Social finance 101

T H I S W O R K S H O P I S A P R O J E C T O F

S I G N A T I O N A L / C A U S E W A Y ,

G E N E R O U S L Y S U P P O R T E D B Y T H E

O N T A R I O T R I L L I U M F O U N D A T I O N ,

A N D P R E S E N T E D B Y

T H E B C C E N T R E F O R S O C I A L E N T E R P R I S E

Social Finance 101

1

What we’ll cover today:

Introductions

What is social finance?

Is social finance a fit for your organization?

What social finance tools are available in Canada?

What’s next for the social finance sector in Canada?

Where can you connect to social finance opportunities, today?

Questions are welcomed at any time.

Thanks to our local workshop host!

2

Who’s in the room?

Charities? Non-profits? Co-operatives? Consultants? Others?

Board members? Staff? Volunteers?

How many are operating social enterprises?

How many are considering the launch of one?

How many have heard of ‘social finance’?

3

Drum roll...4

Introducing the online Guide to Social Finance

Created by Social Innovation Generation National

Funded by the Ontario Trillium Foundation

Bookmark www.socialfinance.ca

Contains up-to-date resources including a social finance directory geared to Ontario audiences

This workshop is based on the Guide’s content

http://www.socialfinance.ca/

What is social finance?5

‘an approach to managing money that delivers a social and/or environmental dividend as well as an economic return’

financing for social enterprises, social purpose businesses, and community-based organizations

synonymous with ‘impact investing’

What is social finance? (con’t)6

can be non-repayable (e.g. grants) in cases where the social finance element attracts additional finance or builds scale (i.e. rarer than repayable)

the investor wants more than anything for the supported organization / venture to succeed

Why do we need social finance?7

donations, grants, and contributions to non-profits are under duress

demand for social services is increasing

social / environmental problems are becoming more complex

governments can’t afford to solve these problems alone

Supporting factors8

community-based groups are interested in building greater self-reliance

investor values are shifting

other countries are establishing best practices

in Canada, a groundswell of systems building is underway

An important note about grants9

Although grants do not commonly form part of the social finance landscape per se, they are an essential component of the community-based sector.

Social finance can complement grants.

Some organizations may not be suited to repayable financing...

...more about this shortly.

How can social finance help?10

launch a social enterprise

grow a project, organization, or enterprise

purchase real estate

increase community impacts

Some quick examples...11

Community bonds:

The Centre for Social Innovation in Toronto raised $1.7M for the purchase and renovation of its new building.

Toronto Community Housing Corporation raised a $450M bond for the revitalization of Regent Park.


Mission-related investment:

A Canadian family foundation provided a loan from its endowment capital to help a local non-profit purchase a LEED certified office building in the area in which they provide services. The loan is for $3M over 10 years at an interest rate of 6.5%.


Loan:

Vancity provided a $5M loan to the Tia-o-qui-ahtFirst Nation to support the development of a local hydro plant, harnessing its local waterway off of Vancouver Island. The project will power 1,700 area homes and net $1.6M annually. Business proceeds will be used to construct a salmon hatchery and to rehabilitate local streams.


Patient capital:

The business development arm of the City of Toronto provided a mortgage to the Riverside Immigrant Women’s Enterprise, an entrepreneurial hub for women. A repayment holiday was extended: payments were not due until 8 months after the tenants had moved in.

Who are the social finance ‘players’?15

Supply

Investors

Grant makers

Demand

Social enterprises

Social purpose businesses

Community-based organizations (charities, non-profits, co-ops)

Plus intermediaries (financial, capacity building, impact measurement)

A social approach to finance emerges

IMPACTINVESTING

Responsible Investing $609 billion in Canada (2009)

A range of investing approaches are influencing the growth of

more proactive placement of capital called

Impact Investing

Mission Related Investing$32 million in Canada(2010)

Microfinance$6 billion global (2009)

Community Investing $1.4 billion in Canada (2009)

The question of profitability...17

Some organizations / enterprises may never be in a position to link to social finance.

