Making the case for outcome-based social impact investment
Note: This post originally appeared in The Financial Post.
Sir Ronald Cohen, generally regarded as the father of British venture capital, and now the leader in the fledgling social impact investing movement, has a message for Stephen Harper: get aboard because “Canada can be a global leader.”
Social impact bonds, a form of financing that’s been in England for half a decade, “tap into the need of government to find new and effective ways of delivering social services. Others put up the risk capital [and governments] pay on [a successful] outcome,” said Cohen, who was in Canada this week for a meeting of the G-7’s Social Impact Investment Taskforce.
Terms such as accountability, payments made for success and not for inputs, and efficiency underpin Cohen’s argument for an investing form with three legs: the outcome’s funder (government or a foundation); the investor (who is hoping for a financial and social return) and the organization doing the delivery.
“This is a way of bringing innovation to the delivery of public services,” said the Oxford and Harvard educated Cohen who also met with the major banks while in Canada. “They were enthusiastic. They recognize the change I am talking about. And they have the opportunity to deliver uncorrelated investment returns to their investing customers in a variety of asset classes.”
In 2010, Cohen, for many years chief executive of Apax Partners, a firm he co-founded and which now manages US$37.4 billion, received 400-million pounds from the government for Big Society Capital, a new social investment company. That capital—backed with 200-million pounds from the banks—came from unclaimed balances. (Such balances normally flow to the government. Japan recently agreed to give US$800 million of such balances to a new social investment bank.)
That capital is “funding impact investment organizations that in turn fund front line organizations helping prisoners, the elderly, school dropout rates and homelessness,” said Cohen, adding 150-million pounds have been committed.
The first social impact bond was issued by Peterborough, a city in the British midlands, in 2010. Backed by the Rockefeller Foundation, the goal was to reduce prisoner recidivism: in 2014, the foundation reported tangible success: while reoffending was reduced by 8.4 per cent, “a reduction of 10 per cent was needed to trigger immediate repayment to investors.”
Since then more than 40 social impact bonds have been issued: 30 are in the U.K. The U.S., Saskatchewan, Australia, parts of Europe and India have also all issued. “It takes a long time to get each one in place,” noted Cohen, who has little time for the argument that agents—the middlemen—could take advantage because government money is involved and because investors receive a tax break.
This is a way of bringing innovation to the delivery of public services
“Today we are measuring risk, return and impact,” a path he says evolved from the initial focus on return to the middle step of risk and return.
“The breakthrough with social impact bonds is to connect the improvement in a social issue with a financial return. By doing that you give the key to the financial markets to not-for-profit entrepreneurs who until now had depended on donations,” said Cohen, adding the technology boom of 15 years back developed because venture capital was able to met the needs of the entrepreneurs.
“Impact investing is a response to the need of social entrepreneurs which is similar to venture capital for the needs of tech and other entrepreneurs,” said Cohen.