Exploring the “Third Wallet”: A New Tool for Impact-First Investing

For many people interested in philanthropy, the basic question is simple: how can charitable capital do as much good as possible?

The answer, of course, is rarely simple. A traditional grant can be the right tool for meeting many needs. It can support urgent services, early-stage ideas, advocacy, research, community organizations, and other essential work for the public good. Market-rate investing plays a different role, helping capital grow and supporting businesses or funds that can meet conventional return expectations.

But what about a third option – one that navigates the space between the two?

At the Social Finance Institute, we often describe this as a “third wallet”: a flexible pool of capital that sits alongside traditional grantmaking and market-rate investing. This third wallet is designed for opportunities where impact is the primary goal, but some financial return is still possible.

This option, which we call impact-first investing, gives philanthropic investors another way to support promising solutions. However, it can also feel abstract.

If a foundation or donor-advised fund (DAF) holder shifts some capital from traditional market-rate investments into impact-first investments, what happens over time? How much impact could that capital generate? How much money might come back and be reused? How do assumptions about repayment, risk, and return change the picture? And how should investors think about the trade-offs between giving money away once and investing it in ways that may preserve or recycle capital?

These are not easy questions to answer in conversation alone. That is why we are excited to introduce the IFI Tool.

Developed by the Social Finance Institute and the Rustandy Center for Social Sector Innovation at Chicago Booth, the IFI Tool is a free, interactive resource designed to help philanthropic investors and other thought leaders and stakeholders explore how integrating impact-first investments into a charitable capital strategy might affect both total impact and financial returns over time.

The IFI Tool is not designed to tell anyone exactly how to allocate a philanthropic investment portfolio. Instead, it offers a simple model that allows users to test different assumptions and compare scenarios. Users can explore what happens when charitable capital is deployed through grants, market-rate investments, impact-first investments, or some combination of the three. In other words, the IFI Tool helps make the third wallet easier to visualize.

The IFI Tool website also includes examples of different impact-first investment structures, including equity funds, below-market-rate loan funds, recoverable grants, and other flexible financing approaches. These examples are intended to make the concept more concrete and show the range of ways impact-first capital can be used.

What does this look like in practice? A promising nonprofit may be able to repay flexible capital over time but cannot take on a conventional loan. A social enterprise may have a strong impact track record, but a risk-return profile that does not fit traditional investors. A community-based organization may need patient capital to expand a proven solution. In each case, impact-first capital can help fill a gap and, when returns are generated, some of that capital can be recycled into future work.

As we developed the IFI Tool with our partners at the Rustandy Center, we sought feedback from across the field. Early versions were workshopped with philanthropic investors at SOCAP and Mission Investors Exchange (MIE) convenings, as well as through individual vetting sessions with foundations, advisors, academics, and other practitioners. Their insights helped shape the IFI Tool’s language, assumptions, examples, and user experience. We are grateful for these early contributors to our work.

Our goal with the IFI Tool is educational. We hope it helps foundations, policymakers, DAF account holders, family offices, community foundations, advisors, journalists, and others ask better questions about when and how different forms of capital can be used.

At its core, impact-first investing is about matching the right capital to the right problem. For some problems, grants are the only viable funding option. Some initiatives can attract and absorb market-rate investments. And some may be well suited to a third wallet: flexible, impact-first capital that can help promising solutions grow, adapt, and sustain their work. We built the IFI Tool to help more people explore that possibility.

We invite you to try the IFI Tool, test assumptions, compare scenarios, and use it as a starting point for conversation. The future of philanthropy will not be defined by any single tool. But with better tools, we can make more thoughtful choices about how capital can advance impact.

You can find the Tool at ifitool.org.