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Building a Social Capital Market in Canada

October 2005

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1. Social Capital Market: Financing Social Change

2. Global Context

3. Canadian Approaches

4. Roles We Can Play

Agenda

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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 . . .

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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

E.g.

• Sustainability and Conservation

• Inner-city economic development

• First Nations economic development

• Affordable housing

Government Funding

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Joint venture of nonprofit housing corporations in Winnipeg

Renovates run-down housing in the inner city

Employs 10-15 low-income inner city residents, mostly Aboriginal Canadians

Has revitalized dozens of homes and commercial buildings across the Winnipeg inner-city

Generated nearly C$1.5M in business revenue in 2004 / 2005 but is struggling for profitability

. . . and some ground breaking organizations already defy these traditional views

Financing Social Change: An Example

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Financing Social Change: An Example

Business generates revenue, strives for profitability and services loans

However,

Profitability and returns do not meet typical private investment hurdles

Jobs are provided for those who might otherwise rely on social assistance

However,

Government is reluctant to support an organization that competes within the private sector

Affordable housing is constructed and at-risk individuals receive job training

However,

ICR does not fit the traditional definition of a charity and cannot receive philanthropic gifts

Investment Outcomes Policy Outcomes Charitable Outcomes

However, these organizations often fall between the cracks of traditional financing programs . . .

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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

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Financing Social Change: Hybrid Financing Tools

Provide access to capital and assist in assessing financial risk

Offer effective tax incentives based on an assessment of overall returns to society

Foundations

offer loan loss reserves or guarantees

Charities help assess social benefit

Private Investors GovernmentCharitable

Organizations

Each of the traditional sector-silos possess tools that could be used to create hybrid investment vehicles . . .

Success is measured in terms of “Social Return on Investment”

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The UK

Future Builders– Approximately $250M Cdn to help finance social sector

infrastructure investments Phoenix Fund

– Approximately $100M in support for direct investment, CDFIs, CDVCs, and a central CDVC.

Community Investment Tax Relief– Tax relief credit for investment in disadvantaged

neighbourhoods.

These countries have built up successful track records over the last 10-20 years.

However there is a significant role for government to play in making this a more desirable outcome

The US Community Reinvestment Act

– Legislation passed requiring mainstream FIs invest a component of their loan books in disadvantaged areas.

Community Development Financial Institutions Fund– Support in the form of start-up or further capital infusions,

technical assistance, or in the form of tax incentives. Community Development Venture Capital Funds

– Tax and capital support for the financing of community development venture capital funds

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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)

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Key impediments – A variety of different organizations are attempting to develop alternative structures that may better reflect a blended value proposition:

– Charities and NFPs– A variety of social enterprises

A growing industry of socially responsible investors finds that it can be difficult to invest in the developing ‘gray space’:

– Foundations interested in making program related investments (pri)

– Funds that need to present a market value proposition to investors

Unfavourable regulatory framework

Narrow political and cultural norms

Lack of innovative investment vehicles

Investor resistance

Progress remains slow in Canada for a variety of

regulatory and cultural reasons

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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

Fewer entrepreneurial

approaches

Resulting in . . .

And few chances to overcome . . .

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And allow . . .

Which creates. . .

Develop . . .

New Risk Capital Vehicles

Social Investors

Entrepreneurial Solutions to Social

Problems

Which encourage . . .

And attracts new . . .

Why Social Enterprise: Creating a Positive Cycle

Risk taking and Innovation

Greater social returns

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Vartana – a social sector focused financial institution

AND

A bank

• By creating an innovative charitable financial institution built with the sector to better meet its full range of financial service needs

• By strengthening voluntary sector organizations, helping them become more effective and innovative in fulfilling their missions

• By building relationships and support across Canada’s voluntary sector, regulatory and business communities

• By establishing a new bank that is economically viable and fits within current policy frameworks

The Bank will significantly enhance the options available to Canada’s voluntary sector:

A registered charity

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Vartana – the need

“The 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

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Vartana – the proposed products/services

Traditional banking products tailored to the sector’s needs…

Loans and guarantees:

• Working capital loans

• Short term bridging loans

• Underwriting for a fund-raising programme

• Final step loans so a project can go ahead

• Loans for capital equipment

• Mortgage loans

• Renovation loans

• Credit cards

Deposit products:

• Chequing accounts

• Savings accounts

• Term accounts (e.g., GICs)

Financial advice and information

Cash management:

• Disbursement services

• Automated information and reporting systems

• Lockbox

• Electronic payments

Investment expertise:

• Investment and advisory services

Employee Benefits:

• Group medical and dental

• Group non-medical and life

Payroll Services

…and, in the future, additional financial products and services

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Our Mission

Invest in social enterprises that employ people from economically marginalized communities

Enable these organizations to grow and succeed financially

Support these organizations to create improved social and financial outcomes for employees

Catalyze other innovative financing models for social initiatives

About SCP

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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

• Risk capital

• Deep engagement

• Management support

• Growth oriented

• Profitable

• Strong job creation per dollar invested

• Cross pollinate ideas and best practices

• Engage communities

• Make the concept “mainstream”

• Provide a positive alternative to social assistance

• Make long lasting changes in communities

About SCP

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$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

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

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What can you do about it?

Key Messages

Private sector

Charities/NFPs

Foundations

Look for ways to be catalysts for blended return projects Think with both a business and a charity hat on more

frequently

Learn and speak a blended return language Consider possibilities outside a solely charitable structure

Consider investing part of your capital base, via program related investments (PRI), in organizations in the form of debt or equity, along with grants

Consider convening meetings including all parts of the community to further advance this type of thinking locally

Government

Consider regulatory policy that can act as an enabler to a developing social capital market

Consider tax policy that makes blended return investments more attractive

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www.socialcapitalpartners.ca

www.vartana.org