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Diamonds In The Rough

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Causeway presentation at the Social Venture Institute - September 8, 2007

Causeway presentation at the Social Venture Institute - September 8, 2007

Published in Business , Economy & Finance
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  • 1. Diamonds in the Rough Emerging opportunities in social finance.
  • 2. quot;Money is a stupid measure of achievement, but unfortunately it is the only universal measure we have.quot; - Charles Steinmetz CAUSEWAY: a national collaboration
  • 3. “Social finance” is… HIGH INVOLVEMENT Venture Venture A sustainable approach to philanthropy capital COMMERCIAL CHARITABLE managing money that delivers social, environmental dividends Traditional grant Bank and economic return. making lending LOW INVOLVEMENT Adapted from Margaret Bolton, 2003 Grants Patient Capital Pure Equity Equity -like Loans Expected loss % 100% 20-50% 10-20% 10-20% 1-8% Return on investment 0 -50%-c.10% No limit Variable up to 30% Fixed 5-18% Undefined Depends 5-7 yrs Depends on Term of investment Often short periods Repayment holidays Fixed term on success success Involvement in Low (except venture Some (through High (through board ) High (through board ) Low business philanthropy ) partners ) Royalty , repayment Exit of investment n/a Repayment IPO, sale, buyout Repayment or APO Liquidation rights None None/subordinate Residual Subordinate First priority Structured in loan Voting rights No No Through ownership No agreement Adapted from : Bridges Community Ventures , UK CAUSEWAY: a national collaboration
  • 4. … happens at many levels… • Investment – A financial investment that delivers a ‘blended return’ • E.g. a loan issued to a social enterprise • Product – Investment vehicles such as bond issues or private equity funds that combines investors with a variety of objectives around an investment area that will deliver a ‘blended return’ • E.g. the $20 M EYE Fund • Catalytic – (Re)application of financial capital to a specific issue with a comprehensive perspective that encourages a the (re)creation of new system for addressing a social or environmental issue • E.g. the Great Bear Rainforest CAUSEWAY: a national collaboration
  • 5. … and is rooted in: • A change in conversation – Control » Potential ts en • Blended value return tm es nv nI la u il Aq e: – Conflicted c ur So » Collaborative • Cross-silos Government Business • A change in flow Hybrid Space – Linear top-down Charity & non- » Complex profit CAUSEWAY: a national collaboration
  • 6. quot;Money. It's a gas.quot; - Pink Floyd CAUSEWAY: a national collaboration
  • 7. It begins with a conversation… • Aligning interests to create innovative solutions Constructive Dynamic R Source Perspective eq n Use Perspective ur ui et re R m en ts ns o i t ic R r st is k e R Constrictive Dynamic CAUSEWAY: a national collaboration
  • 8. … results in specific products • Venture capital – Capital regional et coopérative Desjardins (CRCD) is a $500 million venture capital fund created in 2001 by the Desjardins Movement with the help of a provincial tax credit. Individual investors can invest up to $3500 a year in shares with a 50% tax credit. Shares must be kept for a minimum of seven years. Mission: to provide capital, expertise and access to networks for businesses and cooperatives in all Québec’s regions • Local community development – The Columbus Foundation used $2 million to seed an $18 million low-cost housing fund to build 1,600 new units of affordable housing. • Startup or expansion capital in underserved communities – Deutsche Bank announced it will create an innovative $20 million investment fund to finance the expansion of eye care hospitals in developing countries. The Eye Fund I will provide loans and guarantees to support the development of affordable, sustainable and accessible eye care for the world's poor while providing a near-market return for investors • Debt mechanisms – Milestone achievement of $100m in loans to community finance institutions and social enterprises by Calvert Foundation’s Community Investment Note • Acquisition of assets – BC Pension Funds – 21 BC-based union and management pension funds pooled $27 M to form Concert Properties in 1989 (originally named VLC) with the objective of financing affordable rental housing in BC, and creating jobs in the unionized construction industry. Today the 100% pension plan owned real estate corporation has $800 million in assets, with a track record of creating 10 million hours of on-site employment for unionized construction workers. CAUSEWAY: a national collaboration
  • 9. … and can change whole systems. • Coming together of the great catalysts – capital + community • Great Bear Rainforest (2 million hectares) – Start: environmentalists + lumber companies get together – 2001: private foundations + BC premier’s office -> 1st nat. – 2002/3: determination of ecological value and economic pot. – 2007 Outcomes: • $120 M across 2 funds: $30 M fed, $30 M prov., $60 M private • Provincial government actions – New ‘ecosystem based’ land management regime (3x PEI) – New park designation for ecological protection • Collaborations – Collective land-use agreement among prov. gov’t and first nations – North coast first nations collaborating (e.g. joint marketing and distribution of fish) – Shared governance between private, first nations, government CAUSEWAY: a national collaboration
