Additionality along the Continuum of Capital

Launching new research to show capital providers’ additionality     

Additionality along the Continuum of Capital

Capital gaps exist because markets have gaps. Alarming disparities persist between housing need and provision, food poverty, and lack of accessible healthcare services, revealing that public institutions' interventions are not sufficient to fill these market gaps. While many impact investors finance impact projects that already secure market-rate returns, significant capital gaps remain in addressing investment opportunities that deliver impact that is new and unproven, sub-scale or entails more challenging risk-return profiles.

Catalytic capital is needed to address these gaps and ensure that impact investing pushes further to fund solutions that can build a more equitable and sustainable future. Catalytic capital providers have been leading the way in leveraging a range of innovative financial strategies and mechanisms to achieve impact that otherwise would not be achieved, thereby adding an essential layer of additionality to their investments.

Building on two years of work on catalytic capital, we have seen a growing consensus on its definition and main features, yet some ambiguity on the roles it can play remains. Now, we’re following up with a new research project to showcase how capital providers can be additional along the continuum with the capital they deploy. Following up on our whitepaper, Catalysing Impact, this new initiative goes a step further to explain how investors structure their financial support to address gaps in the market and generate additional impact.



(1) Showcase different capital providers operating along the continuum and playing a catalytic role

(2) provide examples of different financial mechanisms and the type of additional impact generated,

(3) clarify how the risk/impact/financial return expectations of different capital providers play a catalytic role.

We hope that an increased understanding about the catalytic role that different capital providers can play, concrete examples of different financing mechanisms and the impact and the return that can be expected will motivate different capital providers with an impact intentionality to do more.

Topics covered

The research will cover four different investment approaches: INGOs deploying repayable finance, blended finance, venture builders and impact VCs and outcome-based mechanisms.

The chosen topics focus on key financial mechanisms and strategies that were selected due to the additional impact they can generate, as well as their relevance to fill existing gaps. Furthermore, three of the four topics are among key developments in the impact ecosystem from 2023 and areas for action in 2024, as featured in our recent article.

They strike a balance of remaining innovative, as they are still new for most capital providers, while leveraging the extensive knowledge, experience and learnings of those practitioners who have been active in this field for more than a decade. These topics also offer a range of perspectives from different capital providers, underscoring how a collaborative approach can help address significant gaps across the financial spectrum.


How are these approaches additional?

Repayable finance strengthens the capacity of grantees in ways that traditional grants cannot achieve. With flexible terms, impact enterprises can establish sustainable business models and attract follow-on funding, showcasing the multifaceted additional benefits of this approach. Save the Children illustrates how INGOs can blend traditional funding with innovative methods. Its new Save the Children Global Ventures fund will provide flexible financing, including loans and equity investments, ranging from $100,000 to $1 million, for both non-profit and for-profit organisations.

Blended finance delivers additional impact through the mobilisation of commercial finance that would otherwise not be forthcoming, providing impact enterprises with further capital to operate and generate further impact. The FMO and MacArthur case exemplifies this approach, building one of the largest blended finance funds launched in the market to date.  With a total fund size of $1.11 billion, they secured commitments purely from an institutional investor pool.

Venture Builders and Impact VC focusing on early-stage impact ventures provide additional value by addressing the financial gap inherent in early-stage businesses while mitigating both impact and financial risks. An example of this is the maze x program launched by maze impact, an early-stage funding program designed for impact-driven newly-founded teams to enhance the execution capacity after securing their first round of funding.

Lastly, outcome-based mechanisms, such as impact bonds, allow for flexible funding and tailored financial arrangements to fuel innovative social services while addressing gaps in public financing. This approach is demonstrated in the Refugee Impact Bond, a Development Impact Bond developed by KOIS with initial grant support from Convergence. It offers multi-year funding, freeing the program from annual grant cycles, supporting the delivery partner to innovate and adapt to changing contexts, and mitigating donor risk through payments tied to rigorous independent outcome evaluations.


What’s coming in 2024

For each approach we will publish an overview and podcast, featuring active Impact Europe members and highlighting materials for investors who want to learn more.  

Overviews will take the form of short articles and include the topic's relevance in the impact investing sector (why does it matter and why now?), identify which key actors are active, clarify their position in terms of financial returns expectations, and provide technical insights on how they work in practice.

The overviews will be supported by podcasts that showcase case studies, exemplifying how to be additional with each chosen financial mechanism. Episodes will go live as the second season of Focus on Impact subscribe on Spotify, or wherever you get your podcasts, to ensure you don’t miss an update.


The bottom line

Unfortunately, numerous opportunities to deliver much-needed impact fail to attract investment from many impact investors. Lack of knowledge, risk-aversion or financial return constraints may be causes of such reluctance. By launching this research, we take opportunity to illustrate how capital providers can be additional through different financial mechanisms and strategies while keeping their risk-appetite and investment thesis aligned with those of their stakeholders.