Mark January 24, 2012 in your calendar as the date when impact investing went mainstream in CanadaRead More ›
New Capital on the Horizon
There have recently been significant inroads made in creating new sources of financing for non-profits and social ventures in Canada. Causeway, a program of Social Innovation Generation (SiG) and an organization incubated at MaRS in Toronto committed to catalyzing the social finance marketplace, hosted two discussions over the past month to flesh out the development of potential investment vehicles.
In this discussion I will provide context for these conversations and offer resources for further understanding. I will continue to use this blog platform to chronicle the main developments of these funds in an attempt to keep you and the mounting number of social financiers up-to-date.
The social and environmental landscape in Canada is large, vibrant and growing. With 161,000 non-profit organizations, employing 2 million people, with combined revenues of upwards of $140 billion, the sector is larger than the automotive and manufacturing industries. National climate change and sustainability agendas are spurring innovative business models while social challenges are being addressed by a growing movement of social entrepreneurs (be on the watch for a forthcoming article by Tim Brodhead, “Not Letting a Crisis Go to Waste: An innovating Agenda for Canada’s Community Sector”, in The Philanthropist; see also David Bornstein’s soon-to-be-launched web site dowser.org).
Unfortunately, current investing and funding models are ill equipped to cope with the tsunami of fiscal and demographic pressures building in Canada.
In response, a social finance approach encourages market forces to deliver social, environmental and economic dividends while building up social sector infrastructure. MaRS’s 2009 Social Venture Finance white paper is an excellent source of background information.
In early December, Jed Emerson – the father of blended value investing – catalyzed a discussion-rich agenda held at MaRS with mainstream finance, foundation, and non-profit think tank leaders. The challenge was simple, how can Canada, in the wake of clear advances in the US and UK, develop social purpose investment vehicles? A podcast and a complete summary report of the event are available. Stemming from the discussion were five (5) potential avenues for fund exploration:
- Loan and Investment Fund
- Community Investment Vehicle
- Fund of Fund Product
- Social Venture Fund
- Program Related Investment Fund
Drawn from the Jed Emerson event and the follow-up discussion held recently in January, here is a brief background of the proposed funds:
Leadership – Nora Sobolov
- Modeled similar to the Nonprofit Finance Fund in the US, the fund will seek to provide working capital and bridge loans to non-profit and charitable organizations
- Using private sector (banks) and philanthropic capital, the fund would act as an intermediary, providing access to capital for organizations that traditionally have had a difficult time securing financing loans and financing
- The fund will also work with nonprofits to build financial capacity
- Finalize a business plan proposal
- Solidify financing to develop a detailed business and operational plan
- Find investors for the fund
- Recruit experienced experts from the financial sector or potential investors to act as part of an advisory panel
- A product to channel investment dollars from individuals and institutional investors
- Invested nationally in revenue generating social enterprise owned and operated by non-profits
- The Social Investment Organization, the trade association for the socially responsible investment industry is looking to develop the product within the next 18 months
- SIO is looking for experienced consultant(s) to conduct two projects: 1) determining the size of the target pool of social enterprise projects, and 2) developing a vehicle to invest in an underlying bundle of social enterprise projects.
- SIO, with the oversight on an advisory panel is outsourcing the development of this fund to an experienced consultant(s). A Request for Proposal has been sent out.
Fund of Fund Product
- A fund that would invest in an underlying pool of socially responsible funds
- The Fund of Funds would allow investors to get access to socially responsible investment opportunities in a cost efficient manner
- Similar to the proposed Community Investment Vehicle stewarded by SIO but with broader investment criteria (multi asset class, global diversification)
- Large and small capital pools can manage risk by diversifying across a spectrum of investments while sharing risk with other investors
- Potential investments could include equities, fixed income, real estate, private equity, infrastructure, microfinance, social enterprises
- Develop a proposal, business plan, and seek out prospective investors
Social Venture Fund
- Set-up to encourage social innovation and fund social entrepreneurs
- Primarily for early stage social ventures with strong potential to scale
- Try and raise enough funding for a demonstration vehicle that can be leveraged to larger size with government participation
Next Steps: Assess potential funding models and develop a business plan for the fund
Program Related Investment Fund
- The idea of a challenge or campaign has been proposed to raise capital within the Foundation community for a notional fund that could catalyze creation of new financial products serving the mission based investing market (although in the first instance such a capital raise would focus on private and community foundations, others could be drawn in like corporate foundations and event government as a provider of first loss capital)
- With 96.5% of foundation assets typically not aligned to mission (obligatory disbursement are only 3.5% though many foundations exceed that), Foundations have been called-out to make more of an impact with greater portion of their capital
- There have been suggestions to emulate the US campaigns for “More for Mission”, encouraging Program Related Investments (PRIs) and Mission Related Investments (MRI). One role model has been the JW McConnell Family Foundation whose board recently passed policy to dedicated at least 5% of capital to mission related investing
- A Responsible Investing initiative by the Community Foundations of Canada (CFC) has been piloted to encourage mission-related investing practices
- Just recently, CFC launched a Responsible Investing resource website and a research paper that looks at the availability of resources and training on responsible investing targeted at Canadian foundations and endowments
Next Steps: Confirm the leadership for a notional pool capital raising campaign; solicit a commitment from a broad number of foundations; and publicize the resulting pool of capital supporting the emerging social fund marketplace.
One question that continues to come up in discussions is around the landscape in Canada to support social funds. The main concerns tend to cluster around appetite for risk and potential size of deal flow. Research from coast to coast provides examples of social finance at work. Here are a few resources that may prove useful:
- In 2004, Coro Strandberg offered introductory research on Community Investment in Canada – a scan of the environment influencing socially responsible investing practices.
- More recently, Causeway commissioned a research paper “Building the Case for Social Finance in Canada” to provide an overview of the current Canadian landscape, and research on investment tools and opportunities.
- In Peter Elson’s recent research paper, “Building Capital, Building Community”, he and his co-authors explore the contrast between Ontario’s enterprising nonprofit sector and Quebec’s social economy while providing a lay of the land for current and historic deal flow.
And finally, Tessa Hebb and Karim Harji look at the demand and supply of capital, the role of intermediaries, barriers, and opportunities in the area of social finance in their research paper “The Quest for Blended Value Returns: Investor Perspectives on Social Finance in Canada”
We are at a very interesting junction within the social finance realm nationally; these new investment vehicles have the potential to greatly increase the amount of private investment capital flowing to social purposes. Stay tuned for more information about these initiatives or drop me a note if you are interested in learning more or contributing in some way.
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