In the last 40 years the development of technology and telecommunications led by entrepreneurs has deeply transformed our lives. In many cases, companies started by young entrepreneurs surpassed others that until then had been leaders of their sectors. These entrepreneurs were motivated by innovation and risk-taking, even shifting the focus of governments on how economic growth should be achieved.
These ventures had an influence on the investment portfolio management strategy by promoting investments in venture capital funds and riskier shares of young companies that still had no profits. This was because the challenge of high risk / high return investments was accompanied by the creation of a brand new investment class: private equity and venture capital, responding to the financing needs of new companies committed to innovation. high risk.
At present, a young generation of social entrepreneurs is breaking through, trying to make a difference and improve people’s lives. In most cases, the social sector is made up of numerous charitable social service providers who do not have enough capital to finance their activities beyond a year and are supported by foundations that have significant assets in their balance sheets.
How can capital markets do for entrepreneurs and social organizations, just as successfully with business entrepreneurs?
How can they be connected to financial markets? How can one finance those capable of creating and implementing innovative solutions so that they reach an adequate scale for the population and the severity of the social problems on which they work?
In 2007 Sir Ronald Cohen co-founded the firm Apax Partners and decided to join several friends and found Social Finance (SF) an organization whose aim is to develop a social investment market in the United Kingdom, bringing together under one roof financial expertise and social. Within three years of its launch, SF had already developed the Social Impact Bond (SIB) and the UK Ministry of Justice had agreed to make payments in accordance with the reduction of the recidivism rate to be achieved, among those inmates freed from the Peterborough prison. This marked a turning point in the management of charitable organizations whose social performance could already be measured accurately and this performance could be contractually tied to a return perceived by those investors who wanted to improve the quality of life of the released criminals. The payment of interest and capital was to be jointly handled by the Ministry of Justice and the Big Lottery Fund, with the expectation that it would represent for the Ministry only a minority share of its potential future savings. If the required minimum performance was not achieved, investors would lose their money, in effect making a charitable contribution. If the required performance threshold was exceeded, the return for investors would be between 2 and 13%, according to the reduction achieved in the recidivism rate.
This was the first of more than 20 SIBs that have now been placed in the United Kingdom, the US, Australia and the Netherlands, covering areas such as recidivism, homelessness, youth at risk of unemployment, adoption, problem families, education And asthma in disadvantaged populations. The most recent bonus announced by SF USA in December 2013, is a $ 13 million issue (the largest to date) This voucher is helping released New York state prisoners. It was placed by Bank of America Merrill Lynch and the Rockefeller Foundation assumed responsibility for the initial 10% of any loss.
For current charitable organizations, the SIB is no more than the first financial instrument linked to social advancement. Beyond the SIB, other instruments such as quasi-equity, unsecured debt and senior debt are complementarily financing grants to many NGOs to strengthen their balance sheets. On the other hand, a range of investors are emerging in search of different combinations of social and financial returns, from charitable organizations willing to accept low returns, individuals that require higher returns to pension funds that aspire to similar returns to the market.
Impact investment is the answer to the financing needs of social entrepreneurs and organizations oriented towards innovation and growth.
It is increasingly a significant part of the investment portfolios through Impact Private Equity, Impact Real Estate Developments and Absolute Impact Return in addition to Fixed Income and Public Equities.
We are just witnessing the emergence of this social sector conceived from the innovation so that these organizations do not move away from their social mission before the pressure of obtaining financing and the challenges are still many.
In order for social entrepreneurs to expand the scope of services offered, they will need to obtain more capital and must understand how to prepare a business plan to attract teams with qualifications and above all they must be able to measure their social performance and re-report it on comparable terms in the same way That financial results are reported, therefore there is also a need for defined and audited measures presented in a standardized way as functional bases of social investment.
For governments to be able to benefit from the development of impact investments (innovation, obtaining financing linked to the achievement of successful objectives and the possibility of pre-financing social aspects), they must lead the creation of ecosystems that support investment And social entrepreneurship and become constructive managers of impact investment paying attention to reducing the cost of achieving a successful outcome.
“One can anticipate the day when, for each social problem, each country will have an estimate of the cost of an effective social intervention, of the savings that the government could expect from its intervention and, above all, of its value to society. Some interventions will be achieved in more economic ways than others, some funders will value some results more than others and some entrepreneurs will leave their mark on the most difficult social challenges, but both social entrepreneurs and philanthropic investors will concentrate equally on achieving social results more than in Achieve donations “.
Based on a speech by Sir Ronald Cohen, Chairman of the Working Group on Social Impact Investment established by the G8 on 23 January 2014 at The Mansion House (London-UK)