Social Finance in Canada 2013 Consultations on the state of Canada’s social finance market, barriers, and opportunities for Governments Summary Report May, 2013
The Public Policy Forum is an independent, not-for-profit organization dedicated to improving the quality of government in Canada through enhanced dialogue among the public, private and voluntary sectors. The Forum’s members, drawn from business, federal, provincial and territorial governments, the voluntary sector and organized labour, share a belief that an efficient and effective public service is important in ensuring Canada’s competitiveness abroad and quality of life at home. Established in 1987, the Forum has earned a reputation as a trusted, nonpartisan facilitator, capable of bringing together a wide range of stakeholders in productive dialogue. Its research program provides a neutral base to inform collective decision making. By promoting information sharing and greater links between governments and other sectors, the Forum helps ensure public policy in our country is dynamic, coordinated and responsive to future challenges and opportunities. Š 2013, Public Policy Forum 1405-130 Albert St. Ottawa, ON K1P 5G4 Tel: (613) 238-7160 Fax: (613) 238-7990 www.ppforum.ca
Background In 2010-11, The Public Policy Forum conducted a series of consultations and research that resulted in two publications: Barriers to Social Finance in Canada and Supporting Social Finance Fund Development in Canada. These reports outlined the social finance infrastructure in Canada, identified barriers and provided options for the Government of Canada to advance the field of social finance. Those reports found that: 1. There was a growing interest in social finance 2. There were several barriers on the demand side and the supply side 3. Options to make investment (e.g. through intermediaries) were slim. There were a. Few options for mission investors b. Very few options for individuals c. No options large enough for institutional investors 4. Consultations suggested the Government of Canada should nurture the development of 8-10 small to mid-size investment funds through start-up, operating grants and capital grants In early 2013, the Forum engaged 15 social finance leaders (see list in Appendix A), many of whom were involved in previous consultations. Discussions explored: The current market: What does the current market data look like for social finance investment funds today? Investor motivations: Have investors’ motivations changed? If so, in what ways? If applicable, what has caused the changes? Barriers: Have investors’ perception of barriers changed? If so, in what ways? What has caused the changes? Roles for government in 2013: Are there proposed changes to the government role in supporting social finance fund development in Canada? If so, what are they? What are a range of approaches that might be undertaken? Key findings and implications for the Government of Canada The following is a high level summary of findings on the state of the market today and enduring barriers. It includes eight implications for the Government of Canada in 2013. In cases where dynamics have not changed, readers are encouraged to view previous publications that are listed in the text for more details. Motivations, awareness, and market size The motivations for investing in social finance have not changed. Investors continue to strive to better use their resources to generate both an economic impact and a societal impact. They believe that social finance can enable new types of models that generate revenue and/or savings and lead to better outcomes. Many believe that relying solely on traditional grant funding is unsustainable. Finally, foundations want to find ways to use more of their assets to fulfill their mission. Further details on motivations can be found in Barrier to Social Finance in Canada. 1
While motivations among investors are similar, there is much greater awareness of and interest in social finance than there was in 2010-11, particularly among foundations that are interested in investing their endowments to complement the impact they generate from granting and other activities. Over the past few years, several foundations including the Edmonton Community Foundation and the J.W. McConnell Family Foundation have made commitments to invest 5 or 10% of their endowments in social finance investments, but the full implications of those commitments have not yet been realized. Others have committed to specific investment in funds (e.g. Hamilton Community Foundation and Ottawa Community Foundation investing in the Community Forward Fund) or in specific projects (e.g. the Muttart Foundation’s $1M investment in the YWCA Toronto housing project for women). The Centre for Social Innovation launched its own product, a Community Bond that raised almost $2M from small investors, including many individuals. Implication 1: Promoting social finance as a legitimate option (e.g. through promotion, education, and awards) and addressing cultural barriers within foundations (and elsewhere), which were high priorities in 2010, are much less important today. Despite changes in awareness, attitudes and some commitments by foundation to expand toward social finance, there has been limited change in the size of the market. Based on information collected, it appears that the dollars invested in social finance funds or directly in impact investments has increased modestly (~1% a year) over the past two years to just under $2.8B. A few new funds, including the RBC Generator Fund, the Community Forward Fund, and Resilient Capital have opened, which has led to increased commitments of capital (e.g. by RBC and several foundations). A current map of the market is below.
