30 September 2014

It’s the new wave of investment, which threatens to turn the world of ­philanthropy on its head, by a simple switch of focus: to apply the same ­models for ­success in philanthropic endeavours as are applied to business.

It’s social impact investing – sometimes the “social” is left off – and it is nothing short of an attempt to bring the same level of entrepreneurial dynamism that characterises business to the ­philanthropic sphere.

The idea is simple enough – to invest in efforts that not only provide a return on investment, but also target specific social needs. The return on investment, however, is two-fold.

“It’s all about investments that have, or are intended to create, a positive social benefit as well as a financial return, where you measure both,” says Rosemary Addis, co-founder of Impact Investing Australia. “It’s measuring the social and the financial, where social in that context has a broad definition that encompasses environmental and ­cultural and things that generally are for the better for society.”

Although social impact investing is aimed at social problems – for example, homelessness, affordable housing, ­welfare dependency and prisoner ­re-offending – it is explicitly not pure philanthropy as we know it. Impact investing has to pay its way.

“What we’re trying to do with impact investing is make investments that drive positive outcomes, such as better employment outcomes for people who face barriers to getting work, better health or environmental outcomes, or more appropriate housing solutions for people with disabilities. But at the same time, these are commercial ­investments,” says Ben Gales, chief executive of Social Enterprise Finance Australia (SEFA).

“You can actually target institutional investors with good commercial deals that lead to those positive externalities. You can look at aged care, you can look at health care, you can look at indigenous housing, there are huge ­opportunities out there with incredibly positive externalities, but actually ­giving a perfectly good commercial return. We can create investment opportunities that deliver positive externalities but also strong financial returns: we just need to harness the available funds by structuring deals appropriately,” says Gales.

Effectively, there is “no expectation of getting any money back” from ­philanthropy, even if you look upon it as an investment, says David Knowles, head of philanthropy advisory at JB Were. Whereas, in impact investing, “there’s the expectation that you’ll get back your money back and potentially an income stream from the investment”. Within Australia, the Centre for Social Impact at the University of ­Western Australia estimates that impact investing could grow to be a $20 billion sector by the end of the ­decade. Globally, JPMorgan and the Rockefeller Foundation predict that the impact investing sector would grow to between US$400 billion and US$1 trillion in size by 2020.

One of the earliest examples of social impact investing in Australia was the GoodStart Early Learning Syndicate, which was set up in 2008–09 following the collapse of ABC Learning, the largest single provider of child care in the Australian market. Four not-for-profit organisations – the Benevolent Society, Social Ventures Australia, Mission Australia and the Brotherhood of ­­St Laurence – formed the syndicate, which set out to raise capital to buy 678 of ABC Learning’s viable child-care centres, to ensure they stayed open.

The three syndicate members whose balance sheets were significant enough – Benevolent Society, Mission Australia and Brotherhood of St Laurence – invested $2.5 million each in members’ subordinated notes, and all four ­members invested $2.5 million non-cash each (paid for through advisory ­services) in members’ deeply ­subordinated notes. National Australia Bank provided a package of four senior debt facilities worth $120 million, accepting a slightly lower interest rate than ­market.

The Commonwealth government provided a loan worth $15 million – which allowed most of the principal to be repaid in later years – because the transaction was in the public interest. And the syndicate approached more than 150 high-net-worth individuals, philanthropists and foundations to invest in social capital notes: 41 such “social investors” invested a total of $22.5 million in unsecured social ­capital notes, with an eight-year term, offering 12 per cent interest annually – which GoodStart is not obliged to pay if it has insufficient free cash flow in a given year. GoodStart has been running the child-care centres since 2010: it is the largest social enterprise in ­Australia. Another example is a social benefit bond (SBB), a form of finance designed to raise capital for programs that address areas of pressing social needs. These are financial investments that pay a return based on the degree of success that the social program achieves in addressing social needs.

The New South Wales Department of Families and Community Services and Uniting Care launched Australia’s first SBB in March 2013, to fund the ­latter’s Newpin programs to support ­at-risk children in the state’s out-of-home care system to return safely to their parents. The charity runs the project, which saves the government money in the long term: the government pays the investors for each ­successful outcome that is attained.

In the first 12 months of SBB funding, the Newpin program restored ­28 children under six years of age to their families, and prevented children at risk in another 10 families from ­entering the child protection system.

Those outcomes qualified the investors to receive a 7.5 per cent return for year one of the program – against a targeted financial return of 10 per cent –12 per cent a year over the seven-year term of the bond, based on the expected success of the program in restoring children to their families.

In October 2013, the Benevolent ­Society launched a similar $10 million SBB to fund its Resilient Families ­program, an intensive family support program designed to keep children, reported as being at risk of harm, or already in the New South Wales child protection system, with their families. The Benevolent Society SBB was ­structured with two tranches to meet the different risk-and-return profiles of different investor markets. The Class P investment is capital-protected, while the Class E investment will suffer 100 per cent loss if the performance improvement of the Resilient Families program is less than 5 per cent. “We’re interested in growing a social finance market to provide new sources of funding to the social services sector not only to deal with the growing need for social services, but also to find ways to achieve lasting change,” says Wendy Haigh, executive director of finance and business services at The Benevolent Society.

If you were looking solely at GoodStart as an example of social impact investment, the mooted dual social/financial model certainly seems to stack up. “We’re earning a return of 15 per cent on the GoodStart investment, we have been for several years and probably will be for several more. In a climate of very low interest rates, it really has been a good financial ­investment,” says Haigh.

“Our social benefit bond is returning up to 10 per cent (for the capital-protected tranche) or up to 30 per cent (for the capital-at-risk tranche) if it goes well. So it could end up being a philanthropic gift, but we never went into it as that,” she says. “It was both pieces: we were investing in a measured social benefit as well as a financial return. And although it is hard to measure, we will be able to see how well the families in our service are doing compared with families who don’t receive the ­service,” says Haigh.

All you are really talking about with social impact investing is “taking into account the externalities when you consider the investments,” says Gales. “All investments result in externalities – positive or negative – as they impact outcomes for individuals or ­communities or the environment. When I was in venture capital, I used to make commercial investments but avoid negative externalities. “All we’re trying to do with impact investing is make commercial investments that drive positive externalities, such as better employment outcomes for people who face barriers to getting work, better health or environmental outcomes, or more appropriate housing solutions for people with disabilities,” says Gales.

The sector is learning to target ­institutional investors with good commercial deals that lead to these positive externalities, he says. “You can look at aged care, you can look at health care, you can look at indigenous housing: there are huge opportunities out there that have incredibly positive externalities, but actually giving a perfectly good commercial return,” says Gales.