Guest blog: Seizing the opportunity – how catalytic capital can help drive transformative social change

18 May 2023

Exploring new research on Catalytic Capital. Join ACF and SIIG members, and other providers of catalytic capital at an event on 6 June to discuss the report.

Everyone reading this will recognise the scale of the challenge facing communities in the UK. Tackling the major social challenges we face requires a response that far outstrips our current resources. This is why Big Society Capital (BSC) and Access – The Foundation for Social Investment (Access) have come together to fund a piece of research looking at catalytic capital in the UK. As using precious capital in more catalytic ways can leverage more finance for the cause and drive the scale of change we all want to see.

The research was undertaken by Tej Dhami and Mark O’Donnell from leading social impact consultancy, The Change Coefficient and supported by a secretariat from the ACF’s Social Impact Investors Group (SIIG).

Money that helps to unlock other funds

You may have heard the term ‘catalytic capital’ being used in different ways. It’s clear that while many people have an instinctive understanding of what it is – money that helps to unlock other funds – there is little consensus on a definition or any research exploring what catalytic capital means in a UK context. This report builds on global research by adapting the definition used by the MacArthur Foundation in the US and seeks to build a common framework for understanding the nature and role of catalytic capital in the UK.

The updated definition used in the report would characterise catalytic capital as an investment into social purpose organisations and/or impact funds that is patient, risk-tolerant, concessionary, and flexible (or some combination thereof). Crucially, catalytic capital is designed to unlock impact and, in many cases, draw in additional investment to fill persistent funding gaps faced by social purpose organisations. It can also support social impact investment fund managers seeking new markets and attracting new capital.

Driving impact at scale

Through its various usages, it can have a transformative impact at scale. Given that the finance needs associated with tackling major social challenges are many times the current capital available, one of the big goals here is using catalytic capital in a smart way so it unlocks much bigger sums to get closer to the scale of impact that we need.

In addition, there is huge potential to build on the work of a growing number of foundations that are focussed on the impact they can have more broadly, thinking creatively about the tools at their disposal and examining closely how their funding sits within the broader ecosystem.

Stephen Muers, chief executive of Big Society Capital said: “The scale of investment needed to tackle significant social issues in the UK is many times what is currently available. This report points to ways in which catalytic capital can be part of the solution: we have increasing examples from the UK and globally of using capital in a smart way that catalyses many times that in investment and impact”

Identifying market gaps

The Change Coefficient has engaged over 70 different stakeholders on the topic of catalytic capital both from a supply and demand perspective. They also conducted an in-depth literature review of both UK and international examples of catalytic capital at work. The report also showcases a number of different case studies that outline the different approaches that catalytic capital can take both from the perspective of social purpose organisations and impact funds. The report
will be a useful resource for those that are keen to learn more about the usages of catalytic capital.

The report identified a potential gap in the provision of catalytic capital directly into social enterprises of £189m to £480m annually. While such estimates carry a large margin of error given gaps in the dataset, the scale of the gap highlights the potential of this form of capital.

Growing the market

More can and should be done to further grow the use of catalytic capital in the UK. The scale of the challenge and the opportunity is very large and there is a significant opportunity for other funders and foundations to attract more funds to their respective causes and further grow this important investment segment.

This report outlines several recommendations on how to further grow the market, including:

Market-building activities around raising awareness of catalytic capital

Building the evidence base around the economic and social benefits of catalytic capital in order to act as a powerful tool in building the business case for funding catalytic capital here in the UK

Seb Elsworth, chief executive of Access – the Foundation for Social Investment said: “The report powerfully shows the scale of unmet demand for catalytic capital in the UK, with the potential to leverage vast sums to drive impact. Access has been contributing blended finance to meet part of this need for the last 8 years but no one source will be able to meet this need. Foundations and government will need to use all tools at our collective disposal to rise to this opportunity”.

Broadening the conversation

We hope that this is the beginning of a nuanced conversation about the role catalytic capital can play and the different roles foundations, social investors and other funders can play in building an efficient and vibrant ecosystem for catalytic capital here in the UK.

Carol Mack, chief executive of the ACF said: “ACF’s Social Impact Investors Group (SIIG) was pleased to be involved in this project. SIIG members all have a charitable or social mission and their own investible assets and the SIIG is keen to continue identifying ways to deploy and grow the supply of catalytic capital in the UK to support a wide range of social causes”

The insights and findings from the report will feed into work already taking place across the sector to:

Further grow the provision of catalytic investment structures such as blended finance funds
Encourage new audiences to enter the social investment space
Influence and inform decisions around the future role of dormant assets funding.
Act as a valuable resource for different audiences, including charitable foundations, to understand the role their capital can play in this space.

Tej Dhami, managing director of The Change Coefficient said: “Catalytic capital supports the efficient allocation of funding for long-term social impact. The provision of patient, risk-tolerant, concessionary and or flexible investment enables social enterprises to level up and deliver sustainable social impact. We hope this report can create a common framework for catalytic capital in the UK from which we can all collectively build”

You can read the report in full here and find ways in which you can contribute to the discussion and insights that it has generated. You can join in on the discussions and contribute with your views on the report and the topic using the hashtag #UKCatalyticCapital.

Join members of the Social Impact Investors Group and other providers of catalytic capital at an event on 6 June to discuss the report and explore the unique role that foundations play in deepening the impact of impact investments and find out more about emerging catalytic capital approaches from a range of perspectives.