Contents

This document is intended to provide valuable context for a first-time user of the IFI Tool. We encourage you to read the full text. However, returning users may choose to jump directly to the grid of examples by clicking here. 

• Setting the stage
• Selecting IFIs and the key variables to test
• Examples of IFIs and potential variables
• Analyzing the output from the IFI Tool

Setting the stage

This guidance document provides an illustrative example of how an allocator of philanthropic capital (the “investor”) might use the IFI Tool to test different assumptions about impact-first investment opportunities. The investor could be an individual (e.g., an asset manager) or a group of people (e.g., an investment committee). They could be managing any category of philanthropic assets—including funding set aside for grants or charitable donations, money held in donor-advised funds (DAFs), family office resources, foundation endowments, and other vehicles.

Like many philanthropic investors, the hypothetical investor in this case has historically divided their capital into two buckets: a) Philanthropic giving, deployed through grants or charitable donations with no expectation of repayment; and b) Market-rate investments, deployed with the goal of achieving risk-adjusted market-rate returns, preserving or growing capital for future use.

Now, the investor is considering an approach that incorporates impact-first investments. IFIs are deployments of capital to initiatives that prioritize impact while simultaneously generating financial returns, albeit often with lower returns than traditional investments. Impact-first investments may at times project market-rate returns, but they generate the greatest level of impact when deploying capital to initiatives that are unable to attract traditional investors; thus, they typically anticipate lower expected returns or greater risk than market-rate.

The power of IFIs comes from several reinforcing mechanisms, including redeployment (or recycling) of capital, allowing the same dollars to generate impact repeatedly over time; catalytic effects, where relatively small amounts of impact-first capital unlock larger pools of private or public funding; and aligned financial incentives for investees and investors to pursue sustainable outcomes.

The IFI Tool helps philanthropic capital allocators model when and how these dynamics can increase total impact for a pool of assets, relative to a strategy limited to grants and market-rate investments alone.

Selecting IFIs and the key variables to test

The IFI Tool produces a model based on a single input value for the expected financial returns, durations, and impact relative to a grant of a hypothetical IFI.  If users are considering a mix of investments in multiple IFIs over the period analyzed in the model, those input values should reflect the weighted average across those multiple IFIs.  

Also, as noted below, the IFI Tool requires the user to make subjective judgments when estimating the impact relative to a grant for any IFI or category of IFIs (Step 5). Unlike other aspects of an investment, there is no “right” answer here, and one cannot calculate a precise figure using only information from an investee. Depending on their assumptions, investors will draw different conclusions based on the same information.  

The discussion below describes assumptions for starting-point inputs into the Tool for a key variable: Impact Relative to Philanthropic Giving (Step 5 in the Tool). Users should interpret “impact relative to philanthropic giving” as an estimate of the direct impact created by the investment structure and associated incentives relative to a comparable grant. When comparing a grant to an IFI targeting the same objective, one might consider at least four factors: 

• Factor 1: Capital available to the recipient (favors grants): Because investors have a claim on returns, IFIs reduce the share of funds that the recipient of the investment can use to create social value, compared to a no-strings-attached grant to that recipient.
• Factor 2: Risk aversion incentive (favors grants): Investment structures may create incentives for recipients to be more cautious or more extractive than they would with grant funding, potentially forgoing impact from activities with a perceived higher risk to their ability to repay investors.
• Factor 3: Financial incentive alignment (favors IFIs): Conversely, investment structures can align financial incentives in ways that promote discipline, accountability, and long-term financial sustainability for the recipient. By linking capital to repayment or performance, IFIs can encourage recipients to generate their impact through sustainable business models rather than depending on grant funding alone.
• Factor 4: Catalytic leverage (favors IFIs): IFIs can de-risk opportunities and potentially attract commercial investors who otherwise might not participate—unlocking commercial capital to scale beyond what is possible with grants alone.

We encourage users not to get too caught up in the selection of a single number for this input to the Tool. The reason a numerical value is necessary is to generate an “apples-to-apples” comparison through impact units. The model’s value lies in exploring how a range of assumptions affects portfolio impact over time—and IFIs may be attractive across a wide range of scenarios. As shown below in three examples of IFIs, investors may bring different assumptions to their assessment of the four factors.

As general guidance, here are two scenarios that users could consider—among many others.

• Users who anticipate that their selected IFIs will lead to constraints on recipients’ operating funds and/or risk aversion incentives in ways that outweigh the financial incentive alignment and catalytic leverage benefits may wish to select a number toward the left side of the IFI Tool slider bar.
• Users who anticipate that their selected IFIs will create incentives for efficiency and financial discipline and catalyze additional capital for recipients in ways that match or outweigh any potential downside incentives or constraints on recipients’ operating funds may wish to select a number toward the right side of the IFI Tool slider bar.

