Crisis breeds clarity — clarity of purpose, of mission, of ideological alignment and allyship. It reveals to us our weaknesses and our oversights; what threats exist and where the opportunities lie. The clarity that comes after a crisis is often a call to action, and never has the collective obligation to ensure the survival of the Jewish state been as clear to those living in the Diaspora as it is now. But survival doesn’t simply mean winning military battles. It means fortifying communities in Israel’s south and north in ways that don’t just repair damage but make them more resilient, so they can serve as engines of productivity and a bulwark against our adversaries in the future. Revitalizing and reinforcing these areas in more sustainable ways demands new ways of thinking about infrastructure and enterprise development as well as the methods for financing it. It will require something different than what’s been done before — it will require catalytic capital. 

Catalytic capital — or “blended finance,” as it is often called — can take different forms, but it typically involves investment from government and philanthropic sources that helps generate or secure greater amounts of capital flow from private sector institutions such as pension, insurance or sovereign wealth funds. These three layers (public, philanthropic and private) might have different risk-return profiles within the same funding platform or project, but each plays a vital role in getting it off the ground. 

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Public sector investment usually provides the first layer of funding in blended finance models, serving as a sign of regional expertise in the vetting process as well as the high likelihood of significant social or environmental benefit to merit taxpayer buy-in. Building on the government’s guarantees, philanthropic investors can serve as catalysts in several different ways. They can provide planning or “patient” capital that gives projects a needed runway to get off the ground and pursue additional investment. Philanthropic investors willing to accept greater risks in exchange for positive social outcomes can also provide a first loss cushion, which makes projects more attractive to other key investors. Whether one calls it “de-risking” the project by absorbing potential losses later in the lifecycle or “credit enhancing” the debt stack to make it more attractive, the difference is a semantic one and the net effect of the philanthropic capital layer is to make the project viable for institutional investors with lower risk appetites and higher return hurdles. But crowding in capital is only one function of a philanthropic funding layer.

Catalytic investment from philanthropic entities can also serve as a powerful source of leverage, sometimes unlocking ten or more times the amount of capital from other sources. Many small-business lending platforms that employ blended finance models utilize government and philanthropic investment to subsidize lending interest rates, which has the effect of moving banks to generate many times the initial amount of invested capital in credit or loans to clients they would otherwise not service due to size or rating. 

For instance, Ogen, Israel’s leading non-bank lender to low-income families and small businesses that are overlooked by traditional banks, relies heavily on equity from philanthropy for its various financing activities. Philanthropy provides a risk cushion for its lending portfolio, while the affordable loans that Ogen issues to small businesses (with special lending programs dedicated to the north, south and reservists) leverage philanthropic dollars at a rate anywhere from 3-to-1 to 14-to-1. The organization reports an annual default rate that is notably low at 2-3%. As Glenn Yago, founder of the Financial Innovations Lab at the Milken Institute puts it, “it’s not a risky bet to rebuild the area.” 

The new opportunities in Israel

Grants can only go so far, but catalytic capital can set off an investment chain reaction that is orders of magnitude greater, more sustainable and much broader in the scope of its social benefit. The platforms and funds now being developed in Israel by organizations focused on the rebuilding effort each have their own structure that calls for catalytic capital, though they share similar priorities (e.g. energy independence/renewability, agricultural sustainability, small business support and infrastructure security). 

In February, the Financial Innovations Lab released a report in conjunction with Apollo Global Management that delves into the details of a centralized funding platform for projects in the Western Negev. The Israel Forum for Impact Economy (IFIE), which supported the work by Milken, is designing a similar fund. 

“Philanthropists are going to give millions and millions of dollars to rehabilitate. The State is going to give millions and millions of dollars to rehabilitate. Why not work together to attract more capital, right?” Vanessa Kacherginsky, CEO of the IFIE, told me in a recent interview. “If you subsidize or de-risk investment, you could increase the pie.” 

Other NGOs providing blended finance investment opportunities include ReGrow, a fund for farmers in the Western Negev; Koret Israel Economic Development Fund, an emergency loan provider and small business lender; ReHome, a fund providing support services and home loans for displaced families; solar energy projects in the Tkuma region, and many more. 

Kacherginsky sees the current situation as an opportunity, one that empowers communities on the periphery: “This is the perfect storm that Israel needs to rebuild the economy in a different way.” 

Jewish philanthropists are behind the curve

Even though blended finance mechanisms seem to offer win-win opportunities for funders who support Israel, it remains to be seen whether American Jewish philanthropies will answer the call for capital; but if past is prologue, then the prospects are dim. 

