In the realm of impact investing – making investments to simultaneously achieve financial returns and contribute to the greater good – blended finance is emerging as a popular strategy. In 2024, the Global Impact Investing Network (GIIN) found that 43% of surveyed impact investors said they had participated in a blended finance deal since 2021, and 24% said they planned to in the future. This article breaks down the basics UHNWIs should know about blended finance and its essential ingredient: catalytic capital.

What is catalytic capital?

Catalytic capital is seed money for projects that help society. It is patient, flexible, and accepts high risk. Expected returns are usually modest; sometimes investors aim just to keep their money’s value. As long as some return is expected, it counts as impact investing. If no return is expected, however, then it qualifies as pure philanthropy.

Catalytic capital takes many forms such as low-cost loans and first-loss equity. The goal is to “set the stage” for socially oriented projects in areas like clean energy or healthcare. This early funding helps attract other investors later. For example, when a UHNWI gives a low-cost loan to a social enterprise, the loan might make the enterprise more attractive to commercial investors.

What is blended finance?

Blended finance happens when other investors add money to projects that have already received catalytic capital. These later-stage investors typically want greater returns. They feel safer investing because catalytic capital has taken on the biggest risks associated with a new business.

In impact investing, blended finance parallels the venture capital funding model. Later-stage impact investors see that early money has reduced risk, so they are willing to back an impactful project. This approach helps scale impact in areas like renewable energy and affordable housing, as larger amounts of capital flow in. For example, a development bank might give a low-cost loan for a solar project. This makes it attractive for UHNWIs who want greater financial returns from the socially impactful venture.

Example scenarios

Catalytic capital deals do not always lead to blended finance. But blended finance always needs catalytic capital first. Here are two hypothetical examples:

Catalytic capital example: a UHNWI gives a US$1 million low-interest loan to a microfinance startup in Africa. The startup uses this money for technology upgrades and to prove that the business model works. Banks then provide US$5 million in commercial loans.

Blended finance example: a development bank gives a US$5 million low-cost loan to a renewable energy fund in Southeast Asia. The fund builds wind farms. Next, a UHNWI expecting competitive returns invests US$3 million in equity.  Ultimately, the project brings renewable power to thousands of homes.

Tracking performance with the Altoo Wealth Platform

According to the GIIN 2024 report, blended finance is more popular among private debt-focused impact investors. 63% of such investors had participated in blended finance as opposed to 39% of private equity-focused ones. 

Whether blended finance takes the form of debt or private equity – or any other asset class –  UHNWIs can track performance seamlessly with the Altoo Wealth Platform.

The platform automatically gathers data from many sources across diverse portfolios. It then analyses and displays this information clearly in easy-to read dashboards, with advanced tools for measuring returns against goals (such as 2% for a catalytic loan or 10% for a blended finance fund). Results automatically appear in easy-to-read dashboards to give wealth owners a complete picture of how their money is growing.

Operationally, the platform frees ultra-wealthy families and their trusted advisers from tedious manual workflows associated with tracking impact investments. This way, they can focus on the human sides of impact investing, i.e. defining what social returns look like and pursuing the relationships and community building that make their investments meaningful to society as a whole.

Takeaway

Catalytic capital and blended finance give UHNWIs important ways to create change while earning returns. Whether starting projects with loans or scaling them through structured equity deals, these strategies align wealth with purpose.

Ready to unlock the potential of these increasingly popular forms of impact investing? Request a demo of our platform today. See how we can help you drive impact with precision. Contact us at hello@altoo.io

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