An important note is that only the direct impact should be factored into this figure; the IFI Tool already models the additional impact generated through capital redeployment (i.e., the fact that IFIs return capital to the investor that can be reinvested for additional impact), so users should not “double-count” these recycling effects when selecting a percentage value for the impact of IFIs relative to a grant. 

In the real world beyond the Tool’s illustrative model, a “right tool, right problem” approach is the best practice framework for considering impact-first investments. For certain social problems, an investment may be the only way to finance solutions for which no realistic comparable grant equivalent exists. Conversely, in some circumstances, only a grant strategy makes sense, as there is no investible solution to which IFIs could be deployed. In such cases, IFIs are not directly comparable to grants.  

However, for the purposes of its simple model, the Tool is designed to explore different hypothetical scenarios for which grants and IFIs can be directly compared. Users should start by assuming both that investible opportunities do exist and that a comparable grant-based strategy could be a viable alternative for addressing the same issue. The Tool can then be used to explore the question: if there are impact-first investment opportunities, then what is the effect of moving capital into those opportunities when compared to a “base case” of a grants-only strategy?  

Examples of IFIs with potential variables

The table below contains anonymized examples of IFIs with guidance on their duration, expected financial return, and ways to think about impact relative to philanthropic giving, grouped by category. The table also includes more subjective guidance—using the criteria outlined above—for how one might estimate the impact relative to a grant for an IFI in that category. 

These broad ranges for each category of IFIs are not attributable to any specific IFI example, and there is no scientific method for calculating the impact relative to a grant. Rather, this guidance represents one possible set of conclusions; the numbers you input into the model for Steps 4 and 5 should reflect the factors driving your specific assumptions about IFIs. 

CATEGORY A: LOAN/CREDIT FUNDS

Makes loans or lines of credit available at below-market rates; primarily intended as bridge financing or to “go where other loans don’t” (e.g., may build credit history for future financing but is likely not part of a funding round).

How to think about impact relative to philanthropic giving: A comparable philanthropic intervention would be a no-strings-attached grant providing capital to address a similar social impact objective. Compared to an investment, a grant without repayment obligations would increase the net capital available and make a larger share of funds available to recipients for direct impact; also, a grant would tend to reduce risk-aversion by recipients in how capital is deployed. These considerations for factors 1 and 2 may vary considerably depending on the terms of the loans financed by the IFI. On the other hand, loan structures can also create financial incentive alignment that promotes discipline, accountability, and long-term sustainability (Factor 3). While catalytic leverage is typically more limited in this category (Factor 4), these incentive effects—such as more efficient capital deployment and stronger financial sustainability within the recipient organization or investment structure – can generate meaningful incremental value. Users may choose to weigh factors 1 and 2 more heavily than factors 3 and 4 to estimate relative impact to philanthropic giving.

* This table lists expected gross rates of return. Inputs to the IFI Tool should net out fees from the rate of return. 

CATEGORY B: REAL ASSET AND INFRASTRUCTURE FUNDS

Buys/owns real assets as part of their process and/or provides financial backing for real asset acquisition.

How to think about impact relative to philanthropic giving: A comparable philanthropic intervention would be a grant used to fund the acquisition or development of real estate assets. Compared to an investment, a grant without repayment obligations would increase the net capital available and make a larger share of funds available to recipients for direct impact; also, a grant would tend to reduce risk aversion by recipients in how capital is deployed (Factors 1 and 2). Investment structures create financial incentive alignment that supports long-term asset quality, maintenance, and sustainability—for example, by tying repayment to asset performance and ongoing use (Factor 3). In most cases, these structures catalyze additional investment by demonstrating viable models for asset ownership, affordability, and stewardship that can be replicated or scaled (Factor 4). Depending on the user’s assumptions for the above-noted considerations, such as an assumption of greater catalytic effects of crowding in additional funding, the user could assign a higher relative weight to factors 3 and 4 for impact-first investments in real asset strategies, compared with the case of loan/credit funds.

* This table lists expected gross rates of return. Inputs to the IFI Tool should net out fees from the rate of return. 

CATEGORY C: EQUITY AND HYBRID SECURITIES FUNDS

Goes beyond loans to include equity investments, mezzanine capital, debt with warrants, and/or other types of higher risk, “flexible capital”; primarily intended to drive growth and fund the riskiest stages of enterprise growth and/or transition to an impact-first enterprise.

