Impact Investing – the New Opportunities and Challenges

Slovenia April 2011

Arthur Wood

Total Impact Advisorswww.totalimpactadvisors.com

World Sanitation Financing Facility

www.sanitationfinance.org

awood@totalimpactadvisors.com

The Social Finance Crunch – “The Social Finance Crunch – “Population aging is a worldwide Population aging is a worldwide

phenomenon that will affect all G-7 countriesphenomenon that will affect all G-7 countries””

There is simply not enough money in the current There is simply not enough money in the current paradigm – Compounded by the Credit Crunchparadigm – Compounded by the Credit Crunch

Current Social Capital Market – For Profit and Not For ProfitCurrent Social Capital Market – For Profit and Not For Profit- The Structural Funding Challenge for Big Society- The Structural Funding Challenge for Big SocietySocial Sector Fragmentation or Corporate Asset Stripping ?Social Sector Fragmentation or Corporate Asset Stripping ?

NOT FOR PROFIT below market return FOR PROFIT

High risk

Low risk

Grants50%

Programme- RelatedInvestments

Venture philanthropy

Mainstream“For Profit” Investments

Investment plus

Social Responsible Investment

circa

Corporate Engagement incl

CSR

MRI

1. No mechanism from “not for profit” to “for profit”2. R&D detached from the mainstream success

3. If successful community not stakeholders

4. No Collaborative mechanisms

5. Highly fragmented and cost inefficient

6. Inter and Intra Sectoral silos

7. No Clear mechanism for corporate sector to engage

8. Very Unsophisticated Capital Market

INJECTING MODERN CAPITAL AND MANAGEMENT PROCESSES INTO SOCIAL INJECTING MODERN CAPITAL AND MANAGEMENT PROCESSES INTO SOCIAL PROVISIONPROVISION

Grants Recoverable Grants

Investment Plus MainstreamInvestments

no financial return Blended market return market return

Capturing Future Cash flow (Social Impact Bonds ) x 10+

Injecting Modern Corporate / Financial Management practices into Social Mission

Recognising what the Social Sector brings – Innovation, R&D, Community Ownership

New Intermediaries helping to marry the silos corporates/ banks, civil society and GovtDifferent players taking Different and Differing social Economic Return

New legal framework to allow collaboration L3C / CIC / SELLP

Government Supporting Models that encourage Simplicity, Scale, Replication and Collaboration

Programme Related Investment

THE INVESTORS - Key Findings from Private Sector (From Conclusion - UBS Global Philanthropy Forum - Social Investment Review)

Philanthropists toolbox for Impact has expanded significantly

New frontiers in provision of services

HealthcareSanitationMobiles

For-profit investment opportunitiesLayered investingFrontloading: IFFImSocial Finance (ie Contingent Bond)

Expanding opportunities for

impact

Social capital market regulation emerging

L3C / B Corp (USA), CIC + SELLP(UK)EU foundation law

Programming

Governance Investing

Source: UBS Philanthropy Services 2007

OPTIONS FOR INVESTORS: Traditional vs New Opportunities

• The Investment Management Approach - A diversified Portfolio of Impact Investment Funds

>> Cost of Diligence and diversification

>> Limited Personal Touch

• The Direct Investment – The traditional Foundation (Grant Model) and Individual Impact Investing >> Social Capital Market

>> High Personal Touch

>> If done individually high cost of Due Diligence, Control and Monitoring

• Invest in the New Intermediaries - redefining the traditional trilateral relationship with corporate, government and financial sectors

>> By topic – Intellectual Property: CRA, Lightyears sp / Carbon Models / Green Economy

>> New Finance Intermediaries – GAVI, Total Impact Advisors (Blended Value needs blended value expertise)

• Input >> Output to Outcome Models • >> BRAC / Grameen, TEEB (www. teeb.org) and WSFF (www.sanitationfinance.org)

Product Examples of this Innovation

1 – Markets only grow with Transparency – The metrics debate – Rockefeller GIIN / Monitor Report / Milken Institute

2 - Return is Not Unitary – Layered Investment – Price Risk not return draw in new capital, ie - the whole product cycle – DFID Africa Fund, DB Eye Fund, US Affordable Housing Market

3 – Change the incentives to create economies of scale – ie GAVI

4 – Capture the value of the social externalities –TEEB- “Natural capital”, Social Impact Bonds, SFFX.net, WSFF / McKinsey

5 – Empower / Connect the Community – Social Entrepreneurship, Social Finance - and Mobiles – Ashoka / Google

6 – Use the skills and resources of the for profit banks and corporates - but with a clear defined social objective – JPM / Deutsche / Nike

7 – Change the legal framework – 3 Framework L3C / SELLP / B Corp / H Corp / CIC / PPPs / “Charitisation”

8 – New Intermediaries that ensure that social value is extracted – Lightyears, Environtrade, Root Capital, Ashoka SIE Fellows, AMF, Total Impact Advisors / WSFF / TEEB

Political Consensus !Paul Martin – Ex PM of Canada

“ We have learned that entrepreneurship is an unbeatable force. Government unleashed the power of business entrepreneurs when it provided them with the wherewithal to succeed. What I would now ask, is that government unleash the power of social entrepreneurs.”

Gordon Brown – Ex PM of UK with UN Sec Gen Banki Moon

“Our objectives cannot be achieved by government alone however well intentioned, or the private sector alone, however generous, or NGO’s or faith groups, however well meaning or determined. It can only be achieved in a genuine partnership together”

David Cameron – UK PM

“ I believe that this generation could see a revolution in our social economy comparable to the revolution in the commercial economy in the 1980s. That is the revolution that I want to lead…Don’t we need the same transformation in the social sphere that we have seen in the economic sphere? “