Building a Social Capital Market in Canada


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Building a Social Capital Market in Canada

  1. 1. Building a Social Capital Market in Canada October 2005
  2. 2. <ul><ul><li>Social Capital Market: Financing Social Change </li></ul></ul><ul><ul><li>Global Context </li></ul></ul><ul><ul><li>Canadian Approaches </li></ul></ul><ul><ul><li>Roles We Can Play </li></ul></ul>Agenda
  3. 3. Government Funding Private Investment Charitable Donations Financing Social Change: Traditional Investment Lenses Social Safety Net Civil Society Wealth Creation Blended Outcomes ? We tend to think of investment through traditional sector-based lenses . . .
  4. 4. Financing Social Change: The Need for Multiple Lenses Private Investment Charitable Donations . . . but innovative solutions to social and economic challenges may exist between these silos <ul><li>E.g. </li></ul><ul><li>Sustainability and Conservation </li></ul><ul><li>Inner-city economic development </li></ul><ul><li>First Nations economic development </li></ul><ul><li>Affordable housing </li></ul>Government Funding
  5. 5. Financing Social Change: An Example <ul><ul><li>Joint venture of nonprofit housing corporations in Winnipeg </li></ul></ul><ul><ul><li>Renovates run-down housing in the inner city </li></ul></ul><ul><ul><li>Employs 10-15 low-income inner city residents, mostly Aboriginal Canadians </li></ul></ul><ul><ul><li>Has revitalized dozens of homes and commercial buildings across the Winnipeg inner-city </li></ul></ul><ul><ul><li>Generated nearly C$1.5M in business revenue in 2004 / 2005 but is struggling for profitability </li></ul></ul>. . . and some ground breaking organizations already defy these traditional views
  6. 6. Financing Social Change: An Example <ul><ul><li>Business generates revenue, strives for profitability and services loans </li></ul></ul><ul><ul><li>However, </li></ul></ul><ul><ul><li>Profitability and returns do not meet typical private investment hurdles </li></ul></ul><ul><ul><li>Jobs are provided for those who might otherwise rely on social assistance </li></ul></ul><ul><ul><li>However, </li></ul></ul><ul><ul><li>Government is reluctant to support an organization that competes within the private sector </li></ul></ul><ul><ul><li>Affordable housing is constructed and at-risk individuals receive job training </li></ul></ul><ul><ul><li>However, </li></ul></ul><ul><ul><li>ICR does not fit the traditional definition of a charity and cannot receive philanthropic gifts </li></ul></ul>Investment Outcomes Policy Outcomes Charitable Outcomes However, these organizations often fall between the cracks of traditional financing programs . . .
  7. 7. Blended Outcomes Pure Social Outcomes Pure Financial Outcomes Traditional Charities Social Enterprises Traditional Businesses In these cases we must set aside traditional lenses and create hybrid financing mechanisms . . . Financing Social Change: A Social Capital Market Hybrid Financing Vehicles are Required
  8. 8. Financing Social Change: Hybrid Financing Tools <ul><ul><li>Provide access to capital and assist in assessing financial risk </li></ul></ul><ul><ul><li>Offer effective tax incentives based on an assessment of overall returns to society </li></ul></ul><ul><ul><li>Foundations offer loan loss reserves or guarantees </li></ul></ul><ul><ul><li>Charities help assess social benefit </li></ul></ul>Private Investors Government Charitable Organizations Each of the traditional sector-silos possess tools that could be used to create hybrid investment vehicles . . . <ul><ul><li>Success is measured in terms of “Social Return on Investment” </li></ul></ul>