How to think about impact relative to philanthropic giving: A comparable philanthropic intervention would be a grant used to fund the same underlying projects, maximizing direct financial benefit (Factors 1 and 2) but without an IFI’s benefits of influencing broader investment dynamics. Equity-based investment structures create strong financial incentive alignment that supports disciplined deployment and the development of scalable, investable models (Factor 3). Most importantly, these structures represent the highest-risk layer of impact-first capital, accelerating growth in impact-driven startups while aligning the incentives for both the social entrepreneur and the investor. They generate significant catalytic leverage by absorbing risk or offering concessional terms that attract additional capital and enable projects or markets that would not otherwise be financed (Factor 4).

* This table lists expected gross rates of return. Inputs to the IFI Tool should net out fees from the rate of return.

Analyzing the output from the IFI Tool

The examples in the above table can help users select inputs for the IFI Tool. The output screen will show the comparison between the base case and the new case.

Change in Total Discounted Impact (left-hand chart)

The chart on the left shows the Change in Total Discounted Impact, measured in grant-equivalent dollars. The tool assumes that one dollar of grants equals one unit of impact, allowing impact from different sources to be compared and aggregated into a single metric.

In the Base Case, all impact is generated through grants distributed over time. In the New Case, total discounted impact reflects two sources: a) the discounted impact of grants, and b) the discounted impact generated directly by IFIs.

Change in Discounted Philanthropic Assets Value (right-hand chart)

The chart on the right shows the Change in Discounted Philanthropic Assets Value, which represents the discounted dollar value of the portfolio at the end of the time horizon. This metric matters because philanthropic capital is valuable not only for the impact it generates along the way, but also for the future impact it can enable.

Change in Total Impact (with asset liquidation at the time horizon)

The final metric shown below the charts—Change in Total Impact (with asset liquidation at time horizon)—combines the two sources of impact shown above into a single, comprehensive measure of long-term impact.

To do this, the tool assumes that remaining philanthropic assets at the end of the time horizon are liquidated and distributed as grants, converting financial value into impact units on a one-to-one basis. This allows the tool to express all impact—both impact generated over time and impact enabled in the future—in a single metric.

Interpreting the Results

The output illustrates a core insight of impact-first investing. A grants-only strategy maximizes immediate impact but permanently deploys capital. A financial-first strategy preserves and grows capital but generates no direct impact. Impact-first investing sits between these two approaches, generating meaningful impact while preserving capital that can continue working over time. Although impact-first investing introduces a “return haircut” relative to purely financial investments, the direct impact generated by IFIs—combined with the retention of capital—can substantially increase total long-term impact when the investments are well designed and appropriately selected.

Importantly, these results depend on the assumptions entered into the tool. Different expectations around returns, impact relative to philanthropic giving, or investment performance can lead to smaller gains—or declines—in total impact. The IFI Tool is designed not to prescribe a single answer, but to help allocators of philanthropic capital test assumptions, explore trade-offs, and make more informed decisions about when and how impact-first investing can meaningfully amplify impact.

Additional variables to consider and potentially adjust

In addition to the assumptions above, users can explore how changes to other variables affect long-term impact and financial outcomes using the adjustment panel in the IFI Tool. Two variables in particular can meaningfully influence results: the duration of IFIs and the discount rate applied to future impact.

The IFI Tool uses default assumptions of an eight-year duration and a zero percent net discount rate. These assumptions may be reasonable in some contexts but may not reflect the characteristics or preferences of a given investor’s actual portfolio. Users are encouraged to adjust these inputs to better align with their own expectations and priorities:

• Duration of IFIs: This variable represents the number of years until capital invested in IFIs is returned and can be redeployed for additional impact. The Tool’s default assumption of eight years reflects a simplified, blended estimate across different IFI structures. In practice, some IFIs may return capital more quickly, while others may remain deployed for longer periods. Adjusting the duration affects both the timing and magnitude of capital redeployment and, in turn, total cumulative impact over the time horizon.
• Discount Rate: The discount rate (or social discount rate) reflects how users value impact achieved in the future relative to impact achieved today. A higher discount rate places greater weight on near-term impact, while a lower rate places more value on long-term outcomes. The IFI Tool starts with the discount rate set to 0%. If the user opts to toggle on the discount rate in the IFI Tool, it defaults to a social discount rate of 3%, roughly matching long-term U.S. inflation—which results in a net discount rate of zero. This approach is effectively neutral with respect to impact timing, adjusting only for rising costs over time. It also assumes the inflation-adjusted impact of capital remains constant. Users who wish to prioritize immediacy, account for uncertainty, or reflect different views on intertemporal trade-offs may choose to apply a higher or lower discount rate.

Additional detail on these variables and their interpretation is provided in the Methodology section.

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