Report by the UK Cabinet Office, HM Government: London, May 2013
Internationally, philanthropy has played an important role in building social investment marketplaces. In addition to direct investment, philanthropy has supported a range of initiatives to support broader market development, including developing market institutions (like the GIIN), new specialist advisory services, and innovative exchange platforms. This report, prepared by the UK Cabinet Office, explores an additional role for philanthropy (here, specifically foundations), that of co-mingled funds, where commercial and social purpose capital sources work together to achieve social outcomes.
Co-mingled funds offer two advantages to an emerging social marketplace. Firstly, they offer the potential to achieve scale in investment, and therefore scale impact or address issues that require large investment.
Secondly, they can attract new actors into the social investment marketplace, who bring new skills, expertise and networks with them.
The report showcases seven international case studies of co-mingled funds and distils a series of defining features:
- The foundation capital has a significant leverage affect: attracting external expertise and commercial capital into achieving social impact;
- The fund tackles social issues at a scale that cannot be achieved with philanthropic capital alone;
- The social mission of the fund is clearly defined and protected through the governance structure; and
- The fund seeks to achieve a financial return alongside a clear social impact.
The report then identifies three fund structures, which vary according to the role of philanthropic (foundation) capital:
(1) Pari-passu funds: all investors place capital on the same terms (i.e. the same levels of risk in expectation of the same return). Philanthropy may also act as a cornerstone or principal investor giving confidence to other investors. An example of this is the Big Issue Invest Social Enterprise Investment Fund, where the initial support by the Esmee Fairbairn Foundation helped the fund raise further investment.
(2) Risk-reward funds: terms of capital vary based on the motivation of investors. Social investors take a position with a higher risk so as to achieve a desired social outcome, and receive a greater proportion of any financial returns. This lowers the risk for more commercial investors, who receive a commensurately lower level of expected return. The $US270M+ California FreshWorks Fund is an example of a risk-reward fund, where foundations take a higher risk and junior position in the fund to leverage commercial capital.
(3) But-for funds: terms of capital vary depending on investor type, “but for” philanthropy, commercial investors would not follow. Social investors take a subordinate position in the fund, accepting a higher risk for a lower return in order to tackle a social issue at scale. This is to encourage commercial investors who would not normally be interested in the terms of the fund. For example, the Gates Foundation and Swedish International Development Agency provided a guarantee and other commitments for the Global Health Investment Fund, increasing its commercial attractiveness providing it with sufficient scale to address global health problems.
This report concentrates on the evolving, and important role of foundations as investors in social investment. It celebrates the distinctiveness of philanthropic capital, and the potential of this form of capital to expand the range of skills and capital in a social investment market, and at the same time achieve a philanthropic mission. However, the foundation landscape in Australia is distinctly different to that of Europe and the USA, where large foundations have played a leadership role in building impact investment markets. Nonetheless, there are already a series of examples of co-mingled deals in Australia that demonstrate the potential of this approach: including the GoodStart consortia, and the most recent Benevolent Society Social Benefit Bond.
Exploring the potential of these co-mingled deals could be an important step in growing the number of actors, and scale, of a social investment market in Australia.