the$future$of$social$impact investment · the$future$of$social$impact investment...

The Future of Social Impact Investment

Harvard Business Review Webinar Series April 19, 2013

Sir Ronald Cohen

The Rising Challenge of Social Issues

Sir Ronald Cohen, April 2013

The challenge of social issues is huge. We will concentrate on it today, though Impact Investment also addresses environmental and developmental challenges.

Persistent social issues

EducaHon drop-‐out rates

Homelessness

Recidivism Children in care

Teenage unemployment Late detecHon of diabetes and other chronic illnesses

Substance abuse

Elderly care

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We need BOTH a change of philanthropic mindset AND a new method of financing


Ø  Dan PalloPa called at TED for a more business-‐like mindset in order to aPract more donaHons and allow social organisaHons to scale

Ø  He points out, 1970 – 2009: •  144 US not-‐for-‐profits crossed $50m in revenues, while •  56,000 US businesses did so

Ø  More business-‐like approaches are needed, but insufficient. Impact investment needed to aPract significant capital to supplement donaHons and also to drive performance on social outcomes -‐  Taps into $100 trillion in capital markets -‐  Focuses powerfully on achieving outcomes -‐  Enables social entrepreneurs to innovate and scale

Ø  Impact investment and social entrepreneurship will together provoke a change of mindset on social issues, just as VC/entrepreneurship have done for business

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Social Impact Bonds Social Impact Bond (SIB): Case Study – Peterborough Prison 8 year, £5m financial instrument issued in September 2010 with the UK Ministry of JusHce Ø  Aim of the Peterborough SIB: to reduce exisHng 60% recidivism rate by young prisoners within one

year of their release from Peterborough jail Ø  Desired outcome: improve convicted offenders’ lives; make savings to government by reducing

court appearances and prison populaHon; increase tax revenues from employment

Ø  Financial Return: —  Varies directly according to reducHon in recidivism above a hurdle of a reducHon in offending

of 7.5% —  Sliding yield, capped at 13.3% —  Paid only if reoffending is reduced by at least 7.5% over a control group. If not, investors lose

their principal. SIB is equity-‐like on downside and bond-‐like on upside —  Even at 13.3% government pays out only a proporHon of its esHmated savings

Ø  Investors: 17 charitable trusts and foundaHons of which 12 kept the investment on their balance sheet and 5 took it out of PRI / grant allocaHons

Sir Ronald Cohen, April 2013 4

Peterborough SIB: results to date Results of Peterborough SIB: 1.  CreaHon of the One*Service, bringing together five not-‐for-‐profits to achieve the required

reducHon in recidivism

2.  ImplementaHon of a comprehensive management informaHon system tracking prisoner needs and effecHveness of intervenHon by each organisaHon

3.  Significant addiHonal capital aPracted with £5m flowing over three years to small service providers 2009 Revenues:

q  St. Giles Trust – £4.7m q  Ormiston Children and Families Trust -‐ £6.0m q  YMCA (Cambridgeshire) -‐ £3.3m q  SOVA -‐ £6.9m q  MIND (Cambridgeshire) -‐ £0.6m

Performance relaHve to control group should be known by 2014


Social Impact Investment

Ø  Social impact investment links financial and social returns. It aims to bring increased entrepreneurship, innovaHon and capital to the social sector. Through new financial instruments that enable social entrepreneurs to achieve correlated social and financial returns, it connects the social sector to the capital markets for the first Hme

Ø  Charitable, insHtuHonal and private investors, aPracted by social as well as financial returns, fund ventures that result in a social benefit and related government savings and revenues

Ø  Government savings and increased revenues are then shared between government, social organisaHons and investors

Ø  Social entrepreneurs and impact investors aim to fill the gap between societal need and current government and social sector provision, improving many more people’s lives


Power of Social Impact Investment

Ø  Key difference with tradiHonal philanthropy is the measurement of outcomes Ø  This allows the blending of social and financial returns which aPracts:

1.  Investors seeking to achieve social good 2.  Long-‐term investment capital for not-‐for-‐profits 3.  Social entrepreneurs seeking innovaHon, growth and impact

Ø  It drives a change in the mindset of government, philanthropists, investors and social organisaHons and channels capital to prevenHve acHon


A new asset class?

