Social Impact Financing - Unlocking New Money
Thursday, 31st May 2012 at 11:02 am
The social enterprise sector is attracting new money partly because of government funding and partly because of interest from investors with a responsible investment mission.
Specialist business writer, Rachel Alembakis, from The Sustainability Report takes a look at the growth of social enterprise finance and what social-impact investors want.
The growth of the social enterprise finance market has been guided by lenders and investors seeking to generate economic return as well as social value, and the Federal Government is spurring its growth with a $20m fund aimed at further developing social enterprise lending.
Providers make the case that for social enterprises, accessing commercial finance is a way for institutions to purchase property, grow assets and increase their mission as well as developing new business and strategic skills. However, they also caution that not all social enterprises are ready to take on debt and there are specific circumstances that favour a foray into a financing vehicle.
The social enterprise lending space is not new – Foresters Community Finance says they have been providing community finance and social investment in Australia for more than 150 years.
Meanwhile, Community Sector Banking, which is 50 per cent owned by Bendigo and Adelaide Bank and 50 per cent owned by a consortium of 20 Not for Profits, such as Oxfam Australia, Jobs Australia and Youth Accommodation Association, has been in existence since 2000. But the sector is attracting new money, partly because of government funding and partly because of interest from investors with a responsible investment mission.
Last year, the Federal Department of Education, Employment and Workplace Relations launched the Social Enterprise Development and Investment Fund (SEDIF), which has been granted $20m to match funds with qualifying institutions. Thus far, two funds have received SEDIF funds – Foresters Community Finance and Social Enterprise Finance Australia (SEFA).
The $575m Christian Super superannuation fund has also allocated $6m to Foresters for this investment project. Subsequently and separately to this, bankmecu has joined with Foresters and the Victorian Government for a formal partnership to provide similar financing to Victorian community groups.
“There has been a lot of work in deepening this end of the market,” said Belinda Drew, CEO of Foresters Community Finance.
“The potential investors are divided into two main camps. There are those potential investors who are financial first, who get the biz proposition, value that and see that you’re putting the icing on the cake when you add the social outcome.
“It is useful for those investors who have oriented themselves to a value proposition beyond financial return, such as Christian Super. There are also those who we might call social-impact investors – their primary goal is to achieve a social outcome with the capital that they have to invest. There are foundations who to date have focused themselves on grant-making who are now looking to see how they can use their foundation to do this as well.”
Social enterprise financiers are not only having to build their investor/funding base, they are also developing the client market, plus responding to the specific needs of the social enterprise space. Banks that engage in social enterprise lending emphasise that any lending decisions are subject to credit and regulatory processes that are part of their legal obligations, plus acknowledge that the process of lending to social enterprises involves more scrutiny on their part and a lot of preparation and work by the enterprises.
“We have a standard application form and we are looking for social enterprises that are debt-ready and can put a business plan up to us as part of that,” said Managing Director of SEFA, David Rickards.
“As we move through the process, we are asking basic questions – is the business debt- ready, can it sustain the debt, is it a social enterprise and does it fall within our guidelines. If it gets through that screening, we would then go back to talk with the business in more detail.
“We are then looking at management experience and ability to how they’re going to run this business. Some businesses we will have experience in and some we won’t. We know some of the benchmarks and some of the things to look for. We are looking at the security as well – our preference is for some sort of security.
“We would look at the financials and process those and we would then come to a stage of meetings and investigations to go to the next stage, which is more intense investigations. That may be with an industry we don’t know, so we bring in experts to ask them their opinions and to get things that we should be looking for.
“Ultimately, we bring the proposal to the credit committee, with a recommendation and the credit committee either says yes, no, or yes in principle or no in principle,” Rickards said
The aim of social enterprise lending is not to crowd out philanthropic support or government support, but rather to extend the access to capital and free up grant money for institutions that may not be in position to seek financing.
