- Catalytic capital is a cost curve bender in impact investing.
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Like so many 21st century buzzwords, “catalytic capital” sounds like it was birthed in a perfectly curated tweetstorm. (As far as I know, it wasn’t.) It’s an alliterative investment term for “taking one for the team” by using debt, equity, guarantees, and other investments that accept disproportionate risk and/or below-market-rate returns to clear the way for other investments to be made.
The term comes up a lot in impact investing because of the principle behind the “carbon cost curve”: in short, we’re not 100% powered by clean energy right now because the upfront costs needed to make a lot of those investments profitable are still pretty high.
That is set to change in the long term, especially with policy incentives. But in the meantime, putting (say) a wind farm in a coal-powered, emerging-market country is going to be expensive.
Impact investors may want to go in and make that investment, but there is almost no chance of turning a profit. An infusion of catalytic capital from philanthropy and/or development finance (which, when combined with private capital, is “blended finance”) or another investor cool with taking the hit can pave the way for a wave of impact investments.
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