Monday 20 April 2015
How impact investing is making an impact
Monday 20 April 2015
Mobilising capital to make a meaningful social return as well as a commercial return is at the heart of the relatively new investment approach known as impact investing.
Comprising both equity and debt, it can be considered in a similar light to traditional asset classes such as cash, fixed interest, infrastructure and alternative assets.
In Australia, impact investing is attracting much attention, from the largest of institutional asset owners to high net worth individuals. With an estimated Australian market worth of $32 billion in a decade's time, according to Impact Investments: Perspectives for Australian Superannuation Funds, the market is also expected to mirror the progress of similar investments in the UK.
According to Ben Gales, CEO of Social Enterprise Finance Australia (SEFA), people need to recognise that impact investing is not a philanthropic activity nor is it a silver bullet that is going to solve all social ills. However, impact investing does seek to create social, environmental and cultural benefits alongside a financial return and, importantly, measures the achievements of both.
People need to recognise this isn't about philanthropy, it's about harnessing capital to make a commercial return as well as a social return.
While the impact investing market in Australia is developing rapidly, Mr Gales says the market is nowhere near as mature as those in the UK and Europe. It has been "hyped", he says, but lacks capacity building, infrastructure and funds to set up social impact bonds and investment readiness.
The market will take time to mature and develop in a way that suits Australian conditions, he thinks.
"I hope people are not trying to import ideas from the UK or elsewhere because the capacity building and infrastructure for the market need to reflect local conditions such as geography and government structure," he said. "Ours are quite different."
Increasingly, governments cannot meet the growing demand for social services while philanthropy and generosity are insufficient to fill the gap. This can be where impact investing steps in but it should not be considered as a replacement for grants or philanthropic activities.
"Impact investing has its part to play, and we need to recognise what it can do," Mr Gales said.
"But people need to recognise this isn't about philanthropy, it's about harnessing capital to make a commercial return as well as a social return, and this is the way to get it from a fringe activity to a mainstream activity."
The Macquarie Group Foundation has been a supporter of impact investing organisations like SEFA and Social Ventures Australia (SVA) for several years.
The Foundation has supported SEFA, a social lender that connects investor funding with social enterprises and entrepreneurs and provides financing solutions to encourage expansion, since its inception in 2011. SEFA's establishment and growth has been forged by David Rickards, who was the then Head of Equities Research at Macquarie.
In 2011, SEFA required bridge funding after losing the backing of a large equity investor, and Macquarie stepped in to provide this funding. SEFA was then able to receive a grant from the Federal Government.
David Bennett, Chairman of SEFA, a former Treasurer of Macquarie Group and a Board member of the Macquarie Group Foundation, said that without the bridge funding "it would have been very difficult for SEFA to receive the grant from the Government and get started".
Mr Bennett says SEFA competes with grant giving because organisations would prefer to receive money than borrow money.
"While this makes sense, from the overall sector's point of view, organisations that are capable of borrowing to increase their capacity should leave grants to organisations that are not in a position to borrow," he said.
The Macquarie Group Foundation has also provided capacity building support by offering Macquarie employee expertise and mentoring to organisations in order for them to be investment-ready before SEFA signs over a loan.
The Foundation has also supported SVA over its decade-long experience of raising different forms of social investment and venture philanthropy in Australia. SVA has led impact investing in this country and, in 2009, helped coordinate Australia's largest example of social finance investing, the $165 million GoodStart Childcare transaction. SVA also manages Australia's first social benefit bond with UnitingCare and the NSW Government.
Mark Peacock, Impact Investing director at SVA, described the GoodStart transaction as a landmark one that was "really the first of its kind". It had 41 investors contributing $22.5 million into the transaction, which showed there was a large amount of capital ready to be deployed into the sector. "It also showed impact investing does work, because the investors received notes that have continued to pay a coupon of 12 per cent each year, which has been an exceptional return," Mr Peacock said.
He thinks the impact investing sector has been progressing well over the last five to 10 years, moving from a negative screening approach to positive screening when making investment decisions.
The NSW Government is developing the impact of this asset class through the launch of its Social Impact Investment Policy in early February this year. The policy builds on the success of NSW's social benefit bonds and sets out the Government's intent to support a broader social impact investment market in NSW.
The Government aims to deliver two new social impact investment transactions to market each year, which will only be available to wholesale and institutional investors.
The transactions will focus on four priority areas: managing chronic health conditions, supporting offenders on parole, managing mental health hospitalisations and preventing or reducing homelessness among young people.