Examples are those whose social / environmental bottom lines eclipse their financial one.

Training and employment businesses tend to incur 33% more expenses than ‘normal’. They may always be subsidized, and/or at breakeven.

Such ventures would likely not be in a position to repay debt or investors.


Social Capital Partners’ ‘five critical factors of social enterprise sustainability’...

Two business factors (in the venture’s control):

1. Business acumen of the operators

2. Business complexity

...plus...


Three trade-off factors (all conscious choices):

1. Size / nature of the employment barriers of the employees

2. Skills / training gap (between the people being hired and the skills required)

3. Degree of emphasis on the social mission in the day-to-day decision making process

What is ‘sustainability’20

Toronto Enterprise Fund works with employment / training enterprises

They posit a realistic definition of sustainability for these groups

‘Sustainability’ = covering business costs with business revenues + covering social costs with grants / subsidy

Recognizes financial impacts on the income statements of others (e.g. government)

Moving on...21

Assuming that social finance is a ‘fit’ for your organization’s needs, and the capacity exists for repayment...

The forms of social finance22

Commonly includes:

loans

equity investment

patient capital

And in some cases:

grants that attract new capital

grants that enable a social enterprise to shift to financial sustainability

Social finance tools (Canada)23

Example of a loan

Atira Women’s Resource Society recognized that it had real estate management competencies and used these skills to set up a company whose profits subsidize the organization. Atira Property Management accessed loans to operate the social enterprise, from Vancity Community Capital and Social Capital Partners Toronto. A condition for both loans was that 50% of the enterprise’s employees had to be social hires.


Loans

Financial return on investment (ROI) is a fixed rate, and generally runs at 5-18%

Term of investment: fixed term

Low involvement in the business / organization

Exit of investment is through repayment of the loan

Liquidation rights can be first priority

No voting rights


Example of patient capital

Kitchener’s The Working Centre facilitates community projects and operates enterprises that foster training and employment opportunities. They secured a $215K patient capital loan in the form of a flexible mortgage, from the Canadian Alternative Investment Co-operative, for new space for their St. John’s Kitchen project – the payments cover an asset (the building) rather than an expense (rent).


Patient capital

Financial return on investment (ROI) can run from minus 50% to plus 10%

Term of investment: repayment holidays

Some involvement in the business / organization

Exit of investment is through repayment of the loan

Zero liquidation rights (i.e. can’t seize assets)

No voting rights


Example of quasi equity finance

A social enterprise is engaged in promoting car-sharing as a way to reduce emissions while providing affordable access to drivers. They receive a quasi equity loan from the Toronto Atmospheric Fund, and use it to purchase more vehicles to expand their reach and deepen their impacts.


Quasi-equity

Still suitable for charities and non-profits

Financial return on investment (ROI) is a variable rate, and can run to 30%

Term of investment: 5-7 years

High involvement in the business, through Board

Exit of investment is through royalty or repayment

Liquidation rights are generally subordinate

Voting rights are structured in the finance agreement


Example of pure equity finance

An Ottawa environmental organization whose venture will launch locally-owned wind power generators receives an equity investment from the Community Power Fund, which is dedicated to building community power sources: the investor now owns part of the venture through shares.


Pure equity

Not suitable for charities and non-profits

Financial return on investment has no limit

Term of investment is undefined

High involvement in the business, through Board

Exit of investment is through royalty or repayment

Liquidation rights are residual

Voting rights are exercised through ownership

Who offers social finance?31

Traditional financiers

Banks (mostly through impact investing)

Community development finance and credit unions (Caisses populaires, Vancity)

Foundations (mission-related investing)

Governments (including grants and contributions, and Industry Canada, FedNor / Community Futures)


Impact investors

Community loan funds (e.g. Ottawa Community Loan Fund, Canadian Alternative Investment Co-op, new Community Forward Fund)

Environmental and Cleantech funds (e.g. Community Power Fund, Toronto Atmospheric Fund)

Social enterprise funds (e.g. Social Capital Partners, CAPE Fund)


Grants as social finance

Enterprising Non Profits Toronto

Toronto Enterprise Fund

Social Venture Partners (Toronto)

BC Social Enterprise Fund

Next steps for Canadian social finance34

The sector is nascent.

