Through the use of guarantees, a type of credit-enhancement tool, impact investors can leverage relatively small amounts of capital into high-impact deals while addressing the real and perceived risks of impact investing, a report from the Global Impact Investing Network finds.
The report, Scaling the Use of Guarantees in U.S. Community Investing (58 pages, PDF), argues that for foundations with experience making impact investments, guarantees are especially well suited for generating more impact without necessarily requiring additional liquidity. Funded by the Kresge Foundation, the report highlights case studies of how unfunded and funded guarantees have been used in the housing, healthcare, and energy efficiency sectors to mitigate risks related to liquidity, unfamiliarity with the sector, and uncertain geographic markets, thereby stimulating private-sector investment.
The study also found that the use of guarantees for community investing has been concentrated in the affordable housing and community real estate sectors; that the median size of a guarantee is $2 million and that the median fund or project size is $20 million; and that the main providers of guarantees have been foundations. The benefit of guarantees, according to the study, is that they allow investors to gain experience in a new sector, can help prove the viability of a social impact business model, and facilitate access to capital at favorable terms for nonprofits. Challenges to using guarantees at scale, on the other hand, include the complexity of their structure; the difficulty of aligning expectations, including the long-term goals of each party to the transaction, the expected impact of the investment, and how it will be measured; a general lack of awareness of and misperceptions about guarantees; and the limited number of providers.
"The use of guarantees is not new in impact investing, but this valuable tool is extremely underutilized," said GIIN co-founder and CEO Amit Bouri. "Increased awareness of successful examples of investor collaboration through guarantees — and blended capital more broadly — could help spur much-needed, additional investment into solutions to pressing social and environmental problems. There is an enormous opportunity for different types of investors to collaborate to amplify impact."