  9. 9. The UK <ul><ul><li>Future Builders </li></ul></ul><ul><ul><ul><li>Approximately $250M Cdn to help finance social sector infrastructure investments </li></ul></ul></ul><ul><ul><li>Phoenix Fund </li></ul></ul><ul><ul><ul><li>Approximately $100M in support for direct investment, CDFIs, CDVCs, and a central CDVC. </li></ul></ul></ul><ul><ul><li>Community Investment Tax Relief </li></ul></ul><ul><ul><ul><li>Tax relief credit for investment in disadvantaged neighbourhoods. </li></ul></ul></ul><ul><li>These countries have built up successful track records over the last 10-20 years. </li></ul>However there is a significant role for government to play in making this a more desirable outcome The US <ul><ul><li>Community Reinvestment Act </li></ul></ul><ul><ul><ul><li>Legislation passed requiring mainstream FIs invest a component of their loan books in disadvantaged areas. </li></ul></ul></ul><ul><ul><li>Community Development Financial Institutions Fund </li></ul></ul><ul><ul><ul><li>Support in the form of start-up or further capital infusions, technical assistance, or in the form of tax incentives. </li></ul></ul></ul><ul><ul><li>Community Development Venture Capital Funds </li></ul></ul><ul><ul><ul><li>Tax and capital support for the financing of community development venture capital funds </li></ul></ul></ul>
  10. 10. The investor development and government support in the UK and the us has enabled some significant success stories Significant support from government, and from other sectors, has fostered the availability of capital through mainstream institutions and new CDFIs, and supported the development of true blended value organizations. The ShoreBank (US) Triodos Bank & Charity Bank Stony Field Yogurt (US) Energywise Recycling (UK)
  11. 11. While other countries are understanding the need for a more buoyant social capital market Canada is lagging behind Risk Capital / Hybrid Capital
  12. 12. Progress remains slow in Canada for a variety of regulatory and cultural reasons <ul><li>Key impediments – </li></ul><ul><li>A variety of different organizations are attempting to develop alternative structures that may better reflect a blended value proposition: </li></ul><ul><ul><ul><li>Charities and NFPs </li></ul></ul></ul><ul><ul><ul><li>A variety of social enterprises </li></ul></ul></ul><ul><li>A growing industry of socially responsible investors finds that it can be difficult to invest in the developing ‘gray space’: </li></ul><ul><ul><ul><li>Foundations interested in making program related investments (pri) </li></ul></ul></ul><ul><ul><ul><li>Funds that need to present a market value proposition to investors </li></ul></ul></ul><ul><ul><li>Unfavourable regulatory framework </li></ul></ul><ul><ul><li>Narrow political and cultural norms </li></ul></ul><ul><ul><li>Lack of innovative investment vehicles </li></ul></ul><ul><ul><li>Investor resistance </li></ul></ul>
  13. 13. Underinvestment in Hybrid Approaches: A Vicious Cycle And. . . Leads to. . . And. . . Few Risk Capital Investment Vehicles Dearth of Hybrid Investment Institutions Less Risk taking and Innovation Limited Hybrid Investment Expertise <ul><li>Fewer entrepreneurial approaches </li></ul>Resulting in . . . And few chances to overcome . . .