Ø  Great need for innovaHon and scale in tackling social issues + feeling that government and philanthropy cannot succeed + a new generaHon that wants to do good, not just do well

Ø  Social sector has the best experHse and the potenHal to innovate and achieve scale

q  USA: $750bn of assets and 10 million people working in not-‐for-‐profits q  UK: £100bn of assets and 800,000 people working in not-‐for-‐profits

Ø  For-‐profit companies and entrepreneurs are increasingly embedding social objects in their ventures

(e.g. TOMS Shoes) and adopHng Benefit Corp structure

Ø  Investors are increasingly interested in social as well as financial returns. Social organisaHons targeHng “human infrastructure” investment, for example, should aPract capital today


Big Society Capital – experience to date Ø  Independent UK social investment “wholesaler”, with £600m of equity of which two-‐thirds

comes from 15 year-‐old English unclaimed bank accounts, and one-‐third from Barclays, HSBC, Lloyds and RBS

Ø  First-‐year has proved great need for investment capital by social sector organisa]ons:

–  20 investment commitments made covering cornerstone investments in funds, 6 Social Impact Bonds, and loans –  13 equity-‐like investments made –  1 loan

Ø  Strong flow of socially-‐mo]vated investment managers –  Some very innovaHve structures –  From exisHng financial organisaHons –  From start-‐ups

Ø  Strong flow of innova]ve social entrepreneurs and investment opportuni]es

Ø  Developing the infrastructure of the impact investment market is key: investments made in four ini]a]ves aiming to link social investors to social entrepreneurs and social sector organisa]ons


Interest in SIBs across the world


Canada •  Government released NaHonal Call

for Concepts for social finance in November 2012

•  “The federal government is willing to re-‐examine its role in social benefits delivery…[and] consider partnerships with private sector and innovaHve social businesses” – Siobhan Harty, Human Resources and Skill Development Canada

United States •  New York SIB for delivering services to

youth on Rikers Island was launched in 2012 with Goldman Sachs providing capital, Bloomberg Philanthropic guaranteeing loan and Vera InsHtute of JusHce measuring impact. “Hopefully will do 2 or 3 more projects [in 2013]. We are looking to insHtuHonalise SIBs in New York” – Linda Gibbs, NYC government

•  MassachusePs and ConnecHcut in exploraHon stage

•  Fresno County, California in data collecHon stage of making a case for SIB where private insurance company would fund returns

Ireland •  “With support from Social Finance UK…the Department of Public Expenditure & Reform established an Inter-‐Departmental Steering

Group to progress the [SIB] concept across a number of government Departments and this group is currently assessing the feasibility of five potenHal short-‐listed areas.” – Paul O’Sullivan, Clann Credo

Israel •  “Currently

establishing SIBs focused on employment for the ultra-‐orthodox and Arab populaHons” – Yaron Neudorfer, Social Finance Israel

UK •  SIBs launched addressing homelessness, criminal

jusHce, children’s services and youth unemployment •  A number in exploraHon / developmental stage

Korea •  “Currently Korea is considering

how to develop the Korean SIB structure” – Kab Lae Kim, Korea Capital Market InsHtute

Australia •  Social Benefit Bonds (SBB) pilot was launched in

2012 in New South Wales •  First SIB contract in New South Wales signed with

UniHngCare Burnside on a family restoraHon programme for children in out of home care

•  Other states are exploring SBB opHon •  “One charity was required by its partners to have

financial stake in intervenHons to assure investors, another is considering invesHng voluntarily” – Emma Tomkinson, Centre for SIBs

Germany •  “Focus for any SIBs issued will be generaHng

addiHonal capital for programmes, not threatening programmes from the welfare state” – ChrisHan Kroll, Bertelsmann SHxung

France •  Currently examining

internaHonal benchmarks for SIBs

•  Have recently appointed a Minister of Social Sector

Mozambique •  Exploring potenHal

applicaHon of a DIB to tackle Malaria

SIBs have been in opera]on or under considera]on in: USA, UK, Australia, Israel, Germany, Ireland, and Korea. ‘Development Impact Bonds’ are under considera]on too in Mozambique, Swaziland, Uganda and Pakistan

DIBs •  Social Finance UK and Centre for Global Development

exploring potenHal applicaHon of SIBs for Uganda (sleeping sickness), Swaziland (HIV Treatment as PrevenHon) and Pakistan (low-‐cost private schooling)

Source: UK Cabinet Office and Saïd Business School (updated Apr 2013)

Framework for judging combined financial and social returns emerging

EXAMPLE: $10m, 7 year Social Impact Bond to address teenage unemployment

1.  Expected to return 7% IRR in the range of 2.5% -‐ 13%

2.  Social service providers have previously achieved 10% improvement per annum

3.  Investor assessment requires 11% IRR given risk. Minimum social return expected is therefore 4%

4.  4% over 7 years on $10m comes to ≈ $3m

5.  Social value of increased employment can be qualitaHvely and financially assessed -‐ “not everything that counts can be counted” -‐ at maturity of bond and compared to the expected $3m.


Bridges Ventures


Ø  Founded in 2002 to raise funds that aim to achieve strong financial returns and social/environmental

impact Ø  ThemaHc focus:

Ø  First investments focused on business located in the poorest 25% of the UK Ø  Today it invests following four main impact themes: Underserved Areas, Environment, EducaHon

& Skills and Health & Well-‐being.

