to strengthen communities and fuel social innovation in our hometown.
MacArthur Foundation provided impact investments to two Chicago intermediaries so that they could finance social enterprises like Growing Home, an urban farm providing fresh produce, job training, and community building in an underserved neighborhood.
Second, we are providing new kinds of credit and liquidity support to social enterprises, nonprofits, and mission-driven funds—in particular, those pioneering new markets, business, and financing models with potential for outsize impact. For example, we devised an innovative “liquidity facility” that leveraged $50 million of new equity investment in the fast-growing Housing Partnership Equity Trust, the only nonprofit-sponsored, affordable-housing real estate investment trust in the United States.
MacArthur Foundation provided an impact investment to the nonprofit Hispanic Housing Development Corporation so the organization could expand its work to preserve and improve affordable rental housing.
Going forward, we will continue to incorporate new kinds of transactions and collaborations into our work, and support new products and platforms that bridge critical capital gaps. As with the rest of our impact investing, these new efforts must meet a “but for” standard: but for our intervention, capital would not flow.
In addition, we will look at new opportunities through a market making lens. Are we bringing more investors to the table in easier, more efficient ways? Are we supporting enterprises and intermediaries that have the potential for substantial growth and/or replication? Does the financing model address a widespread challenge? And, overall, can we expect significant leverage that multiplies impact?
There is no one-size-fits-all solution—and impact investments cannot meet the needs of every organization focused on social, economic, or environmental challenges. Many organizations—perhaps the majority—will always need some amount of government funding or traditional philanthropic support.
Still, foundations that have significant impact investing experience and financial assets that they alone control are well positioned to work on the frontline of impact investment innovation. Several of us are already collaborating in various ways, in the United States and globally, and we are eager to see this group expand. Together, we can help impact investing transcend the hype and realize its true promise: to leverage the power of the market in a way that creates a better future for people and places around the world, and for the planet itself.
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Read more stories by Julia Stasch.