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Philanthropic Capital

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A type of social investment used by foundations and philanthropists who want to create social benefits but who don’t expect a financial return

What does it mean?

Philanthropic capital is a broad term which describes capital that has no expectation of any financial return. It can, therefore, be used strategically in ways that can enable financial structures to be created (e.g. first-loss tranches) or to leverage in other funds (e.g. using financial guarantees). (See glossary of terms)

Who might use it?

Foundations and philanthropists who provide finance to increase the overall level of investment and innovation in civil society. Philanthropic capital aims to achieve systematic change in the social investment market.

Such capital, for example, can act as a financial guarantee to leverage in more funds from both within and outside the social sector as it can reduce the risk (perceived or actual) or act as a “signal” to encourage other investors. For example, if it is part of a social investment fund, it may entice investment from other investors (including commercial funds) due to the signalling and risk mitigation effect, leading to more finance for the overall market.

This type of investment may also encourage innovation in the sector, bringing about charitable bonds, social impact bonds and high risk (but high yield) finance for high-impact organisations. Without this philanthropic capital, many social investment funds would be unable to make some investments to innovative organisations because, even for them, the investment would be too risky. Innovation is high risk, and philanthropic capital enables new social investment products to be created.

Who provides it?

  • Deutsche Bank’s Impact Investment Fund I seeks to provide finance to social enterprises via intermediaries with the aim of generating both positive social impact and a financial return, as well as seeking to play a role in encouraging and developing the social finance market.
  • Esmée Fairbairn Foundation (through its Finance Fund) provides philanthropic capital to social investment funds to encourage growth and innovation in the social investment sector.
  • Tudor Trust provides philanthropic capital to social investment funds, especially those that invest in community groups.

Case study - CAF Venturesome’s Social Impact Fund

CAF Venturesome’s Social Impact Fund invests in small and medium sized charitable organisations when they have a low risk need for finance (e.g. bridging loans to grants). The fund is made up of loans (“Impact Loans”), outright donations (“Gift Capital”) and/or liquidity (“Liquidity Facility”).

  • An Impact Loan is a contribution to the Fund over three or five years.
  • Gift Capital is a permanent contribution to the Fund. There is no expectation that it will be returned.
  • The Liquidity Facility is a contribution to the Fund over the duration of the Fund’s life.

Gift Capital investors are subordinate to Impact Loan investors. Any initial losses will be apportioned to these investors, therefore, this is the “first-loss tranche”. Gift capital reduces the risk for other investors, which enabled CAF Venturesome to attract more investment.

The fund is targeting a capital structure of 4:1 Impact Loan : Gift Capital to de-risk the fund for investors. The Social Impact Fund was launched in June 2011 and raised £3.4m by six months, in addition to £1m of Gift Capital.

Page last edited Oct 22, 2015

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