The Opportuni-es and Disrup-ve Poten-al of the Impact Economy

Transcription

1 Live Tweet During the Webinar #accimpact Ques-ons during the Webinar? The Opportuni-es and Disrup-ve Poten-al of the Impact Economy A Beginner s Guide for Experienced Lawyers, Financial Officers, and Development Professionals Fall 2013 Session 3 Capital and Impact Thursday, November 14, :00-2:00 p.m.

2 Live Tweet During the Webinar #accimpact Ques-ons during the Webinar? 2

3 The Landscape The capital markets have the poten-al to significantly influence the social, environmental and economic challenges of socie-es. To scale the impact economy and to address some of these cri-cal social and environmental challenges in increasingly effec-ve ways, we must harness the mainstream capital market infrastructure and investment ecosystem for impact. One way to help achieve this objec-ve is to grow the impact inves-ng sector. Refresher: Impact Inves-ng is commonly defined as an investment approach inten-onally seeking to create both financial return and posi-ve social or environmental impact that is ac-vely measured. * *Michael Drexler and Abigail Noble (2013): From Margins to the Mainstream Assessing the Impact Investment Sector in Opportuni7es to Engage Mainstream Investors, World Economic Forum Investors Industry, DeloiWe Touch Tohmatsu hwp://reports.weforum.org/impact- investment/# 3

4 Current Conditions Increasing amounts of capital are flowing into the Impact Economy: The current size of the Impact Inves-ng market is es-mated to be between $50-70 billion.* The projected market size in 2020 is expected to be somewhere between $400 billion to $650 billion.* While eszmates vary as to how large the impact investment market is and will be, there is consensus that the impact investment market is growing at a rapid pace. *Michael Drexler and Abigail Noble (2013): From Margins to the Mainstream Assessing the Impact Investment Sector in Opportuni7es to Engage Mainstream Investors, World Economic Forum Investors Industry, DeloiWe Touch Tohmatsu hwp://reports.weforum.org/impact- investment/# 4

5 Change is Coming Mainstream capital market players are entering the game: v Goldman Sachs: Urban Investment Group ( h_p:// we- do/inves-ng- and- lending/urban- investments/ case- studies/social- impact- bonds.html) v JP Morgan Social Finance plaeorm ( h_p:// finance.htm) v Morgan Stanley Inves-ng with Impact plaeorm ( h_p:// impact.html) v Deutche Bank Impact Investment Fund I ( h_ps:// _investm ent_fund_1.html) v Credit Suisse Impact Inves-ng Research Report ( h_ps:// suisse.com/ch/en/news- and- exper-se/research/credit- suisse- research- ins-tute/news- and- videos.ar-cle.html/ar-cle/pwp/news- and- exper-se/ 2012/04/en/impact- inves-ng- solu-ons- for- global- issues.html) 5

6 Change is Coming Impact InvesZng conversazons are taking place nazonally and globally through recognized conferences, forums and seminars: v Social Capital Markets Conference (SoCap) - h_p://socialcapitalmarkets.net/ v World Economic Forum - h_p:// v G8 Summit - h_p:// data/g8supportle_er.pdf v Global Innova-on Summit - h_p:// innova-on v Opportunity Collabora-on - h_p://opportunitycollabora-on.net/ v Social Venture Network - h_p://svn.org/ v Investor s Circle - h_p:// 6

7 Webinar Session 3 Overview Ø The types of capital flowing into the impact economy. Ø Background and history about how the capital equa-on in impact evolved to where it is today. Ø Specific impact investment case studies illustra-ng the types of asset owners inves-ng in impact and the kinds of investments they are making. Ø Insights into the debt side of the impact capital stack. Ø An overview about Social Impact Bonds explaining how SIBs work and who is using them for what purpose. Ø Vision of how impact individuals, organiza-ons and enterprises can increasingly a_ract capital from mainstream capital market players to grow and scale the Impact Economy. 7

8 Quick Preface What follows is a 101 version of the impact capital spectrum It doesn t apply to everything, and everything isn t absolute It s not an exact science And, as always, the following diagrams are not exactly to scale (C) Mark Newberg 2013

9 Capital (and Vehicle) Types By Return Target No Return Some Return Market Return Grant Funding Concessionary Debt Debt DonaZons Micro- Lending Private Equity PRI MRI Suitable For Angel Angel Non Profit For Profit Vehicle Venture Venture (C) Mark Newberg 2013

10 But What About? No Return Some Return Market Return Social Impact Bond To Be ConZnued Crowd Funding To Be Determined (C) Mark Newberg 2013

11 Background/History of Impact Investing Ø Crea-on of socially responsible investments. Ø Deficiencies in then exis-ng investment channels to address impact opportuni-es. Ø Differences between impact capital and socially responsible inves-ng (SRI). 11

12 Impact Investing Landscape and Stakeholders Intermediaries Impact Investors Funds/Products Social Enterprises Government Regula-on and Legisla-on Measurement, Repor-ng, and Verifica-on Other Standard Sepng En--es

13 Who are the asset owners? High Net Worth Individuals FoundaZons Commercial Investors Impact Investments Development InsZtuZons & Banks

14 Mission Investment Continuum Across Traditional Asset Classes Below- Market Investments Higher Risk Lower Risk Lower Risk Higher Risk Market- Rate Investments Source: F.B. Heron FoundaZon Mission- Related InvesZng ConZnuum

15 Example: DBL Investors Purpose: To invest in companies that can deliver top- Zer venture capital returns while working with the company's management to promote social, environmental and economic impact in the regions in which they operate. Target Venture: Private growth companies with a strong emphasis on investments in clean tech, healthcare, IT, and sustainability- oriented products and services. Geography : US Fund Size: $225 million in two funds Investors: FoundaZons, Individuals, InsZtuZonal Investors Investees: Pandora, RevoluZon Foods, Tesla Motors

