Inside Philanthropy

A blog on philanthropy and nonprofit news and issues. A publication of Philanthropy Journal.

August 6, 2007

Nonprofits need investment capital

Foundations and government need to help make investment capital more accessible to nonprofits, which in turn need to better equip themselves to secure that capital.

Those are the conclusions of experts convened by Johns Hopkins University to talk about a study last year by researchers there that found the lack of investment capital posed a critical challenge for nonprofits.

The follow-up talk reinforced the study’s finding that nonprofits find it tough to get access to the investment capital they urgently need.

While some nonprofits can get some capital, it mainly is for “hard” purposes, the experts say.

And while some capital providers are offering innovative ways to make capital available to nonprofits, much work remains, they say.

“Clearly, with nonprofits emphasizing that they cannot access sufficient investment capital, and providers indicating that capital is available and financial instruments exist that can meet nonprofit needs, a major disconnect exists between these groups,” the Hopkins researchers say.

They conclude that nonprofits need to better understand capital resources, investing, debt and business planning, while capital providers need to better understand nonprofits and create tools “more appropriate” to assessing nonprofit risk.

And foundations in particular must “be better educated about nonprofits’ capital needs,” the researchers say.

“As foundations generally expect more than what they fund and fail to help nonprofits understand their economic models, they inadvertently set up their grantees for failure,” they say.

Foundations also should develop a range of financial instruments that extend beyond grants to include products like loans and loan guarantees, or even offer below-market-rate loans through “foundation banks.”

If foundations devoted only 1 percent of their total assets to such an enterprise, the researchers say, it could add nearly $5 billion in investment capital to the charitable marketplace.

Government also needs to step up, developing new tax credits to spur capital providers to invest in nonprofits, while more “intermediaries” also are needed to connect potential sources of investment capital to nonprofits needing capital.

Despite some promising innovations, the charitable marketplace is limited by its dependence on traditional grantmaking.

By better understanding how investment capital works and the critical role it can play in how charities do business, and working to make capital more available and accessible in the charitable marketplace, foundations, capital providers, nonprofits, government and intermediaries can help that marketplace more effectively address urgent social needs.


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