Rethinking how capital flows

An investment or fund structure is the legal and organizational framework that determines how an investment vehicle is set up, operated, and regulated. It defines how assets are held, how investors participate, how returns are generated.

The marketplace of capital products has historically been dominated by a few traditional structures: venture capital, bank debt, and grants. These structures have been deployed by a handful of conventional legal structures, such as a closed-ended, GP/LP fund structure.

All over the globe, innovators are creating innovative structures that are better suited for driving impact and are fit-for-purpose for impact driven organisations. Let's break down some examples of innovative legal, capital and investment structures.

Investment Structures

• Recoverable Grants - a grant structured so the recipient repays the funds, either partially or fully, often contingent upon the success of the funded project.
• Forgivable Loans - a type of loan that may be completely or partially forgiven if certain conditions are met.
• Structured Exits:
  • Redeemable Equity - an equity investment where the investee company agrees to buy back or redeem investors' shares over time through dividends tied to revenues or free cash flow.
  • Profit Sharing - a flexible funding model with payments tied to a percentage of profits instead of an interest rate.
  • Revenue-Based Loan - an investment where payments are tied to a percentage of revenue instead of an interest rate.
  • SME Mezzanine Debt - a hybrid financing instrument that ranks between senior debt and equity in the capital stack.
• Supply Chain Financing - financing options for businesses to access working capital by using existing customer orders.

Capital Structures

Capital structures refer to how different types of funding are layered and combined to meet the needs of both investors and enterprises. In the world of innovative finance, these structures are designed not just for financial return, but to unlock impact, reduce risk, and make deals work in contexts where conventional financing often fails. Here are two foundational capital structuring approaches widely used across the innovative finance ecosystem:

• Blended Finance – the strategic use of public or philanthropic funding to mobilize private investment for sustainable development. Blended finance reduces investment risk through instruments like first-loss capital or guarantees, making it easier for private investors to participate in markets they might otherwise avoid.
• Catalytic Capital – investments that accept higher risk, longer timelines, or concessionary returns to enable impact that wouldn't otherwise be possible. Catalytic capital includes flexible equity, subordinated debt, and guarantees that "crowd in" more conventional capital. As defined by IFI Cornerstone Funder and innovative finance pioneer MacArthur Foundation, catalytic capital is essential for advancing innovations, building track records, and supporting high-impact but underfunded areas.

Legal Structures

• Permanent Capital Vehicle: Evergreen Fund - an investment fund that continuously accepts new capital while allowing investors to redeem their shares at regular intervals.
• 506(c) Rolling Fund - a fund model that enables managers to publicly fundraise.
• Impact Search Fund - a structure where entrepreneurs raise capital to acquire and grow existing social-impact businesses.
• Steward Ownership: Perpetual Purpose Trusts - a legal entity designed to hold assets indefinitely to serve a specific purpose rather than benefit individual beneficiaries.
• Donor Advised Fund - a philanthropic giving vehicle with the flexibility to invest in a variety of asset types.
• Guarantee Pool - a collective reserve established by multiple parties to share risk, where members contribute resources that serve as financial backing to guarantee loans.
• Revolving Loan Fund - a self-replenishing pool of money that uses repayments from past loans to issue new loans.

Incentives are the mechanisms or conditions that motivate decisions of participants in the financial markets. Incentives are fundamental to how the financial markets function and are designed to align interests, promote desired outcomes, or address inefficiencies.

Traditional finance has historically utilized specific structures that prioritize financial incentives when structuring and designing investment vehicles and products. Impact investing has attempted to measure and prioritize both financial and social/environmental incentives, but this has often been done using traditional investment tools and strategies.

Innovative finance includes mechanisms that rethink and redesign the structural incentives within an investment product or vehicle to formally align behavior and decision-making with desired impact outcomes. Examples include:

Compensation

• Impact Linked Compensation - a compensation structure where payment to executives or employees is partially determined by the measurable social impact their work generates.

Contracts

• Impact Linked Finance - a financing approach that ties financial terms or conditions to the achievement of measurable social outcomes.
• Outcomes-based Financing - a funding mechanism where payments are contingent upon the achievement of predetermined social results rather than activities.

While there's no single dominant process across the financial industry, many traditional strategies have failed to prioritize inclusion, accountability, and long-term impact. At IFI, we highlight innovative strategies that shift how decisions are made — redistributing power, inviting new voices, and structuring decision-making to better align with community needs and systemic goals. Below are key decision points across the financial lifecycle, with examples of innovative approaches in each area:

Sourcing + Due Diligence

• Community-led decision making
• Participatory due diligence practices

Impact Measurement + Management

• Embedded impact criteria for investment decisions
• Outcome-oriented metrics co-designed with stakeholders

Governance

• Employee ownership models
• Steward ownership and purpose trusts
• Stakeholder-aligned voting structures

Exits

• Community buyouts
• Alternative exits for impact
• Secondary markets for mission-aligned companies

Fundraising

• Crowdfunding and co-op financing
• Entrepreneurship through Acquisition (ETA)
• GP staking for underrepresented fund managers