Ø  Over $450 million under management across three types of funds: Sustainable Growth Funds, Property Funds & Social Entrepreneurs Fund

Ø  Sustainable Growth Funds –  Financial returns:

•  9 successful exits with IRRs ranging from 12% to 260% (1.6x to 22x). •  Recent exits: The Hoxton Hotel (47% IRR, 9x), Whelan Refining (33% IRR and 4.7x)

–  Social impact : •  86% por{olio companies in underserved areas •  50% employees living in underserved areas •  4.7x economic mulHplier effect

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Galvanising impact investment to become an asset class

Ø  Alloca]on by Founda]ons: -‐ Make 1-‐5% allocaHon to impact investment (e.g., Fisher FoundaHon, USA) -‐ Hire execuHve to manage it -‐ Extension of ERISA “prudent man rule” to include impact investment

Ø  Support Founda]on Investment in Omidyar, Rockefeller, Skoll (USA) market-‐building: Esmee Fairbairn, Barrow Cadbury, Tudor, Pahnapour (UK)

Yad Hanadiv (Rothschild FoundaHon), (Israel)

Ø  Develop evidence that returns of 7 -‐ 8% p.a. uncorrelated with equiHes are possible (invesHng half in not-‐for-‐profits and half in profit-‐for-‐purpose enHHes like Bridges Ventures

Ø  Develop models for adapHng risk/return profile to suit pension funds and private investors (e.g. through insurance or assumpHon of first loss by a FoundaHon focused on social issue addressed)

Ø  Create impact investment companies like Big Society Capital to lead co-‐investment, underwriHng and cornerstoning of funds

Ø  Support specialist financial intermediaries such as Social Finance (UK, USA, Israel) and Third Sector (USA) and specialist advisors like Bridgespan (USA)


Complementary roles of Not-‐for-‐Profit and Profit-‐with-‐Purpose organisaHons


Ø  New combined models emerging: -‐  Not-‐for-‐profits are adopHng business management and finance tools -‐  For-‐profit business are embedding social purpose into their model

Ø  Not-‐for-‐profit

-‐  Have long experience + a culture of improving lives + ability to get help from community -‐  They may therefore lead in innovaHon on tackling social issues and related delivery, especially

where role of community is important to success Ø  Profit-‐with-‐purpose companies

-‐  Only need to tweak the tradiHonal entrepreneurship/VC model to raise capital -‐  To the extent that Benefit Corp structure embeds the social mission permanently, they may

well lead in innovaHon where the market drives rapid growth

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Challenge in successfully mixing social and business models


Not-‐for-‐Profits

Ø  Designing “pay-‐for-‐outcome” securiHes so that philanthropic moHve is strengthened and payment is only made for worthwhile outcomes

Ø  Take care to avoid unintended consequences from incenHves Profit-‐with-‐Purpose Businesses

Ø  Embed the social mission in corporate structure so that it is maintained through a sale of the business

Ø  Create governance that prevents mission drix

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Turning impact investment into a powerful, internaHonal force for good

Crucial now that government creates an enabling environment… For example, in the USA: Ø  Tax incenHves (similar to municipal bonds in USA?)

Ø  Set up government “outcomes fund” to pay on success of securiHes such as SIBs

Ø  ERISA regulaHon change to “prudent man rule” to include impact investment

Ø  Unclaimed assets in Life Assurance companies and Pension Funds to go to social investment organisaHon like Big Society Capital, charged with developing the market

Ø  Create “Benefit Corp+” to embed permanently social objects in profit-‐with-‐purpose businesses

Ø  G8 meeHng in the UK this June will hopefully bring internaHonal reinforcement


Further InformaHon Comments and ques]ons: Please submit any comments or quesHons to Sir Ronald via his website: hPp://www.ronaldcohen.net/ -‐ “Contact” Websites: q  Big Society Capital hPp://www.bigsocietycapital.com/ q  Bridges Ventures hPp://www.bridgesventures.com/ q  Social Finance USA hPp://www.socialfinanceus.org/ q  Social Finance UK hPp://www.socialfinance.org.uk/ q  Social Investment Taskforce hPp://www.socialinvestmenPaskforce.org/

Blog posts: The Social Sector Needs to Take More Risk and Accept Failure Sir Ronald Cohen and William A. Sahlman, 6 February 2013, Harvard Business Review hPp://blogs.hbr.org/cs/2013/02/the_social_sector_needs_to_tak.html Social Impact Inves;ng Will Be the New Venture Capital Sir Ronald Cohen and William A. Sahlman, 17 January 2013, Harvard Business Review hPp://blogs.hbr.org/cs/2013/01/social_impact_invesHng_will_b.html Ar]cles: Stanford Review of Social Innova]on: hPp://www.ssireview.org/arHcles/entry/big_society_capital_marks_a_paradigm_shix


the$future$of$social$impact investment · the$future$of$social$impact investment...

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