Money Willing to Wait Ten Years Is the Scarcest Capital in the Market

Before a new shopping mall opens, which tenant does the leasing team most want to sign first?

Not the most profitable brand, but the anchor tenant: a large supermarket, a cinema or a department store. Anchors usually get better rents and terms, because once they sign, other brands dare to follow; without them, the mall may never get built at all.

The investment world has anchor tenants too. In impact investing, they are called catalytic capital.

"Catalytic" does not mean "first loss"

Impact investing means pursuing financial returns while writing down in advance the social or environmental outcomes you intend to bring about, and measuring them continuously. Catalytic capital is the part of it that is willing to go in first so that other money can follow.

When many people hear "catalytic," they think of "first loss": investors sitting in a subordinated position, absorbing losses first so others can invest with confidence. If that were the only definition, most families would simply close the door, and they would be right to.

But that is not the full definition. Under the framework of the MacArthur Foundation's Catalytic Capital Consortium, catalytic capital has four attributes, which can be arranged as a ladder from cheapest to most expensive:

• Patience: accepting lock-ups of ten years or more, with no demand for quarterly liquidity. What it costs is time.
• Flexibility: being willing to transact on non-standard terms such as small tickets, tranches or convertibles. What it costs is effort.
• Risk tolerance: being willing to back teams or markets without a track record. What it costs is judgment.
• Concessionary terms: accepting below-market returns, subordination or first loss. Only on this rung does it cost money.

First loss is just the most expensive form on the top rung. For Taiwanese families, the easiest and most underrated rungs are actually the first two: most money that must report performance to its investors regularly cannot wait ten years, while families, with their short decision chains, are naturally good at negotiating non-standard terms.

Giving up the interest, not the principal

Even on the most expensive rung, the concession can be designed very clearly.

In 2022 the World Bank issued a five-year, US$150 million Wildlife Conservation Bond, nicknamed the "Rhino Bond." The design was simple: the principal is repaid in full at maturity, but investors forgo five years of interest, which is instead invested in black rhino conservation in two protected areas in South Africa. At maturity, the Global Environment Facility (GEF) pays investors a success payment based on the actual growth of the rhino population: the more the rhinos grow, the more investors receive.

The bond spells out the concession precisely: what you give up is five years of interest; what you get is an outcome that can be counted; and the risk you bear is capped. Participants included not only asset managers but also private banking clients of Citi and Credit Suisse.

Consider a foundation example as well. In 2017 the Ford Foundation announced it would allocate up to US$1 billion of its endowment over ten years to mission-related investments in affordable housing in the United States and financial services in emerging markets. This money is not a grant. It expects financial returns and does not crowd out the annual grant budget; it is simply more willing than ordinary capital to wait, and to invest where the market has not yet proven itself.

Making sure those willing to go first don't lose out

The question catalytic capital hears most often is: "Why should those who go in first bear more?" Governments in various places answer by using incentives to make up that cost.

Singapore's approach is the most elegant. To obtain the 13O and 13U tax incentives, family offices must invest a certain share of their assets locally. Since 2023, capital committed to blended finance structures with substantive participation by Singapore financial institutions can be counted at a multiple: ordinary concessionary capital at 1.5 times and deeply concessionary capital at 2 times; grants that family offices give to such structures also count at 2 times toward local business spending. In other words, for a family willing to be the anchor tenant, one dollar can count as two.

The US New Markets Tax Credit has been in place since 2000: investors who put money into businesses in low-income communities through certified community development entities can offset federal income tax equal to 39% of their investment over seven years. Over more than two decades it has supported more than 7,000 projects, with banks and large corporations as most of the investors.

Hong Kong amended its rules this year to add carbon credits and emission allowances to the qualifying assets of family-owned investment holding vehicles, so that families investing in climate-related assets can also enjoy the existing tax concessions.

But incentives are not a cure-all. The United Kingdom introduced Social Investment Tax Relief in 2014, allowing investors in social enterprises to deduct 30% from their income tax; after nine years of low uptake, the government decided in 2023 not to extend it. The problem was not that the relief was too small, but that there were too few good deals, too few intermediaries, and investors did not know how to assess them. Incentives can lower costs, but they cannot substitute for an ecosystem.

The most worldly return: good deals

Besides incentives from governments, the market itself offers rewards.

A survey by Hong Kong's Sustainable Finance Initiative this August found that the biggest challenges Asia-Pacific family offices face in impact investing are quality deal flow and exits (26%), followed by finding credible co-investment partners (18%). Good deals are themselves a scarce resource, and families willing to be the first to say "yes" are often first in line for allocations. The first cheque buys not just a good feeling, but valuation, board seats, information rights and follow-on rights.

It is the same logic as the anchor tenant: whoever signs first gets the best spot.

You don't have to go it alone

One more thing is worth making clear: catalytic capital is rarely provided by a single party.

The best structures usually have each force contribute what it does best: banks bring distribution and structuring, foundations bring philanthropic capital willing to absorb losses, public funds bring policy signals and risk sharing, and corporates bring orders and industry validation. Families bring time, along with industry knowledge and networks that cannot be bought in the market.

Singapore's Asia Impact First Fund is one example: a US$20 million fund anchored by DBS with US$10 million, joined by several family offices, family foundations and corporate groups. A single family's ticket may be too small and its risk too concentrated; investing alongside other forces is what allows a family's time and flexibility to make a difference.

Taiwan already has the beginnings of this kind of collaboration. The Ministry of Environment's green growth fund and the National Science and Technology Council's smart robotics investment program both pair public funds with private co-investors to share early-stage risk. What is missing is more long-term capital willing to wait, and willing to say "yes" first.

The cheapest thing is time

Back to the shopping mall. The anchor tenant gets good terms not because it is more generous, but because it is willing to come first and to sign a long lease.

Impact investing is the same. In catalytic capital, the cheapest thing is time; the most expensive is loss. If you are willing to wait ten years, you are already among the scarcest capital in the market.

The author is an executive director of the Taiwan Impact Investing Association, a partner of Sustainable Impact Capital (SIC) and chairman of DoublePortion Capital.