Introduction

Impact investing cohered as a practice in the mid-2000s, based on the principle that capital could generate positive social and environmental impact. Two decades later, leaders are questioning whether the field is meeting its own goals, as sufficient capital is still not reaching those who need it most. The industry largely operates using return expectations inherited from traditional finance; as of 2025, 84% of impact investors target market-rate returns. In response, a community of ‘impact-first’ investors has emerged to re-centre the sector on social and environmental outcomes.

Context

Social enterprises often fall into a persistent early-stage funding gap known as the ‘Valley of Death’, where they require fit-for-purpose capital to move from early-stage to growth-stage. Impact-first investing prioritises impact over financial return. However, these funds exist within a financial system organised around market-rate returns, creating a structural misalignment between risk, return, and impact. This paper argues that closing the fund-level subsidy gap is a high-value use of philanthropic capital to address these shortfalls.

Methods

Eight impact-first investment organisations conducted a collaborative cost study representing a combined 170 years of institutional experience. The participating funds represent $197.2M in assets under management (AUM) deployed across 362 deals, with ticket sizes ranging from $7K to $4M, averaging $571K. Five were debt funds and three were equity. To benchmark against traditional finance, the study used a comparison dataset of 79 private debt and venture capital funds with $10M–$100M AUM, assuming a 2% management fee and full deployment over four to five years.

Core insights

Impact-first funds are efficient. The study found that impact-first funds are operationally competitive. They completed an average of 10.5 deals per year, compared to 6.4 deals for traditional benchmark funds. Furthermore, impact-first funds averaged approximately $80,000 per deal to close, whereas the traditional benchmark sample averaged $125,000 per deal. Statistically, no relationship was observed between deal size and cost per deal, meaning it costs a comparable amount to deliver a small impact-first deal as it does one in the hundreds of thousands of dollars.

The Valley of Death is a “rational decision”. The real difference emerges in the cost per dollar deployed. It costs impact-first funds an average of $0.21 to deploy $1, compared to approximately $0.08 for traditional funds. This ‘premium for inclusion’ of roughly 13 cents on the dollar reflects the cost of carrying capital, support, and risk to excluded communities. From a traditional fiduciary perspective, avoiding these smaller, high-touch investments is rational, explaining why the ‘Valley of Death’ persists at the enterprise level.

Market-making subsidy is a force multiplier. Impact-first funds require ‘non-commercial’ capital, such as grants or first-loss capital, which often comprises half or more of their AUM. This subsidy is not a patch for weak performance but a necessary ingredient for building inclusive markets. Philanthropic capital in an impact-first fund can multiply its effect by de-risking enterprises and recycling capital, unlocking multiples of its own value via repayable investment in early-stage social enterprises.

Case studies illustrating the multiplier effect. The report highlights three enterprises: Jibu, which grew into a pan-African safe water network with an impact multiplier of 47x; Clínicas del Azúcar, a diabetes clinic network in Mexico with a 7x multiplier; and Husk Power Systems, which evolved from a biomass experiment into a cross-continental utility with an 18x multiplier. In these cases, catalytic capital enabled enterprises to prove new models and enter high-risk markets that traditional finance would have avoided or priced beyond what customers could bear.

Return concessions are the cost of inclusion. Impact-first debt funds priced loans approximately 4–20 percentage points below prevailing market lending rates for small and medium enterprises (SMEs). This pricing gap is the financial expression of enabling access to capital. These funds generally met or exceeded their investor return expectations, which typically ranged from 2–5% for senior debt, compared to 8–10% for market-rate debt benchmarks.

Conclusion

Impact-first funds correct for market failure and convert overlooked opportunities into investable ones. What appears to be inefficiency is actually the cost of delivering impact where markets fail. Closing the subsidy gap at the fund level is one of the most direct ways to address the capital gaps social enterprises experience. Philanthropic capital should be used to resource the intensive work ‘beneath the surface’, including patient diligence, custom structuring, and enterprise support, which are integral to delivering durable outcomes.