Diamonds In The Rough - PDF

Diamonds in the Rough

The opportunity of amarketplace for social

finance in Canada

CAUSEWAY: a national collaboration

"Only when the last tree has diedand the last river been poisonedand the last fish been caught willwe realize we cannot eat money."

- Cree proverb

“Money plays the largest part indetermining the course of history."

- Karl Marx


‘Finance’ is about:managing risk… for financial return

• From wikipedia:– The study of money and other assets;– The management and control of those assets;– Profiling and managing project risks; or– The science of managing money.


Risk management =beware of uncharted waters.

Motivates selecting the known, familiar, direct

Creates rigid and specific investment terms

•Legal structure•For-profit •Not-for-profit•Charity

•Use of proceeds•Operations•Assets•Projects

•Investment structure•Grant•Loan•Equity


Which invites a game…of financial ‘Twister’

Table 1.5 - Project Capital Funding SummarySource of Funding Form of Funding Amount

Homegrown Solutions Grant 18,800.00$ Pacific Coast Savings credit Union First mortgage 2,000,000.00$

Line of credit 300,000.00$ Real Estate Foundation of BC Second mortgage & grant 318,000.00$ City of Victoria Grant 20,000.00$ Vancouver Foundation Grant 50,000.00$ VanCity Community Foundation Third mortgage & grant 200,000.00$ Victoria Cool Aid Society Equity 285,000.00$

Account interest 8,893.66$ Total funding 3,200,693.66$

Total capital costs 3,195,787.30$

Surplus 4,906.36$


"Money is a stupid measure ofachievement, but unfortunately

it is the only universalmeasure we have."

- Charles Steinmetz


Expected loss % 100% 20-50% 10-20% 10-20% 1-8%

0

Often short periods

Low (except venture philanthropy )

n/a

None

No

-50%-c.10% No limit Variable up to 30% Fixed 5-18%

Repayment holidaysUndefined Depends

on success5-7 yrs Depends on

successFixed term

Some (through partners )

High (through board ) High (through board ) Low

Repayment IPO, sale, buyoutRoyalty , repayment

or APORepayment

None/subordinate Residual Subordinate First priority

No Through ownershipStructured in loan

agreementNo

Return on investment

Term of investment

Involvement in business

Exit of investment

Liquidation rights

Voting rights

Grants Patient Capital Pure Equity Equity -like Loans

Adapted from : Bridges Community Ventures , UK

“Social finance” is…A sustainable approach to

managing money that deliverssocial, environmental dividends

and economic return.

HIGH INVOLVEMENT

LOW INVOLVEMENT

CHAR

ITAB

LE

COM

MER

CIAL

Venturephilanthropy

Traditionalgrantmaking

Venturecapital

Banklending

Adapted from Margaret Bolton, 2003


… happens at many levels…• Investment

– A financial investment that delivers a ‘blended return’• E.g. a loan issued to a social enterprise

• Product– Investment vehicles such as bond issues or private equity

funds that combines investors with a variety of objectivesaround an investment area that will deliver a ‘blended return’

• E.g. the $20 M EYE Fund

• Catalytic– (Re)application of financial capital to a specific issue with a

comprehensive perspective that encourages a the(re)creation of new system for addressing a social orenvironmental issue

• E.g. the Great Bear Rainforest


… and is rooted in:• A change in

conversation– Control

» Potential• Blended value return

– Conflicted» Collaborative• Cross-silos

• A change in flow– Linear top-down

» Complex

Government Business

Charity & non-profit

HybridSpace

Source: A

quilla

n Inve

stmen

ts


"Money.

It's a gas."

- Pink Floyd


Requirements

Return

Sour

ce P

ersp

ectiv

e Use Perspective

Constructive Dynamic

Constrictive Dynamic

RiskRes

trictio

ns

It begins with a conversation…• Aligning interests to create innovative solutions


… results in specific products• Venture capital

– Capital regional et coopérative Desjardins (CRCD) is a $500 million venture capital fundcreated in 2001 by the Desjardins Movement with the help of a provincial tax credit.Individual investors can invest up to $3500 a year in shares with a 50% tax credit. Sharesmust be kept for a minimum of seven years. Mission: to provide capital, expertise andaccess to networks for businesses and cooperatives in all Québec’s regions

• Local community development– The Columbus Foundation used $2 million to seed an $18 million low-cost housing fund to

build 1,600 new units of affordable housing.• Startup or expansion capital in underserved communities

