Delivering Early Wins to Support Impact Investing
27 January 2015 at 9:45 am
There are some simple and inexpensive policy changes which can help grow impact investing in Australia, and the re-establishment of the Prime Minister’s Community Business Partnership provides a unique opportunity to deliver them, writes Krystian Seibert, Policy & Research Manager with Philanthropy Australia.
In a December article for Pro Bono Australia News I gave a broad overview of some proposals Philanthropy Australia put forward in a submission to the Australian Government’s newly re-established Prime Minister’s Community Business Partnership.
The submission set out some ‘Early Wins’ for the Partnership – these are not intended to be transformative reforms but rather practical proposals which will have a positive impact, and which can be implemented relatively easily, inexpensively, and quickly.
In this article I want to delve more deeply into some of the ‘Early Wins’ which could help support the growth of impact investing in Australia.
Providing Loan Guarantees to Charities
Program Related Investment is not something which has entered the Australian common parlance yet – they are investments made by trusts or foundations to support charitable activities that involve the potential return of capital within an established timeframe.
In the United States, the two most common forms of Program Related Investment are providing below-market interest rate loans, and loan guarantees.
In Australia, Public and Private Ancillary Funds can already provide below-market interest rate loans to charities with deductible gift recipient status.
However, the current regulations restrict them from providing a loan guarantee – which would involve using a Public and Private Ancillary Fund’s assets to guarantee a loan which a charity is seeking to obtain from a lender.
A charity may seek finance from a lender, only to be told that a guarantee is needed so that if the charity defaults, the guarantor can repay the debt. Under the current regulations, if the charity approaches a Private or Public Ancillary Fund to seek assistance, such a Fund can only provide a grant and not a guarantee.
This is illogical – both a grant and a loan guarantee are ways of helping a charity further their charitable purposes. They are different means of achieving the same ends.
Last December, a new report highlighted how loan guarantees can be used by US Community Foundations in particular as an important tool to deliver impact. We need access to that tool in Australia as well.
Nearly $7 billion in assets are held by over 3000 Private or Public Ancillary Funds in Australia. These assets need to be able to be leveraged more effectively to maximise their impact and unlock more funding to help achieve change in our community.
Making it Easier for Private Ancillary Funds to Make Impact Investments
Wholesale investors are able to access a wider range of investments than retail investors, however, reduced protections and disclosure requirements apply than in the case of retail investors.
Wholesale investors tend to be banks, bigger businesses and high-net worth individuals, and everybody else is a retail investor.
Many Private Ancillary Funds are established by high net worth individuals who in their own right would meet the wholesale investor tests under the Corporations Act 2001 (Cth).
However, under the current law, there is a lot of uncertainty about whether such Private Ancillary Funds themselves meet the wholesale investor tests, which can make it difficult for them to invest in Social Impact Bonds as they are only available to wholesale investors at this stage. Other types of impact investments also tend to only be available to wholesale investors.
This article outlines in more detail just how frustrating the situation can be for a Private Ancillary Fund which is seeking make a difference through impact investing.
The Financial System Inquiry looked at this issue last year – and in its final report it recommended that it be addressed.
This can be achieved by way of some minor legislative changes, which would unlock more capital within Private Ancillary Funds to be used towards investing in social impact bonds and other impact investments.
Encouraging Foreign Investor Support for Impact Investment
We’re seeing a huge inflow of investment into Australia as a consequence of the introduction of what’s called the Significant Investor Visa.
The visa requires migrant investors to invest $5 million into ‘complying investments’ within Australia for a minimum of four years before being eligible to apply for a permanent visa.
Between 24 November 2012 and 31 December 2014, 595 visas were granted, with nearly $3 billion being invested in complying investments, while nearly another $3 Billion is proposed to be invested.
The Australian Government is reforming the Significant Investor Visa programme to better direct additional foreign investment into areas lacking capital, such as startups, venture capital and commercialisation of research and development.
To expand impact investment in Australia one of the key priorities is the need to grow capital from diverse sources – it makes sense that this should include trying to direct some foreign investment into impact investment by classifying impact investment as ‘complying investment’.
Some may question whether foreign investors will be attracted to impact investment – but over time interest is likely to grow and we don’t want impact investment to be frozen out of such a big pool of potential funding.
With nearly $3 Billion currently proposed to be invested under the visa, if 1 per cent of foreign investment generated by the visa is directed towards impact investment it would make tens of millions of dollars of additional funding available.
We Still Need to Focus on Transformative and Game Changing Proposals
These three ‘Early Wins’ have the potential to support the growth of impact investing in Australia – but of course we also need to focus on more complex and game changing proposals.
The Australian Advisory Board on Impact Investing has already started looking at how to build the foundations for a growing impact investing market in Australia.
Such important initiatives can feed into the work of the Prime Minister’s Community Partnership, so that it can drive the implementation of some easier reforms but also some of the less simple but more transformative proposals.
About the author: Krystian Seibert is a regular columnist for Pro Bono Australia on philanthropy, public policy and research. He is the Policy & Research Manager with Philanthropy Australia and tweets at @KSeibertAu