Philanthropic equity can powerfully benefit the nonprofit sector, according to a new report from Nonprofit Finance Fund (NFF) released on Tuesday. NFF Capital Partners’ Portfolio Performance Reportanalyzed the role of philanthropic equity in the nonprofit sector based on its own engagements, and found that on average it more than tripled program delivery and doubled revenue for nonprofits that have conducted philanthropic equity campaigns.

According to NFF, philanthropic equity investments are typically significant, multi-year investments that a nonprofit organization uses on it way to sustainable growth or change. Philanthropic equity investments can transform an organization in a way that persists, using transparent, shared reporting systems. These investments are distinct and separate from program and operating support used to maintain “business as usual,” NFF said in a statement.

Though still a tiny percentage of charitable giving, philanthropic equity is generating increasing interest among funders and social change entrepreneurs looking for new models to address critical issues, NFF said.

“Like for-profit companies, nonprofit organizations need access to capital investments so they can explore better business models, scale impact and create lasting change,” George Overholser, founder and managing partner of NFF Capital Partners, said in the statement. “We cannot wring more ‘results’ from an overburdened sector without addressing fundamental flaws in the way nonprofits are financed. This report presents evidence that applying the principles and practices of philanthropic equity can create dramatic and sustainable progress. Every organization in our portfolio has substantially enhanced both its program delivery and financial durability.”

Since 2006, NFF Capital Partners has supported 16 campaigns for philanthropic equity, totaling $312 million in financial investments, NFF said. The study analyzed nine campaigns for which multi-year data were available–GlobalGiving, DonorsChoose.org, VolunteerMatch, Year Up, Ashoka’s Changemakers, VisionSpring, Root Capital, Stand for Children, YES Prep Public Schools, College Summit and Project HEALTH.

It found that annual program delivery has grown on average by a factor of 3.1x, with a compound annual growth rate of 57%. GlobalGiving, Ashoka’s Changemakers and VisionSpring achieved fivefold growth in their program areas.

In addition, the study found, annual business model revenue for the nine organizations has grown on average by a factor of 2.0x, with a compound annual growth of 36%. In aggregate, business model revenue, excluding philanthropic equity, has expanded by $30 million compared with pre-campaign baselines.

“While these initial results are extremely encouraging, many challenges remain as we work to develop a robust capital marketplace for philanthropic equity,” said Craig Reigel, a partner at NFF Capital Partners, said in the statement. “High-stakes investments have inherent risks, but also extraordinary rewards. Based on results-to-date, we are optimistic about the promise philanthropic equity holds for the future of the nonprofit sector.”

The report laid out three key challenges for further development of a capital marketplace for philanthropic equity:

  • Clarifying the role of the philanthropic equity stakeholder. Most funders do not yet have a shared view of what it means to participate as a nonprofit “equity” shareholder.
  • Building syndicates. True syndicates act on a single set of metrics, goals and reports, but these are still not the norm.
  • Maintaining rigor. Without sustainable plans, nonprofits that have begun to raise operating funds in the name of philanthropic equity could damage further development.

NFF, which was founded in 1980, provides services that build the capacity and durability of nonprofits, the statement said. It has some $80 million in assets, and has provided more than $200 million in loans and access to additional financing in support of $1 billion in projects for nonprofit clients across the U.S. The organization has offices in New York, Philadelphia, Newark, Boston, Detroit, Washington, D.C., San Francisco and Los Angeles.

Michael S. Fischer (msf7@columbia.edu) is a New York-based financial writer and editor and a frequent contributor to WealthManagerWeb.com.