  14. 14. Why Social Enterprise: Creating a Positive Cycle And allow . . . Which creates. . . Develop . . . New Risk Capital Vehicles Social Investors <ul><li>Entrepreneurial Solutions to Social Problems </li></ul>Which encourage . . . And attracts new . . . Risk taking and Innovation Greater social returns
  15. 15. Vartana – a social sector focused financial institution AND A bank <ul><li>By creating an innovative charitable financial institution built with the sector to better meet its full range of financial service needs </li></ul><ul><li>By strengthening voluntary sector organizations, helping them become more effective and innovative in fulfilling their missions </li></ul><ul><li>By building relationships and support across Canada’s voluntary sector, regulatory and business communities </li></ul><ul><li>By establishing a new bank that is economically viable and fits within current policy frameworks </li></ul>The Bank will significantly enhance the options available to Canada’s voluntary sector: A registered charity
  16. 16. Vartana – the need “ T he most pressing current challenge facing the sector relates to financial capacity. It is clear that new models that provide non-profit and voluntary organizations with the stability and support they need to develop human resources and organizational infrastructure, and to engage in long-term planning are at the heart of realizing their full potential to serve Canadians .” - Voluntary Sector Initiative
  17. 17. Vartana – the proposed products/services Traditional banking products tailored to the sector’s needs… <ul><li>Loans and guarantees: </li></ul><ul><li>Working capital loans </li></ul><ul><li>Short term bridging loans </li></ul><ul><li>Underwriting for a fund-raising programme </li></ul><ul><li>Final step loans so a project can go ahead </li></ul><ul><li>Loans for capital equipment </li></ul><ul><li>Mortgage loans </li></ul><ul><li>Renovation loans </li></ul><ul><li>Credit cards </li></ul><ul><li>Deposit products: </li></ul><ul><li>Chequing accounts </li></ul><ul><li>Savings accounts </li></ul><ul><li>Term accounts (e.g., GICs) </li></ul><ul><li>Financial advice and information </li></ul><ul><li>Cash management: </li></ul><ul><li>Disbursement services </li></ul><ul><li>Automated information and reporting systems </li></ul><ul><li>Lockbox </li></ul><ul><li>Electronic payments </li></ul><ul><li>Investment expertise: </li></ul><ul><li>Investment and advisory services </li></ul><ul><li>Employee Benefits: </li></ul><ul><li>Group medical and dental </li></ul><ul><li>Group non-medical and life </li></ul><ul><li>Payroll Services </li></ul>… and, in the future, additional financial products and services
  18. 18. Our Mission <ul><ul><li>Invest in social enterprises that employ people from economically marginalized communities </li></ul></ul><ul><ul><li>Enable these organizations to grow and succeed financially </li></ul></ul><ul><ul><li>Support these organizations to create improved social and financial outcomes for employees </li></ul></ul><ul><ul><li>Catalyze other innovative financing models for social initiatives </li></ul></ul>About SCP
  19. 19. Our Investment Approach Using the principles of venture capital To invest in high potential social enterprises And create a network of successful enterprises across Canada That ultimately employ thousands of people <ul><li>Risk capital </li></ul><ul><li>Deep engagement </li></ul><ul><li>Management support </li></ul><ul><li>Growth oriented </li></ul><ul><li>Profitable </li></ul><ul><li>Strong job creation per dollar invested </li></ul><ul><li>Cross pollinate ideas and best practices </li></ul><ul><li>Engage communities </li></ul><ul><li>Make the concept “mainstream” </li></ul><ul><li>Provide a positive alternative to social assistance </li></ul><ul><li>Make long lasting changes in communities </li></ul>About SCP
  20. 20. Portfolio Company Operating Profits Target Employees Non-Target Employees Portfolio Company Revenue Target Employees: 260 Total Employees: 400 Portfolio Company Revenue: 10.6M Portfolio Company Profits: 600k Individual Portfolio Companies About SCP: Results from our Portfolio Companies
  21. 21. What can you do about it? <ul><li>Key Messages </li></ul>Private sector Charities/NFPs Foundations <ul><ul><li>Look for ways to be catalysts for blended return projects </li></ul></ul><ul><ul><li>Think with both a business and a charity hat on more frequently </li></ul></ul><ul><ul><li>Learn and speak a blended return language </li></ul></ul><ul><ul><li>Consider possibilities outside a solely charitable structure </li></ul></ul><ul><ul><li>Consider investing part of your capital base, via program related investments (PRI), in organizations in the form of debt or equity, along with grants </li></ul></ul><ul><ul><li>Consider convening meetings including all parts of the community to further advance this type of thinking locally </li></ul></ul>Government <ul><ul><li>Consider regulatory policy that can act as an enabler to a developing social capital market </li></ul></ul><ul><ul><li>Consider tax policy that makes blended return investments more attractive </li></ul></ul>
  22. 22.