Building a Social Capital Market in Canada October 2005

1. Building a Social Capital Market in CanadaOctober 2005

2. Agenda • Social Capital Market: Financing Social Change • Global Context • Canadian Approaches • Roles We Can Play

3. Financing Social Change: Traditional Investment Lenses We tend to think of investment through traditional sector-based lenses . . . Wealth Creation Private Investment ? Blended Outcomes Government Funding Charitable Donations Civil Society Social Safety Net

4. Financing Social Change: The Need for Multiple Lenses . . . but innovative solutions to social and economic challenges may exist between these silos E.g. • Sustainability and Conservation Private Investment • Inner-city economic development • First Nations economic development Government Funding Charitable Donations • Affordable housing

5. . . . and some ground breaking organizations already defy these traditional views Financing Social Change: An Example • Joint venture of nonprofit housing corporations in Winnipeg • Renovates run-down housing in the inner city • Employs 10-15 low-income inner city residents, mostly Aboriginal Canadians • Has revitalized dozens of homes and commercial buildings across the Winnipeg inner-city • Generated nearly C$1.5M in business revenue in 2004 / 2005 but is struggling for profitability

6. However, these organizations often fall between the cracks of traditional financing programs . . . Financing Social Change: An Example Investment Outcomes Policy Outcomes Charitable Outcomes • Business generates revenue, strives for profitability and services loans However, • Profitability and returns do not meet typical private investment hurdles • Jobs are provided for those who might otherwise rely on social assistance However, • Government is reluctant to support an organization that competes within the private sector • Affordable housing is constructed and at-risk individuals receive job training However, • ICR does not fit the traditional definition of a charity and cannot receive philanthropic gifts

7. Financing Social Change: A Social Capital Market In these cases we must set aside traditional lenses and create hybridfinancing mechanisms . . . Traditional Businesses Social Enterprises Traditional Charities Blended Outcomes Pure Social Outcomes Pure Financial Outcomes Hybrid Financing Vehicles are Required

8. Each of the traditional sector-silos possess tools that could be used to create hybrid investment vehicles . . . Financing Social Change: Hybrid Financing Tools Government Private Investors Charitable Organizations • Provide access to capital and assist in assessing financial risk • Offer effective tax incentives based on an assessment of overall returns tosociety • Foundationsoffer loan loss reserves or guarantees • Charities help assess social benefit Success is measured in terms of “Social Return on Investment”

9. However there is a significant role for government to play in making this a more desirable outcome The UK • Future Builders • Approximately $250M Cdn to help finance social sector infrastructure investments • Phoenix Fund • Approximately $100M in support for direct investment, CDFIs, CDVCs, and a central CDVC. • Community Investment Tax Relief • Tax relief credit for investment in disadvantaged neighbourhoods. • These countries have built up successful track records over the last 10-20 years. The US • Community Reinvestment Act • Legislation passed requiring mainstream FIs invest a component of their loan books in disadvantaged areas. • Community Development Financial Institutions Fund • Support in the form of start-up or further capital infusions, technical assistance, or in the form of tax incentives. • Community Development Venture Capital Funds • Tax and capital support for the financing of community development venture capital funds

10. The investor development and government support in the UK and the us has enabled some significant success stories The ShoreBank (US) Stony Field Yogurt (US) Significant support from government, and from other sectors, has fostered the availability of capital through mainstream institutions and new CDFIs, and supported the development of true blended value organizations. Energywise Recycling (UK) Triodos Bank & Charity Bank

11. Progress remains slow in Canada for a variety of regulatory and cultural reasons • A variety of different organizations are attempting to develop alternative structures that may better reflect a blended value proposition: • Charities and NFPs • A variety of social enterprises • Key impediments – • Unfavourable regulatory framework • Narrow political and cultural norms • Lack of innovative investment vehicles • Investor resistance • A growing industry of socially responsible investors finds that it can be difficult to invest in the developing ‘gray space’: • Foundations interested in making program related investments (pri) • Funds that need to present a market value proposition to investors

12. Underinvestment in Hybrid Approaches: A Vicious Cycle Dearth of Hybrid Investment Institutions And few chances to overcome . . . And. . . Less Risk taking and Innovation Limited Hybrid Investment Expertise And. . . • Fewer entrepreneurial approaches Leads to. . . Few Risk Capital Investment Vehicles Resulting in . . .

13. Why Social Enterprise: Creating a Positive Cycle And attracts new . . . Social Investors Develop . . . Greater social returns New Risk Capital Vehicles Which creates. . . Which encourage . . . Risk taking and Innovation • Entrepreneurial Solutions to Social Problems And allow . . .

14. Vartana – a social sector focused financial institution The Bank will significantly enhance the options available to Canada’s voluntary sector: • By creating an innovative charitable financial institution built with the sector to better meet its full range of financial service needs • By strengthening voluntary sector organizations, helping them become more effective and innovative in fulfilling their missions • By building relationships and support across Canada’s voluntary sector, regulatory and business communities • By establishing a new bank that is economically viable and fits within current policy frameworks A registered charity AND A bank

15. Vartana – the need “The most pressing current challenge facing the sector relates to financial capacity. It is clear that new models that provide non-profit and voluntary organizations with the stability and support they need to develop human resources and organizational infrastructure, and to engage in long-term planning are at the heart of realizing their full potential to serve Canadians.” - Voluntary Sector Initiative

16. Vartana – the proposed products/services Traditional banking products tailored to the sector’s needs… …and, in the future, additional financial products and services Loans and guarantees: • Working capital loans • Short term bridging loans • Underwriting for a fund-raising programme • Final step loans so a project can go ahead • Loans for capital equipment • Mortgage loans • Renovation loans • Credit cards Deposit products: • Chequing accounts • Savings accounts • Term accounts (e.g., GICs) Financial advice and information Cash management: • Disbursement services • Automated information and reporting systems • Lockbox • Electronic payments Investment expertise: • Investment and advisory services Employee Benefits: • Group medical and dental • Group non-medical and life Payroll Services

17. About SCP Our Mission Investin social enterprises that employ people from economically marginalized communities Enable these organizations to grow and succeed financially Support these organizations to create improved social and financial outcomesfor employees Catalyze other innovative financing models for social initiatives

18. About SCP Our Investment Approach Using the principles of venture capital To invest in high potential social enterprises And create a network of successful enterprises across Canada That ultimately employ thousands of people • Risk capital • Deep engagement • Management support • Growth oriented • Profitable • Strong job creation per dollar invested • Cross pollinate ideas and best practices • Engage communities • Make the concept “mainstream” • Provide a positive alternative to social assistance • Make long lasting changes in communities

19. About SCP: Results from our Portfolio Companies Portfolio Company Revenue Non-Target Employees Portfolio Company Operating Profits Target Employees Individual Portfolio Companies Target Employees: 260 Total Employees: 400 Portfolio Company Revenue: 10.6M Portfolio Company Profits: 600k

20. What can you do about it? • Key Messages Private sector • Look for ways to be catalysts for blended return projects • Think with both a business and a charity hat on more frequently Charities/NFPs • Learn and speak a blended return language • Consider possibilities outside a solely charitable structure Foundations • Consider investing part of your capital base, via program related investments (PRI), in organizations in the form of debt or equity, along with grants • Consider convening meetings including all parts of the community to further advance this type of thinking locally Government • Consider regulatory policy that can act as an enabler to a developing social capital market • Consider tax policy that makes blended return investments more attractive

21. www.socialcapitalpartners.cawww.vartana.org