– Deutsche Bank announced it will create an innovative $20 million investment fund tofinance the expansion of eye care hospitals in developing countries. The Eye Fund I willprovide loans and guarantees to support the development of affordable, sustainable andaccessible eye care for the world's poor while providing a near-market return for investors

• Debt mechanisms– Milestone achievement of $100m in loans to community finance institutions and social

enterprises by Calvert Foundation’s Community Investment Note• Acquisition of assets

– BC Pension Funds – 21 BC-based union and management pension funds pooled $27 M toform Concert Properties in 1989 (originally named VLC) with the objective of financingaffordable rental housing in BC, and creating jobs in the unionized construction industry.Today the 100% pension plan owned real estate corporation has $800 million in assets,with a track record of creating 10 million hours of on-site employment for unionizedconstruction workers.


… and can change whole systems.• Coming together of the great catalysts

– capital + community• Great Bear Rainforest (2 million hectares)

– Start: environmentalists + lumber companies get together– 2001: private foundations + BC premier’s office -> 1st nat.– 2002/3: determination of ecological value and economic pot.– 2007 Outcomes:

• $120 M across 2 funds: $30 M fed, $30 M prov., $60 M private• Provincial government actions

– New ‘ecosystem based’ land management regime (3x PEI)– New park designation for ecological protection

• Collaborations– Collective land-use agreement among prov. gov’t and first nations– North coast first nations collaborating (e.g. joint marketing and

distribution of fish)– Shared governance between private, first nations, government


Proposed Vancouver Homelessness LPfrom Vancouver Homelessness Funding Model Report


“Money is only a tool. It willtake you wherever you wish,but it will not replace you as

the driver.”

- Ayn Rand


The social finance ‘diamond craft’• The potential value of any social finance

undertaking is strongly influenced by:• Understanding (clarity)

– Depth of understanding• What’s the issue?• What’s involved in addressing it?

• Value (carat)– Amount of capital involved in the issue?

• Assets, income, expenditures, etc. ?

• Engagement (shape and facets)– Comprehensiveness of input into discovery and design

• Participation (cut)– Variety of participants and perspectives in envisioned

solution


You can do a lot withdiplomacy, but with diplomacybacked up by force you can

get a lot more done.

- Kofi Annan


On the precipice of unprecedentedchallenges + systemic failure

Growing social and environmentalpressures

+government and market failure

=the conditions for innovation.


The U.S. and UK have responded• US - New Market Tax Credits

– $37 B in economic infusion– Introduced in 2001 to provide tax

credits to investors inCommunity Development Entities

– 88% of investors would not havemade the investment in low-income communities without it

• UK - Community InterestCompanies (CICs)– 1164 CICs registered– Hybrid legal structure

• Capped dividend payable to shareholders• Asset lock retains assets within the company or other CICs

Source: US Dept. of the Treasury, Insights,New Markets Tax Credits


encouraging an entire marketplaceU.S.

Source: GoodCaptial Story Index Presentation and Jay Coen Gilbert, Don Shaffer and John Katovich


encouraging an entire marketplaceUK


And in certain areas…

Source: GoodCapital and Mark Beam?


… structured financial products.20 deals | 21 orgs | $6.5B

(affordable housing, microfinance, global ngo’s)


The Canadian diamond field• Limiting regulatory framework

– Income Tax Act and charity lawsignificantly constrain flow ofcapital

• Strong non-profit sector– $120 B annual expenditures– >7% of Canada’s GDP– Above average growth– 1.5 M workers + 0.5 M

volunteers– 2nd largest in world per capita

• Internationally significant– Resources

• Water, energy, forests– Examples

• Great Bear Rainforest

Organizational Types

For Profit Not-for-Profit Charity

Wealth

Maximization

Any

Purpose Except

Profit

Relieve Poverty

Advance Religion

Advance Education

Community BenefitAcceptable Purpose

Acceptable Purpose by Structure

Adapted from: W. L. Hunter


Preparing for a diamond harvest• Changing the conversation• Developing the craft

– Financial structuring research,demonstration, anddissemination

• Enabling the marketplace– Policy (tax incentives and

supporting hybridization)– Opening systems to

restructuring


CAUSEWAY a national collaboration

A national collaborationworking on new pathways

for financial investmentin public benefit.


CAUSEWAY a national collaboration

Michael LewkowitzStart-up Coordinator

Phone:(416) 607-5643(778) 329-0021

Email:[email protected]

Tim DraiminChair, Steering Committee

Phone:(604) 647-6611 x244(416) 481-8652

Email:[email protected]

CONTACT

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