Investment by Intermediary (in AUM)
Total = $2.8B $1,215M
$680M
$140M
100% 80% -
D i r e c t
Other intermediaries (BC NDI Trust, Chantier, CLFs, RISQ, others) Aboriginal Financial Institutions (40 orgs)
60% -
$750M Other direct
Toronto Community Housing Corp Bonds
Direct Intermediaries
Other
Credit unions
inter
SEF SCP CFF
40% -
Renewal
Community Futures (270) 20% -
ns
Other fundsFunds Credit union members
~30 Com. Loan Funds Investeco Other
Fo un
da tio
Governments
Other funds 47 NS CEDIFs CAPE
Source of Capital
Note: Excludes clean tech AUM and all assets invested in private housing developers (inc. affordable housing) Source: Building Local Assets, State of C/MI of Canadian Foundations; Building Capital, Building Community; websites; PPF analysis
Almost 85% of capital continues to be invested through funds. Funds that were launched with government money (e.g. Community Futures, Aboriginal Financial Institutions) continue to be almost 50% of the market. While these funds generate co-investments in their projects by banks,
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credit unions and others, they are not structured to manage the investment of private capital.1 Implication 2: Consider options to better use government capital to leverage private capital including opening and promoting Community Futures and Aboriginal Financial Institutions as investment vehicles for private investment. Opening up these and other funds to private investors may have the potential to expand social finance options and stimulate the market. Opportunities for investors Impact investors (private sector firms, foundations, credit unions, and others) continue to face a limited number of direct investment opportunities that will satisfy their risk/reward profile. When available returns are not sufficient to cover perceived and real risk, investors struggle to invest. In many parts of the country the investment pipeline needs to be strengthened. There are a variety of reasons for a relatively weak impact investment pipeline. Each has different implications for government. 1. There continue to be a limited number of charities, nonprofits, and social purpose businesses that are ‘investment ready’. Sector leaders highlighted two main reasons for the relatively weak pipeline Social purpose organizations continue to lack supports to become investment ready. As outlined in Barriers to Social Finance in Canada, the Social Finance Task Force report, and other publications, most charities and nonprofits, and many social purpose businesses struggle to access the supports available to conventional small business (e.g. BDC and Community Futures services). In most locations, they are not eligible for services and/or the services are not designed to meet their needs. The few services designed to support these organizations to become investment ready (e.g. advisory services from MaRS, the Community Forward Fund, credit unions, and Innoweave) are of insufficient scale. When investment funds need to provide these services, it increases their costs and makes deals less attractive. Implication 3: Explore options to help more charities, nonprofits, and social purpose businesses become investment ready, including enabling access and adapting existing small business services and / or enhancing access to services that are designed for charities, nonprofits and social purpose businesses.
The application of charity law makes it challenging and costly for organizations to take investment without risking their charitable status. Participants continued to be concerned about the impact of the Canada Revenue Agency ‘no profits for nonprofits ruling’ and other applications of charity law on the time and money required for organizations with charitable status to take investment and/or to establish a social enterprise that generates revenue to repay investors. Implication 4: Explore the specific ways in which charity law is being applied (or is perceived to be applied) that are deterring organizations with charitable status from seeking investment and/or establishing social enterprises and examine options
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By Contrast the US Community Development Financial Institution (CDFI) Capital Fund has invested $1B over the past 15 years. This has been matched by $15B in private capital that is co-invested in the network of CDFIs. When CDFIs invest their $16B, they also generate co-investment from additional sources.
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including the establishment of a destination test for charities and nonprofits and/or corporate structure to enable investment in community benefit organizations (e.g. BC Community Contribution Company). 2. The risk/reward profile of many deals is not attractive enough for many impact investors. Many deals are not attractive enough to credit unions, impact investment funds and others to meet their risk/reward threshold. Risk/reward thresholds vary by investor. In early 2013, many mission driven investors would accept 3-4% for something that is ‘low risk’. There are a variety of ways to address this issue each of which is addressed in other sections First loss capital for impact investment funds was suggested as a means to lower risk. Tax credits such as those in the United States (New Market Tax Credit) and in Nova Scotia (in conjunction with Community Economic Development Investment Funds) were suggested as a means to enhance returns. Reductions of administrative and compliance costs through streamlined regulations would further enhance net returns. 3. Charity law regulations governing foundations continue to make it difficult and/or costly for them to invest in certain deals. Two issues related to the application of charity law restrict the types of deals that foundations can invest in and/or the cost of making investments. These include: Concern that the Canada Revenue Agency may rule that an impact investment is a contribution to a non-qualified donee Requirement to divulge equity investments greater than 2% of investee value Both of these issues are detailed in Barriers to Social Finance in Canada. Implication 5: Investigate options to reduce the impact of these two issues, including: changes to the application of the regulations, the introduction of a new national corporate structure for social purpose businesses (e.g. similar to the BC Community Contribution Company) that facilitates investment by foundations, and/or the establishment of more funds or growth of fund(s) to lessen the impact of these restrictions. Funds and intermediaries There continue to be very few social finance intermediaries that accept new investment from private investors. As noted in Supporting Social Finance Fund Development in Canada, it is hard and expensive for investors to execute individual deals. There continue to be very few social finance funds that are larger than $1M in assets that accept external investment. While participants had a range of views on the number and range of new funds that are needed, all agreed that additional product is required to meet the range of needs of different types of investors. The market would benefit from both the growth of existing funds along with some new funds.
