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Investment Banking for Social Enterprise

Investment Banking for Social Enterprise

Raising money for social enterprises used to be a kind of charity work. Now there’s a bond market.

In 2007, Toby Eccles, who was then working with Sir Ronald Cohen in the UK Treasury’s Commission on Unclaimed Assets, saw that the gap between the social enterprise and the ‘money’ was far too wide, and so co-founded ‘Social Finance’ - the first investment bank-like organisation providing advice and access to social sector entities interested in delivering social impact.  Speaking to INSEAD Knowledge in his London office, Eccles explains, “I saw that the social world lacked strategic financial thinking about the financial aspects of social issues. We wanted to bring to bear real financial acumen on genuine social issues and start to generate ideas to make the finance work more in line with the social value by raising money.”

Reformed Investment Bankers

He recruited a mixed team of 45 what he describes as ‘reformed former investment bankers’, social sector experts and former government officials. “We have the tension within the firm of people coming from very different sectors. If we can reconcile that tension internally we can provide solutions for social enterprises outside.”

Eccles admits that the idea of the post 1945 social contract whereby the public sector will continue to provide a social safety net is being questioned as never before in the UK. “Government is looking to commission more and do less and how is the charitable world and social enterprise going to respond to this? Is it going to have access to capital to take on a significant proportion of that work or is it going to lose it to the private sector?”

From Procurement to Social Bonds

He believes that the answer lies in a mixed bag of public and private sector with social enterprises running on more competitive lines and private enterprises being prepared to adopt the notion of sharing and removing barriers to entry. Consequently government needs to change its overly bureaucratic tender procurement process whereby whoever get the most points wins. This tends to favour private at the expense of social enterprises.

Social Finance has pioneered the development of Social Impact Bonds in the UK which Eccles believes is a viable alternative to the traditional procurement process. “A lot of people in government want to make a difference… but feel frustrated with the system that is preventing them from making things better.” So their Social Impact Bonds have made a difference in a variety of areas – from reducing recidivism amongst prisoners, supporting children in care, healthcare and drug rehabilitation.

They recently have launched a bond to support children from chaotic families – children on the edge of care - and saw that there was a financial as well as social benefit from using intensive therapeutic intervention to keep children in families and out of the formal care system. By analysing social services commissioning models and the data on such children, they found that adolescents who had previously spent longer than five weeks in the care system were likely to spend the greater part of their childhood in care – at considerable cost to the tax payer. Moreover they were also less likely to be economically productive in the future.

“We can analyse a social issue with financial metrics in a way that they haven’t been able to do themselves. So, for example, not just the cost of care but extending that analysis to look at the long-term cost to the wider economy. And to show government how they allocate their resources at the moment and show them how it could be improved to produce better outcomes. For less money.”

The money raised from the bond supports the social enterprises providing the multi systemic therapy and delivers a return to investors over a number of years that increases the more successful the scheme is at keeping children out of care. This ‘payment by results’ bond pricing model ensures that investors get a decent return (from the government) but the government itself pays out less in care costs and longer term social costs.

In a time of economic austerity where government spending on social services is being cut back, Toby Eccles believes that the model of Social Impact Bonds creates a win win for investors and tax payers as well as a multiplier effect on social spending. “It’s a tool for enabling social change as a partnership between government, social enterprise and investors. The key thing we are doing is bringing together these three groups, often for the first time.”

Toby Eccles is the co-founder and development director of Social Finance. He will be taking part In the INSEAD Entrepreneurship Forum on "Impact Investing: Creating an Industry from Innovations," on the INSEAD Europe Campus in Fontainebleau, France on May 23rd, 2013.

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