16 Example: Self Help Credit Unions Purpose: To strengthen community organizazons, grow local businesses, provide affordable home loans, revitalize downtowns and advocate for financial reforms that create posizve outcomes. Geography : NC, IL, CA Lending to date: $6.8 billion Investors: Individuals, foundazons, enterprises Financial Return: Market rate CONFIDENTIAL: NOT FOR EXTERNAL DISTRIBUTION

17 Financing for Nonprofits Commercial Lenders Banks, Credit Unions, etc Community Development Financial InsZtuZons (CDFIs) Nonprofit and for profit enzzes CDFI.Gov FoundaZons Program related investments (below market) Mission related investments (market rate)

18 Success Contracts and Social Impact Bonds Social Impact Bonds (SIBs) and Pay for Success (PFS) Contracts: A new Impact Economy funding approach. Social Impact Bonds leverage private money so that the government only has to pay for the programs that produce specified measurable outcomes. SIBs are one of the emerging methods that governments are using to develop the Impact Economy. Pay for Success Contracts are contracts between governments and non- profit service providers where payments to the service providers are condizoned upon on achieving specific performance targets. PFS Contracts can be supported through the use of SIBs. 18

19 SIB Name is Misleading Ø SIBs are not bonds or financial instruments. Ø SIBs are private- sector financing arrangements. Ø Governments are not required to issue debt in the tradizonal sense as required for a bond issue. Ø SIBs are employed in a private/public partnership transaczon, where the SIB proceeds fund the non- profit s good works with the hope that the long term savings from the intervenzon will produce a return to the bondholder. 19

20 SIB Specifics A government unit contracts with an intermediary that raises capital from investors. The intermediary then contracts with a nonprofit service provider to run a mul-year program that a_empts to alleviate a social problem, such as homelessness or prison recidivism. The intermediary monitors progress and works with the nonprofit to make any needed modifica-ons during the course of the program. At the end of the contract, an independent assessor determines the results of the program and how much the government should repay investors. The investors can lose a por-on or all of their money if program goals are not met and can receive a return of their investment, plus an agreed upon return, if the program is successful, all depending on how the SIB is structured. The suitability of any par-cular interven-on for SIB capital should be judged in part on its ability to be replicated and expanded to serve a larger number of people as well as the capability of iden-fying with precision the resul-ng cost savings to the governmental unit. 20

21 SIB Case Study v v v v v v v Social Finance, a Bri-sh non- profit organiza-on served as the intermediary in a social impact bond issued by the UK Ministry of Jus-ce. Both Social Finance and the Ministry agreed upon measures of success and iden-fied the non- profit service providers to implement the program. Social Finance raised about $8 million from private investors who believe that the specific service providers selected by Social Finance can improve outcomes for these prisoners. For the bond investors to get back their ini-al investment, by 2014 the recidivism rate of prisoners must fall at least 7.5 percent, compared to a control group. If the rate falls more than 7.5 percent, the bond investors will get a return on their investment in propor-on to how high the rate falls. If the rate does not fall at least 7.5 percent, the bond investors do not get any money from the government. Social Finance also oversees the three non- profit service providers helping to support former prisoners, including by providing housing, finding them work and educa-ng them on staying healthy. 21

22 Current State of the SIB Market As of 2013, Britain has pioneered 14 SIBS, including the 2010 SIB funding the prisoner- rehabilita-on program. In 2012, New York City launched the first social impact bond program in the country, focusing on reducing recidivism among 16 through 18 year olds detained at the Riker s Island jail. Massachuse_s is developing two social impact bond programs targe-ng juvenile jus-ce issues and homelessness. President Obama is a supporter of PFS Contracts and SIBS. h_p:// for- success Harvard s Social Impact Bond Technical Assistance Lab conducts research on how governments can foster social innova-on and improve results from social spending programs. h_p://hks- siblab.org/ 22

23 SIB Results Social Impact Bonds are a new Impact Economy invenzon. The jury is szll out on SIBs since they are predicated on addressing social challenges requiring mulz- year programmazc soluzons. Not yet enough data to really know how effeczve they can be in easing social ills and saving money for governments. Results of the UK s first SIB: According to one government report, the six- year program has so far led to a 6 percent drop in recidivism. 23

24 SIB Keys to Success Choosing the right social issues to address - SIBs should focus on interven-ons that: Ø Have a high probability of success based on prior evidence; Ø Have measurable outcomes supported with authorita-ve data and strong evalua-on methodologies; Ø Are overseen by experienced managers that have flexibility to adjust their approach; and Ø Yield significant future savings to the government if successful. Finding qualified non- profit partners for service delivery. Finding qualified intermediaries to manage the en-re SIB process. Iden-fying the right financial incen-ves. Measuring the Impact - data is key. 24

25 Scaling the Impact Economy What are the key things that individuals, organiza-ons and enterprises opera-ng in the Impact Economy can do to increasingly a_ract capital from mainstream capital market players? 25

26 Q&A Ques-ons during the Webinar? Live Tweet During the Webinar #accimpact 26

27 Cynthia Muller: Director of Impact InvesZng Arabella Advisors Mark Newberg: Managing Director of Impact Investment Strategies 5 Stone Green Capital mmn@5sgc.com Ques-ons during the Webinar? impact@wcsr.com D. Wayne Silby: Chairman Calvert FoundaZon waynesilby@gmail.com Pam Rothenberg: Partner Womble Carlyle Sandridge & Rice LLP PRothenberg@wcsr.com Live Tweet During the Webinar #accimpact 27