Impact investing and grantmaking are both tools for directing capital toward social benefit — but they work differently, suit different situations, and require different expertise. Understanding the distinction matters for funders who are considering whether impact investment belongs in their philanthropic toolkit alongside grants.
Grants transfer capital from funder to grantee with no expectation of financial return. The grantee uses the funds for specified purposes, reports on outcomes, and the relationship ends when the grant period closes. The funder's capital is permanently deployed.
Impact investments deploy capital with an expectation of financial return alongside a social objective. The return may be below market rate (concessional investment, sometimes called a programme-related investment or social investment) or at market rate. The investee repays the capital over time. The funder's capital is (at least partially) returned and can be redeployed.
This difference in capital structure creates a different relationship, different incentives, and a different set of appropriate use cases.
Grants are appropriate when:
The beneficiaries can't pay. If the people or communities who benefit from a service can't pay for it, there's no revenue stream that could service investment capital. Grants are the only viable tool.
The activity doesn't generate revenue. Community education, advocacy, peer support, arts programming — many valuable activities simply don't produce the cash flows that could repay investors.
The risk is too high for investment. Early-stage, unproven programmes where failure is a genuine and acceptable possibility. Investment requires sufficient confidence of success to repay capital; grants accept that some funded activities won't succeed.
Market failure is structural. Where private markets have structurally failed to serve a community — rural health, remote disability services — investment models often don't work because the market failure that blocked private capital also blocks commercial investment models.
The work is inherently non-commercial. Advocacy, community organising, and policy work don't generate revenue and can't be commercially structured. These require grants.
Impact investment makes sense when:
There is a viable revenue model. Social enterprises, trading charities, and fee-for-service organisations with genuine revenue streams can service investment capital.
Capital needs are asset-related. Social housing development, community facilities, equipment — assets that hold value and can be leveraged or sold. Investment finance is typically better suited to capital assets than to operational expenditure.
Scale-up is the objective. An organisation with a proven model that needs capital to scale, and a revenue model that will grow with scale, is a good candidate for impact investment.
Revolving capital is more efficient. Where capital can be repaid and redeployed, investment is more capital-efficient than grants for funders with large endowments.
Market signals matter. Where requiring investees to service capital creates useful discipline — forcing organisations to think commercially about their cost structure and revenue model — investment can produce better outcomes than grant funding that removes commercial pressure.
Programme-related investments (PRIs). In the US context (and increasingly in New Zealand philanthropy), a PRI is an investment made by a foundation in support of its charitable mission where the primary purpose is social impact rather than financial return. PRIs can include:
- Low-interest loans to non-profit organisations
- Guarantees that enable non-profits to access commercial lending
- Equity investment in social enterprises
- Convertible notes to early-stage social enterprises
Mission-related investments (MRIs). Investments from an endowment that align with the organisation's mission without qualifying as PRIs. For example, a health foundation investing its endowment in healthcare companies or screening out tobacco stocks.
Social bonds. Government-issued bonds that pay returns to investors based on whether specified social outcomes are achieved. Social impact bonds (SIBs) and social outcomes contracts — sometimes called "pay for success" models — are variations on this theme.
Community finance. Loan funds that provide affordable credit to community organisations, social enterprises, or low-income communities that can't access mainstream finance. Community development finance institutions (CDFIs) operate in this space internationally; New Zealand has early-stage equivalents.
New Zealand has a developing social investment ecosystem. Key developments:
The Social Investment Agency promotes the use of social investment approaches — using data and investment thinking to direct government funding toward preventive interventions. This isn't impact investing in the capital markets sense, but reflects investment framing.
Ākina Foundation supports social enterprises and impact investment in New Zealand, including through the Ākina Impact Fund and social enterprise development support.
Community foundations are beginning to explore impact investment from endowments — investing a portion of their investment portfolios in social enterprises or community organisations through loan and guarantee facilities, alongside their grant programmes.
Iwi investment vehicles — including those of major iwi like Ngāi Tahu — have long combined commercial investment with social and community obligations, providing New Zealand-specific models of patient, mission-aligned capital.
The most sophisticated philanthropic practice combines grants and investments in a coherent capital deployment strategy:
Grant to prove, invest to scale. Use grants to fund early-stage, uncertain work — proving models, building evidence. Once a model is proven and revenue-generating, use investment to support scale-up.
Guarantee to enable commercial lending. Community foundations or large trusts can issue guarantees that allow organisations to access bank lending at rates they couldn't access without the guarantee. The guarantee is a contingent liability rather than a cash grant, but provides equivalent or greater value.
Mission-aligned endowment management. Aligning the investment of endowment capital with the foundation's charitable mission — at minimum through negative screening (excluding harmful industries), more actively through positive allocation to aligned investments.
Blended finance structures. Using grants to de-risk investment structures — providing first-loss capital that makes the remaining investment attractive to commercial investors. This levers philanthropic capital by attracting additional commercial capital.
Expertise requirements. Impact investing requires investment expertise that most grant-making organisations don't have internally. The due diligence, legal structuring, and ongoing monitoring of investments is substantially different from grants management.
Mission drift risk. Investment logic — focused on financial sustainability and return — can displace mission logic over time. Social enterprises and charities that have taken investment capital sometimes find that financial return requirements crowd out social mission.
Complexity and cost. Structuring, negotiating, and monitoring impact investments is expensive. For small investments, the transaction costs may exceed the benefit of the investment structure over a well-designed grant.
Not a replacement for grants. The social investment rhetoric of some governments — claiming that grants should be replaced by investment models that require financial sustainability — misunderstands where grants are appropriate. Many essential community services cannot be commercially structured.
Tahua's grants management platform is built for grantmakers who run complex portfolios, including organisations that combine traditional grants with social investment — with full lifecycle tracking from application through outcome reporting.