Australia Needs a Not for Profit Capital Market - Report

A new report calls for the establishment of a Not for Profit capital market in Australia, saying it is the key to addressing financial exclusion in the Not for Profit sector.

The 'Finance and the Australian not-for-profit sector – Examining the potential for a not-for-profit capital market in Australia’ report, undertaken by Foresters Community Finance on behalf of NAB, looks at the financial needs of the Not for Profit sector and the potential for developing a Not for Profit capital market in Australia, as recommended by the Productivity Commission.

The Productivity Commission’s 2010 report into the contribution of the Not for Profit sector said development of a robust capital market for NFPs should be a priority, with the Office for the Not for Profit sector to take the lead in ensuring the establishment of the panel to advise on capital market development.

The 2010 PC report said there is a major constraint on capital access for NFPs that arises because the market which specialises in providing both finance and other support to NFPs is underdeveloped.

The 'Finance and the Australian not-for-profit sector’ report says developing a NFP capital market will require structural and cultural shifts within the sector, and better understanding from financial institutions of the needs and business models of NFPs.

The report says there has been very little focus on the need to establish a Not for Profit capital market that would include the development of debt and equity instruments that focus on growing the impact, viability and sustainability of the sector.

It says that much of the capital focus of the sector has been on growing grant and gift capital, however there is no organised discussion on the demand for non-grant capital from within the NFP sector.

The report says the demand for access to finance and capital investment in more generally focused on small to medium sized organisations.

A NFP capital market has been examined both in practice and in research in both the United Kingdom and the United States for more than a decade, and the report says there are lessons that can be applied to the Australian context, including focusing on developing the capacity for the NFP market to present “investable” propositions to financiers, and to use specialised intermediaries to bring the finance and NFP sectors together.

According to the report, if mainstream financial institutions are to play a role in the development of a NFP capital market, they could do so in three ways:

1. By engaging directly with NFPs and developing more specialist knowledge about the sector and a broader range of capital relationships with the sector;
2. By contributing to and capitalising the development of specialist intermediaries who could then provide capital to NFPs. This method would pool capital from numbers of financial institutions through intermediaries who have specialist knowledge and could mitigate some of the risks of direct capital provision, and;
3. By becoming part of a range of ‘investors’ who capitalise a wholesale fund that then provides capital to a range of specialist intermediaries (blending philanthropic funds, grant funding and funds from financial institutions). This would provide the greatest potential for blended capital types and returns, but would require some kind of incentive to financial institutions for involvement

The report says if a robust capital market for NFPs is to be built in Australia it will require cultural shifts (in all sectors and across the full spectrum of stakeholders); political will and action at policy level; a degree of experimentation and risk-taking in developing the market; and the sharing of learning across the commercial and social sectors.

The report aims to provide the beginnings of engagement with the findings of the Productivity Commission’s call for the development of a sustainable capital market for NFP organisations, with the report’s authors recommending the report as a framework for further dialogue leading to action.

To download the full report, visit – http://www.foresters.org.au/