CapShift is a guest author and contributor to our Outside Perspectives Series.
We recently reached out to CapShift to share their unique insights on impact investing in a multi-part series. CapShift’s impact investing platform and suite of solutions empower financial and philanthropic institutions, and their clients, to invest in their vision for a better tomorrow.
Many donors begin their philanthropy journey with a simple goal: to support the causes they care about. Cash gifts in celebration of a loved one or contributing to your favorite nonprofit’s fundraising drive are common and simple entry points for donors to take action.
But as giving journeys evolve, many donors start to look for ways to do even more. If you’re confused by the options available, you’re not alone. What once seemed like a world of grants and annual gifts has grown into a dynamic landscape of vehicles and strategies that can advance your impact goals.
For philanthropists just getting started in exploring a world beyond traditional grants, it can be overwhelming to understand the full range of opportunities for philanthropic capital — from grants, recoverable grants, impact-first investments, to market-rate impact investments — and the different advantages they provide. The good news is that setting up your giving at the right home can already put you well on your way to expanding your impact.
Choosing a home for your philanthropy — a place where your charitable capital lives while you decide how to deploy it — can shape your donor experience and the tools you can use to mobilize capital. For most donors, that home is often either a private foundation or a donor-advised fund (DAF).
While these structures may sound technical, they’re really just tools to hold your capital. With the right fit, they can be launchpads for your generosity.
How DAFs and Foundations Open the Door to Expand Your Giving
At their core, private foundations and donor-advised funds share several powerful traits that make them compelling for donors looking for more options or flexibility in their giving. These structured giving vehicles are also an excellent way to explore more advanced impact strategies.
Because they are designed for public benefit, both foundations and DAFs are well suited for grantmaking and even impact investing. In fact, both allow donors to tap into a wide range of tools to advance impact — the language for them may differ, but the toolkit is essentially the same:
- Public Market Investments: Values-aligned public investments in public equity or fixed income. Impact strategies most often include screening out companies not aligned with an investor’s values, proactively targeting investments with positive social impact, or engaging in shareholder activism or proxy voting on key environmental, social, or governance issues.
- Market-Rate Impact Investments: Market-rate investments aim to generate both financial returns and impact. These are typically private, alternative investments and often categorized as mission-related investments (MRIs) by foundations. Market-rate impact investments typically advance social, environmental, and economic challenges that cannot be easily met through grants alone.
- Impact-First Investments: Flexible, low-return investments made to advance mission (e.g., low-interest loans to Community Development Financial Institutions (CDFIs) or catalytic equity in a social enterprise). Also known as program-related investments (PRIs) for foundations, these can include loans, loan guarantees and equity investments when supporting a charitable purpose.
- Recoverable Grants: Structured as programmatic grants with potential for recovery, typically to nonprofit organizations. These offer flexible capital to nonprofits that can be returned, if successful, to be used for continued grantmaking.
Different Legal Structures, Same Intent
While foundations and DAFs may differ in their legal structures, both are great choices for philanthropic giving that offer donors important advantages. For instance, both foundations and DAFs offer the opportunity for multi-generational engagement, tax benefits and advanced impact techniques.
Of note, foundations have an annual five percent minimum distribution requirement. Recoverable grants and PRIs count toward this requirement while MRIs do not and must meet fiduciary standards. Foundations should consult their advisors to ensure necessary compliance before making PRIs or other impact investments.
On the other hand, while DAFs do not presently have mandated distribution requirements, they do have their own unique distinctions as a public charity. If you’re considering opening a DAF, it’s important to understand that all investments in a DAF must align with the DAF provider’s role as fiduciary and avoid private benefit or self-dealing. As a result, DAF providers set different programmatic guidelines, which shape what’s possible for donors. Understanding these differences is key to selecting a DAF that can support your impact investing goals.
Practical Considerations For Getting Started
If you’re looking to expand your giving beyond traditional grants, there are practical considerations to get started, for both foundations and DAFs. Both start with ensuring alignment with your mission and goals.
For a foundation, start with drafting or updating your Investment Policy Statement (IPS) to reflect your impact goals and permissible tools. It’s also helpful to take stock of your internal readiness. Many foundations find that adding impact investing to their toolkit raises new questions: Do board members or staff need training? Should outside expertise be brought in for sourcing and diligence? Who will monitor both financial and impact performance over time?
With DAFs, the first step is understanding the policies of your sponsoring organization. While some DAFs broadly offer liquid, private investment, or recoverable grant offerings, others may restrict eligibility by account, investment type, or size. When considering using a DAF for impact investing, it’s important to consider how their offerings align with your programmatic goals. A few guiding questions can help illuminate what’s possible:
- Does the DAF provider offer mission-aligned investment pools? Are they passive screens or actively managed funds that engage with companies on issues you care about?
- Are recoverable grants permitted? If so, who tracks repayment and impact? Are there parameters around size or term?
- Can the DAF make private investments? If so, what does the approval process look like, and are certain structures or sizes restricted?
While donors getting started often choose one giving vehicle over the other, it’s worth noting that foundations and DAFs are not mutually exclusive; some foundations may also include DAFs in their giving strategy, leveraging both vehicles to drive financial and philanthropic synergies.
Start Small and Learn As You Experiment
Regardless of your structure, consider piloting before you run: Shifting a small portion of your public equity or fixed income portfolio into mission-aligned options can give you maximum flexibility to change course as you learn over time. Alternatively, experiment with one alternative grant structure like a recoverable grant with clearly defined goals and timelines. These early steps can help build valuable feedback loops and build confidence without locking you into long-term commitments.
Let Your Full Financial Toolkit Work For Your Mission
Grants will always be essential — they’re the lifeblood of nonprofits and impact-driven organizations. But the challenges you care about often need more than one type of capital. By tapping into the broader tools available through a private foundation or donor-advised fund, you can give your mission the flexibility and fuel it needs to thrive.
Choosing the right vehicle(s) can open the door to mission-aligned investments, recoverable grants, and other ways to support impact beyond traditional checks. These tools work alongside your grants, helping organizations bridge gaps, take risks, and advance solutions that need different types of financial support.
Check out our case studies for on-the-ground examples of how you can leverage giving vehicles for impact:
- Turn Your Donor-Advised Fund into an Impact Powerhouse
- A Foundation Evolves from Impact Curiosity to Portfolio Commitment
About This Series
This article is the third in a new guest series from CapShift, designed to help philanthropists explore the full potential of impact investing — from foundational concepts to practical steps and real-world examples.
If you’re curious to learn more, follow along with our multi-part impact investing series and discover how to put more of your capital to work for good.
You can find additional resources at capshift.com.
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