“Grants, endowments, donations, government support – they are all very important to the sector and will continue to be important to the sector,” said National Community Banking Manager at bankmecu, Steven Lynch, .
“But I think the work that Foresters Community Finance is doing in the community asset space indicates that there is untapped potential for some organisations to pursue lending to assist them achieve their objectives.
“Really, that’s what’s driving the relationship between bankmecu and Foresters – working together to assist community based organisations which may have the potential, or have the capability to borrow to buy their own buildings,” Lynch said.
Furthermore, seeking a financing solution can encourage social enterprises to develop more commercial approaches to service delivery, which can bring sustainability to the operations, said Chief Executive Officer and Managing Director at Community Sector Banking, Greg Peel.
“It’s very important for social enterprises to adopt a commercial approach in their business,” Peel said.
“They need to build, if you like, long term scale and sustainability in that business, because that maximises their profitability and maximises their ability to reinvest the profit and adopt approaches with robust and sustainable businesses.
“Accessing traditional debt or blended solutions does that. You need to act in a sustainable and commercial fashion because the investors won’t want to look at it as another grant or philanthropic venture. They’re looking at a blended return too,” he said.
Social enterprise finance is predicated on a level of return for investors – whether they be a bank’s depositors or investors such as Christian Super. Foresters Community Finance has previously said that returns are pegged to the Reserve Bank of Australia (RBA) cash rate, while Rickards of SEA said “we are aiming for a government bond-like return.”
But the lending institutions also point to the social value that can be generated in addition to the economic or financial return.
Bankmecu specialises in social enterprise lending for the purpose of developing affordable housing. Lynch said that the bank had provided financing for “close to” $100m in affordable housing projects, and the bank values both the economic return and the social return that social enterprise lending brings.
Last year, bankmecu, Community Housing Federation of Australia and PowerHousing Australia commissioned consultancy Net Balance to apply a social return on investment analysis to the community housing sector.
The report, The Social Value of Community Housing in Australia, concluded that there was a value of $665m over five years on the social benefits that stem from Australia’s current 42,000 community houses and units. The report measured the benefits that come from a person moving to a safe, secure and affordable home, and analysed the entire community housing sector – not just the projects that bankmecu finances.
Furthermore, going through the process and obtaining financing as a source of funding brings new skills to bear for a social enterprise, said Drew of Foresters Community Finance.
“The first thing is that they need to think about their organisation differently,” Drew said.
“If they’re thinking about taking out a loan over a decade, they need to think strategically for a decade. If they’re going to buy a property, they have to think about what they’re going to do over the life of the property. It extends the strategic orientation to a much longer time-frame and beyond the timeframes of grant cycles of one, two and three years.”
“What goes on as well relates to governance and decision-making, so you’re looking at senior management and boards, and looking at contracts and rules and such. The other thing that goes on as well is they build a number of technical skills and disciplines that they didn’t have before – buying a property, maintaining a property so that it remains viable and doesn’t become a liability to them over time, and other technical skills,” Drew said.
There is a concomitant development and extension of skills in the affordable housing sector, Lynch said.
“Especially in the community housing space, it’s led to roles changing from finance manager to chief financial officer, for example,” Lynch said.
“There has been a need for new skills brought into enterprises both at a management and board level. This is only natural when organisations are coming from a low base to borrow in some case tens of millions of dollars.”
Financiers in this space look to developing social enterprises and managing and increasing the capital under their management which they say is consistent with both their obligations to investors and depositors as well as with the broader mission of developing more social enterprises in Australia.
“It’s quite a different philosophy – the philosophy is about recycling,” Rickards of SEFA said.
“It’s about loaning the money and getting it back to do it all again.”
Rachel Alembakis is the founder of The Sustainability Report, reporting on Environmental, Social and Governance (ESG) issues related to companies listed on the Australian Stock Exchange. Rachel is a guest contributor writing exclusively for Pro Bono Australia on business issues affecting the Not for Profit sector. www.thesustainabilityreport.com.au