While impact investing has been a growing sector in the U.S. economy for close to three decades, most Jewish foundations and federations still draw impenetrable distinctions between their grantmaking work and investments made with the endowment corpus — or as Michael Lustig describes it, “the endowment side is milk and the grantmaking side is fleishig.” Lustig, an adjunct professor of finance at NYU Stern and the Jewish world’s greatest impact investing evangelist, tells me he believes the resistance is a product of inertia. “It’s something that is not in the repertoire of these organizations even though it has a multiplicative effect,” he says. “If it ain’t broke, don’t fix it; meaning we’ve been doing things a certain way for so long, it’s worked, it’s great, we want to keep doing that. We’ll look at new types of things to fund, but within the same rubric that we’ve done in the past.” 

Jeff Schoenfeld, co-chair of the Jewish Federations of North America’s Israel Emergency Allocation Committee, raises the point that federation CIOs and endowment investment managers believe they have a fiduciary responsibility to maximize the returns of the corpus. “You are not sitting there with a fiduciary responsibility to ‘do good,’” he says, “so that investment committee has said there’s no role for impact investing or Israel-specific investing as part of our asset allocation.” 

Kacherginsky puts it another way: “It’s risk management. When you look at it from the endowment perspective.” 

Even if federation CIOs have a duty to donors not to take excessive risk — though one could argue that, considering the federation mission and the needs of the current moment, a higher perceived risk-return tradeoff is appropriate — that still leaves family foundations, family offices and donor advised funds (DAFs) as potential sources of catalytic capital. Schoenfeld estimates that more than 50% of the Jewish philanthropic assets placed in DAFs are sitting as cash instead of being put to use for a positive social purpose. 

The resistance by Jewish funders to embrace novel financial models seems at odds with our cultural reputation for monetary savvy. Perhaps it’s the shape-shifting nature of what it means to be catalytic that confuses investment officers and managers. After all, investments into blended finance structures can yield market rate returns, below market rate returns or merely a return of principle. They can satisfy a foundation’s 5% payout threshold, when made in accordance with program related investment (PRI) guidelines, or they can also be allocated from the corpus of an endowment, when returns meet or approach market rate. A grant that provides operational and planning support or technical assistance to get a project going while additional funds are raised would also be considered catalytic. It’s tough to know what catalytic capital even is because it can take on so many forms. 

A time for change

Although we can call it by different names and it can be different things, it’s clear that the one thing this type of investment demands is a perspective shift. Doug Stewart of the Max and Marjorie M. Fisher Foundation, which has a dedicated impact portfolio carved out from its endowment, says he believes that only a change in collective mindset will precipitate broader adoption of such approaches. 

“This is kind of a Copernican thing,” says Stewart. “I think this is going to be completely obvious to everyone as time goes on. But right now, people are like ‘that’s not how it works. That’s not how the planets revolve’.” The double bottom line perspective that looks to generate social returns alongside financial ones has gained traction in many American investing circles but not in Jewish ones. 

Kacherginsky, like Stewart, believes that the slowness to adapt and the choice, whether deliberate or not, to eschew innovation for the sake of convention is rooted in the Jewish philanthropic psyche. “What we’re trying to do is to take the giving, which is kind of very emotional and transform it. To be kind of a logical decision… It’s a tectonic change,” said Kacherginsly. This change is needed though, if the concerted efforts to raise capital now in Israel will be successful in securing the kind of funding required not just to rebuild but to reimagine the landscape as one that is attractive to businesses, families, ongoing investment and deeper integration into the national economy. 

Far from a campaign to restore what once was, these blended finance proposals are a vision of what could be. For the government’s part, commitments have been secured and there is excitement for these new models. During a meeting with IFIE representatives, Israel’s minister of finance proclaimed that he wanted to have blended finance vehicles supporting the rehabilitation of the north and south within a year’s time. 

Will Jewish philanthropists answer this call to action? For the sake of Jews worldwide, one should certainly hope so. 

For more information on blended finance investment projects in Israel, contact the Israel Forum for Impact Economy’s National Advisory Board.

Jordana Grunfeld is a correspondent for Impact Entrepreneur magazine and draws from a deep background in philanthropy and public affairs. She has served as a communications strategist and media producer for dozens of political candidates, NGOs and advocacy campaigns, and has over 25 years of collective experience serving on nonprofit boards as a trustee.