Fees are the operational costs associated with managing money for any purpose—whether traditional investments, impact-first investments, or grants. They cover the people and infrastructure needed to find, evaluate, execute, and monitor opportunities. Costs may be internal (in-house staff) or external (outside managers)—whoever manages the relevant investments or programs. 

Fees typically differ across investment types: traditional investments benefit from standardized processes and scale, while impact-first investments and grants may carry additional costs for the specialized expertise required to evaluate the impact prospects of different opportunities and integrate that evaluation into decision-making and monitoring. 

Fees are the operational costs associated with managing money for any purpose—whether traditional investments, impact-first investments, or grants. They cover the people and infrastructure needed to find, evaluate, execute, and monitor opportunities. Costs may be internal (in-house staff) or external (outside managers)—whoever manages the relevant investments or programs. 

Fees typically differ across investment types: traditional investments benefit from standardized processes and scale, while impact-first investments and grants may carry additional costs for the specialized expertise required to evaluate the impact prospects of different opportunities and integrate that evaluation into decision-making and monitoring. 

This section focuses on relative direct impacts of grants vs IFIs only; redeployment effects (the fact that IFIs return capital to the investor that can be reinvested for additional impact) and deployment constraints (such as limited IFI funding opportunities available) are captured elsewhere in the model.

We recognize these are uncertain assumptions to make. Nonetheless, they are implicit for every philanthropic allocator—our aim is progress, not perfection.

Four Key Drivers of Relative Impact

1. Capital available to 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.
2. Incentive factors (favoring grants): Investment structures may create incentives for recipients to be more cautious than they would with grant funding, potentially forgoing impact from activities with a perceived higher risk to their ability to repay investors.
3. Incentive factors (favoring IFIs): Conversely, investment structures can create incentives for additional funder support and greater efficiency than would occur with a grant, by improving recipients’ financial discipline and program sustainability.
4. Catalytic leverage (favors IFIs): IFIs can de-risk opportunities and test commercial viability – unlocking commercial capital to scale beyond what is possible with grants alone.

Selecting a Value

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.

We encourage users not to get too caught up in a single number at this step in the Tool. 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.

The model timing works as follows: all allocations to grants and IFIs are made at the beginning of the year. All cash flows occur at the end of the year and are reinvested at the beginning of the following year. Social impact of IFIs and grants occur at the end of the year. This affects results through the social discount rate. These timing assumptions can lead to small deviations from anticipated intuitive results in edge cases.

Philanthropic assets (or philanthropic capital) refer to funds designated for charitable purposes, which may include both tax-exempt assets (such as those held by foundations) and taxable assets (such as those managed by family offices) – as long as they are committed to advancing philanthropic goals. Collectively, these assets might be known as one’s philanthropic portfolio.

If one wishes to adjust the social discount rate, they should assess three key drivers: changing program costs over time, time preference for impact now versus later, and future impact opportunities and impact risk (see the Methodology for more details on this).

The IFI Tool’s default discount rate is set at 3%, which is the simplified discount rate based only on historical inflation rates; this means that the default discount only adjusts for one of the three elements noted above: an estimate of changing program costs over time. 

Another way to describe this is impact relative to philanthropic giving: a user-input variable in the Tool that represents the percentage of the expected impact generated by an IFI versus the expected impact generated by comparable philanthropic giving.

Note that the redeployment effect of IFIs – the fact that capital is returned by IFIs and redistributed – is explicitly modeled in the IFI Tool, while the other forms of impact value creation generated by IFIs should be factored into this user-selected “Impact Relative to Philanthropic Giving” variable.

To view examples of how a user might think about estimating this figure, see the Investor Lens. 

As an example, if a $100 IFI made at the beginning of Year 3 has an expected rate of return of 5% and a duration of 4 years, the investment will yield $112.50 of cash at the beginning of Year 7. For more examples of IFI durations, visit the Investor Lens page.

The Tool uses “annual allocation IFIs” to refer to impact-first investments (IFIs) that are disbursed annually. This is particularly relevant in the context of a foundation, where there are pre-defined plans for annual giving.

Another way to describe this is impact relative to philanthropic giving: a user-input variable in the Tool that represents the percentage of the expected impact generated by an Annual IFI versus the expected impact generated by comparable philanthropic giving.

Note that the redeployment effect of Annual IFIs – the fact that capital is returned by IFIs and redistributed – is explicitly modeled in the Tool, while the other forms of impact value creation generated by IFIs should be factored into this user-selected “Impact Relative to Philanthropic Giving” variable.

To view examples of how a user might think about estimating this figure, see the Investor Lens. 

As an example, if a $100 IFI made at the beginning of Year 3 has an expected rate of return of 5% and a duration of 4 years, the investment will yield $112.50 of cash at the beginning of Year 7. For more examples of IFI durations, visit the Investor Lens page.