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There are two major barriers to the establishment and expansion of funds. 1. Limited deal flow that meets investors risk/reward profile, which makes it hard for funds to get to an efficient scale. Participants highlighted that this could be addressed by providing new and existing funds with first loss capital to lower the risk profile of their offering to investors. Several participants highlighted that these first loss funds should be matched (several times) by private money. Implication 6: Consider providing first loss capital grants to new and existing funds. 2. The high cost and time required to register a new fund under current securities law. New funds have been established at high (pro-bono and paid) legal, administrative, and human cost. Participants noted that current securities law makes it challenging to register new social finance funds. Implication 7: Investigate challenges registering social finance funds under existing securities law and means to reduce barriers, including the publishing of model social fund prospectuses. Implication 8: Consider subsidizing the startup and expansion costs of a limited number of social finance funds to ease their administrative burden. With limited growth in number of funds, there was agreement that Canada needs more regional and sectoral funds prior to exploring a national fund of funds. Summary There has been a significant increase in knowledge and interest in social finance over the past several years. New funds have been established and new investors are entering the market. Despite these changes, growth in money invested in social finance has been relatively slow. Several barriers remain including limited deal flow, high costs and regulatory barriers in fund registration, foundation investment restrictions, and restrictions on charities and nonprofits that deter them from seeking investment. As outlined in the eight implications, which are restated below, Governments can help accelerate the social finance field by looking for ways to mitigate the effect of charity law and securities law. They can support fund development and growth through the provision of risk capital, and they can increase the demand side by helping more organizations to become investment ready. Implication 1: Promoting social finance as a legitimate option (e.g. through promotion, education, and awards) and addressing cultural barriers within foundations (and elsewhere), which were high priorities in 2010, are much less important today. Implication 2: Consider options to better use government capital to leverage private capital including opening and promoting Community Futures and Aboriginal Financial Institutions as investment vehicles for private investment. Opening up these and other funds to private investors may have the potential to expand social finance options and stimulate the market. Implication 3: Explore options to help more charities, nonprofits, and social purpose businesses become investment ready, including enabling access and adapting existing small business services 5
and / or enhancing access to services that are designed for charities, nonprofits and social purpose businesses. Implication 4: Explore the specific ways in which charity law is being applied (or is perceived to be applied) that are deterring organizations with charitable status from seeking investment and/or establishing social enterprises and examine options including the establishment of a destination test for charities and nonprofits and/or corporate structure to enable investment in community benefit organizations (e.g. BC Community Contribution Company). Implication 5: Investigate options to reduce the impact of these two issues, including:  changes to the application of the regulations,  the introduction of a new national corporate structure for social purpose businesses (e.g. similar to the BC Community Contribution Company) that facilitates investment by foundations, and/or  the establishment of more funds or growth of fund(s) to lessen the impact of these restrictions. Implication 6: Consider providing first loss capital grants to new and existing funds. Implication 7: Investigate challenges registering social finance funds under existing securities law and means to reduce barriers, including the publishing of model social fund prospectuses. Implication 8: Consider subsidizing the startup and expansion costs of a limited number of social finance funds to ease their administrative burden.
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Appendix A: Participants Ted Anderson, MaRS Centre for Impact Investing Seth Asimakos, Saint John Community Loan Fund Derek Ballantyne, Community Forward Fund Jane Bisbee, Social Enterprise Fund Tim Brodhead, Social Innovation Generation Terry Cooke, Hamilton Community Foundation Lois Fine, YWCA Toronto Martin Garber-Conrad, Edmonton Community Foundation Jonathan Hera, RBC Sara Lyons, Community Foundations of Canada Chris Payne, Government of Nova Scotia Rebecca Pearson, VanCity Joanna Reynolds, MaRS Centre for Impact Investing Adam Spence, MaRS Centre for Impact Investing Brian Toller, Ottawa Community Foundation
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