Private foundations are best known for their grantmaking. However, each year, foundations nationwide invest hundreds of billions, often with the simple goal of maximizing financial returns to fund future grants. While many foundations screen their endowment investments based on environmental, social, and governance factors, only a few optimize their investment strategies for mission impact. 

At the same time, many community development nonprofits face challenges in securing the capital needed to carry out their core missions and, importantly, to test new ideas and strategies. This “tension” between philanthropies seeking economic returns even while nonprofits face capital gaps—especially for the kind of flexible capital that is needed to innovate—is nothing new. However, with IRS rules requiring an annual minimum of five-percent charitable payout often treated as a ceiling, and rising costs, more foundations are seeking ways to maximize the use of their balance sheet to achieve greater social impact.

There is, however, a way for nonprofits to gain greater access to “flexible” capital and for foundations to generate a financial return. And this is not just through program-related investments or endowment-based mission-related investments.

Financial guarantees are a powerful tool, yet they are underutilized in the social sector. Guarantees can support nonprofits’ capital needs while helping foundations advance both their social and fiscal objectives. Since December 2019, the nearly $50 million Community Investment Guarantee Pool has been testing guarantees in partnership with 16 philanthropic and other mission-driven investors. It’s still early days, but in the past three years, we’ve learned more about how guarantees can benefit both mission-driven investors and community groups.

First, it is important to clarify what guarantees are. At the most basic level, a guarantee is akin to automobile insurance. Drivers generally do not expect to get into accidents. However, if something unexpected does happen, the insured driver will not need to bear the full financial cost. 

Read the full article about guarantees in grantmaking by Jim Baek, David Newsome and Jane Reisman at Nonprofit Quarterly.