  • 10. The social finance ‘diamond craft’ • The potential value of any social finance undertaking is strongly influenced by: • Understanding (clarity) – Depth of understanding • What’s the issue? • What’s involved in addressing it? • Value (carat) – Amount of capital involved in the issue? • Assets, income, expenditures, etc. ? • Engagement (shape and facets) – Comprehensiveness of input into discovery and design • Participation (cut) – Variety of participants and perspectives in envisioned solution CAUSEWAY: a national collaboration
  • 11. CAUSEWAY a national collaboration A national collaboration working on new pathways for financial investment in public benefit. CAUSEWAY: a national collaboration
  • 12. CAUSEWAY a national collaboration CONTACT Tim Draimin Michael Lewkowitz Chair, Steering Committee Start-up Coordinator Phone: Phone: (604) 647-6611 x244 (416) 607-5643 (416) 481-8652 (778) 329-0021 Email: Email: tim@tidescanada.org michael@igniter.com CAUSEWAY: a national collaboration
  • 13. “Money plays the largest part in determining the course of history.quot; - Karl Marx quot;Only when the last tree has died and the last river been poisoned and the last fish been caught will we realize we cannot eat money.quot; - Cree proverb CAUSEWAY: a national collaboration
  • 14. ‘Finance’ is about: managing risk… for financial return • From wikipedia: – The study of money and other assets; – The management and control of those assets; – Profiling and managing project risks; or – The science of managing money. CAUSEWAY: a national collaboration
  • 15. Risk management = beware of uncharted waters. Motivates selecting the known, familiar, direct •Legal structure •For-profit •Use of proceeds •Not-for-profit •Operations •Charity •Investment structure •Assets •Grant •Projects •Loan •Equity Creates rigid and specific investment terms CAUSEWAY: a national collaboration
  • 16. Which invites a game… of financial ‘Twister’ Table 1.5 - Project Capital Funding Summary Source of Funding Form of Funding Amount Homegrown Solutions Grant $ 18,800.00 Pacific Coast Savings credit Union First mortgage $ 2,000,000.00 Line of credit $ 300,000.00 Real Estate Foundation of BC Second mortgage & grant $ 318,000.00 City of Victoria Grant $ 20,000.00 Vancouver Foundation Grant $ 50,000.00 VanCity Community Foundation Third mortgage & grant $ 200,000.00 Victoria Cool Aid Society Equity $ 285,000.00 Account interest $ 8,893.66 Total funding $ 3,200,693.66 Total capital costs $ 3,195,787.30 Surplus $ 4,906.36 CAUSEWAY: a national collaboration
  • 17. Proposed Vancouver Homelessness LP from Vancouver Homelessness Funding Model Report CAUSEWAY: a national collaboration
  • 18. “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” - Ayn Rand CAUSEWAY: a national collaboration
  • 19. You can do a lot with diplomacy, but with diplomacy backed up by force you can get a lot more done. - Kofi Annan CAUSEWAY: a national collaboration
  • 20. On the precipice of unprecedented challenges + systemic failure Growing social and environmental pressures + government and market failure = the conditions for innovation. CAUSEWAY: a national collaboration
  • 21. The U.S. and UK have responded • US - New Market Tax Credits – $37 B in economic infusion – Introduced in 2001 to provide tax credits to investors in Community Development Entities – 88% of investors would not have made the investment in low- income communities without it • UK - Community Interest Companies (CICs) Source: US Dept. of the Treasury, Insights, New Markets Tax Credits – 1164 CICs registered – Hybrid legal structure • Capped dividend payable to shareholders • Asset lock retains assets within the company or other CICs CAUSEWAY: a national collaboration
  • 22. encouraging an entire marketplace U.S. Source: GoodCaptial Story Index Presentation and Jay Coen Gilbert, Don Shaffer and John Katovich CAUSEWAY: a national collaboration
  • 23. encouraging an entire marketplace UK CAUSEWAY: a national collaboration
  • 24. And in certain areas… Source: GoodCapital and Mark Beam? CAUSEWAY: a national collaboration
  • 25. … structured financial products. 20 deals | 21 orgs | $6.5B (affordable housing, microfinance, global ngo’s) CAUSEWAY: a national collaboration
  • 26. The Canadian diamond field Acceptable Purpose by Structure • Limiting regulatory framework Organizational Types – Income Tax Act and charity law For Profit Not-for-Profit Charity significantly constrain flow of Relieve Poverty Wealth Any capital Maximization Purpose Advance Religion Except Advance Education • Strong non-profit sector Profit Community Benefit Acceptable Purpose Adapted from: W. L. Hunter – $120 B annual expenditures – >7% of Canada’s GDP – Above average growth – 1.5 M workers + 0.5 M volunteers – 2nd largest in world per capita • Internationally significant – Resources • Water, energy, forests – Examples • Great Bear Rainforest CAUSEWAY: a national collaboration
  • 27. Preparing for a diamond harvest • Changing the conversation • Developing the craft – Financial structuring research, demonstration, and dissemination • Enabling the marketplace – Policy (tax incentives and supporting hybridization) – Opening systems to restructuring CAUSEWAY: a national collaboration