We still need to:

1. Unleash new sources of capital

2. Build an enabling tax and regulatory environment

3. Develop a robust investment pipeline

Canadian Task Force on Social Finance35

Convened by Social Innovation Generation (SiG) to identify opportunities to mobilize private capital for public good.

Members include Paul Martin, Tim Brodhead, Bill Young, Nancy Neamtan, Tamara Vrooman and other sectoral innovators and influencers.

See www.socialfinancetaskforce.ca

Released Mobilizing Private Capital for Public Good in December. The paper includes seven recommendations.

http://www.socialfinancetaskforce.ca/

Task Force next steps36

SiG is acting as a relationship broker

The Task Force itself is not mandated to implement the recommendations

Work is happening across the country with respect to the recommendations

A follow-up report from the Task Force is expected by the end of the year.

Other important developments37

‘Federal and provincial-territorial governments should embrace the sustainability of Canada’s non-profit sector as an explicit policy goal and address problems in the current policy and regulatory frameworks governing the sector that are barriers to this.’

‘The federal government should undertake changes to the Income Tax Act…to allow charities and non-profits more flexibility… to allow enterprising activity as long as all proceeds are directed to fulfillment of the organization’s mission.’

Other important developments38

Launched by the Government of Ontario in April 2010

Project to seek advice and ideas on ways to renew, streamline, and modernize the relationship between the government and the not-for-profit sector

Focused on: collaboration, policy and legislation, funding mechanisms, and information coordination

Recommendations include ‘make a range of social financing tools available to Ontario’s not-for-profit sector’.

Connecting to social finance opportunities39

At the online Guide to Social Finance, click on ‘Directory of Funds’

Offers an up-to-date listing of Canadian social finance opportunities

More than 30 social finance sources are listed, with detailed information on program requirements, application procedures, and websites

Thank you...40

Stacey Corriveau can be reached at:

[email protected]

604.859.4618

T H E S O C I A L F I N A N C E T A S K F O R C E

R E C O M M E N D A T I O N S

41

Bonus material

Task Force Recommendations42

Recommendation #1

To maximize their impact in fulfilling their mission, Canada’s public and private foundations should invest at least 10% of their capital in mission-related investments by 2020 and report annually to the public on their activity.


Recommendation #2

To mobilize new capital for impact investing in Canada, the federal government should partner with private, institutional, and philanthropic investors to establish the Canada Impact Investment Fund. This fund would support existing regional funds to reach scale, and catalyze the formation of new funds.


Recommendation #3

To channel private capital into effective social and environmental interventions, investors, intermediaries, social enterprise, and policy makers should work together to develop new bond and bond-like instruments.


Recommendation #4

To explore the opportunity of mobilizing the assets of pension funds in support of impact investing, Canada’s governments are encouraged to mandate pension funds to disclose responsible investing practices, clarify fiduciary duty in this respect, and provide incentives to mitigate perceived investment risk.


Recommendation #5

To ensure that charities and non-profits are positioned to undertake revenue generating activities in support of their missions, regulators and policy makers need to modernize their frameworks. Policy makers should also explore the need for new hybrid corporate forms for social enterprise.


Recommendation #6

To encourage private investors to provide the lower cost and patient capital that social enterprises need in order to maximize their social and environmental impact, a Tax Working Group should be established. This group should adapt proven tax-incentive models. This initiative should be accomplished for inclusion in 2012 federal and provincial budgets.


Recommendation #7

To strengthen the business capabilities of charities, non-profits, and other forms of social enterprises, the eligibility criteria of government-sponsored business development programs targeting SME’sshould be expanded to explicitly include the range of social enterprises.

Social finance 101

Documents

Transcript of Social finance 101