Social Finance
Dr. John Hoffmire
Director,
Saïd Business School Venture Fund
Saïd Business School
University of Oxford
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Social Finance
“You might suppose that financial innovation had done
enough damage. But bankers, investors and philanthropists
believe it can help the world’s poor.”
- The Economist
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What is Social Finance?
It is part of a broader social investing concept…
“…the resources required to empower social and
environmental change.”
- Financial capital (money)
- Social capital (networks)
- Human capital (expertise and skills)
(Source: “The Landscape of Social Investment: A Holistic Topology of Opportunities and Challenges,” Mar 2008, Alex Nicholls with Cathy Pharoah)
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Social Finance Aliases
There are many signposts pointing to
social investment and social finance…
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Philanthrocapitalism
Natural Capitalism
Social Capital
Social Venture Capital
Venture Philanthropy
Blended Value Returns
Social Enterprise
Corporate Social Responsibility Through Investment
Impact Investing
(Source: “The Landscape of Social Investment: A Holistic Topology of Opportunities and Challenges,” Mar 2008, Alex Nicholls with Cathy Pharoah)
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Social Finance: What is it?
It is not new.
Ethical screening of portfolios - $7 trillion of assets were
screened in 2009
“Community development” – grew 22% annually in
America, 2001-07 to $26bn
Microfinance – total lending grew 44% annually from 200106, to $25bn
(Source: “A Place in Society”, The Economist, 25 Sep 2009)
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Social Finance: What is it?
“What is new is the interest of mainstream financial
institutions and investors.”
“A growing number of investors are trying to repeat the
microfinanciers' success, but in equity rather than loans. “
“A more innovative idea, perhaps, is the “social impact
bond”, the brainchild of Social Finance.”
(Source: “A Place in Society”, The Economist, 25 Sep 2009)
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Social Finance and Social
Entrepreneurship
Initiatives combining innovation and market-oriented
strategies with a “strong social purpose.”
Public Sector - Private Sector - Third Sector
(Source: “The Landscape of Social Investment: A Holistic Topology of Opportunities and Challenges,” Mar 2008, Alex Nicholls with Cathy Pharoah)
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(Source: “Eight paradoxes of the social enterprise research agenda.” (2008), Ken
Peattie and Adrian Morley.)
Social Enterprise in Context
First System / Private /
Profit Oriented
Second System / Public Service /
Planned Provision
Third System / Self-help / Mutual /
Social Purpose
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Social Finance: Basic Components of
Impact Investing
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Contrast to Traditional Funding
(Source: “Understanding Social Investment,” 2010, by The Social Investment Business Group)
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(Source: “The Landscape of Social Investment: A Holistic Topology of Opportunities and
Challenges,” Mar 2008, Alex Nicholls with Cathy Pharoah, adapted from Alter, 2007)
Categories of Social Finance
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Growth of Social Finance
Fast growing
• Microfinance
• Credit Unions
• Socially Responsible Investment
Slower growing
• Social Equity Finance
• Risk Capital
• Social Market Development Finance
(Source: “The Landscape of Social Investment: A Holistic Topology of Opportunities and Challenges,” Mar 2008, Alex Nicholls with Cathy Pharoah)
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(Source: “The Landscape of Social Investment: A Holistic Topology of
Opportunities and Challenges,” Mar 2008, Alex Nicholls with Cathy Pharoah)
Social Investment Opportunities
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(Source: “The Landscape of Social Investment: A Holistic Topology of Opportunities and
Challenges,” Mar 2008, Alex Nicholls with Cathy Pharoah, adapted from Alter, 2007)
Social Finance Across the
Organisational Life Cycle
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Spectrum of Social Entrepreneurship
by Resource Strategy
(Source: “The Landscape of Social Investment: A Holistic Topology of Opportunities and Challenges,” Mar 2008, Alex Nicholls with Cathy
Pharoah, adapted from Howard and Giddens, 2004)
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Social Finance by Contractual
Arrangements
(Source: “The Landscape of Social Investment: A Holistic Topology of Opportunities and Challenges,” Mar 2008, Alex Nicholls with Cathy Pharoah)
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Social Investing Strategy
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Direct Impact Approaches
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Mission Investing
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Mission Investing
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Emerging Investment Paradigm
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Social Investing Spectrum
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Social Investing Spectrum
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Segments of Impacts Investors
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Impact Investment: Market Participants
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Israel: Sources of Non-Profit Funding
(Source: : Dr. Nissan Limor, The Needs of Civil Society and the Third Sector in Israel as cited in “Social Capital Market for Israel,” Report of the Working Group for
Social Investment, Didi Lachman-Messer with Elad Katz)
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Traditional Capital Market
Relationships
(Source: “Social Capital Market for Israel,” Report of the Working Group for Social Investment, Didi Lachman-Messer with Elad Katz)
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A Proposed Model for Israel
(Source: “Social Capital Market for Israel,” Report of the Working Group for Social Investment, Didi Lachman-Messer with Elad Katz)
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Measuring Performance
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(Source: “The Landscape of Social Investment: A Holistic Topology of Opportunities and
Challenges,” Mar 2008, Alex Nicholls with Cathy Pharoah, adapted from Alter, 2007)
Approaches to Measuring
Performance
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In Practice: UK’s “Social Finance”
UK: Social Impact Bond introduced in 2010
USA: Pay for Success Bond followed UK lead in 2012
Example: “[Social Finance] raised money from private investors to
fund the expansion of schemes run by charities to reduce the
reoffending rate among certain categories of criminal after their
release from jail. If the recidivism rate falls far enough, investors
can earn up to a 13.5% annual rate of return. If there is no
improvement, investors could lose all their money.”
(Source: “A Place in Society”, The Economist, 25 Sep 2009)
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In Practice: Social Impact Bonds
Outcomes based contract
Provides up-front funding for services
Re-allocates risk from public sector
(Source: http://www.socialfinance.org.uk/work/sibs)
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In Practice: Social Impact Bonds
(Source: http://www.socialfinance.org.uk/work/sibs)
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(Source: http://yobucko.com/education/sofi-raises-77-million-to-address-student-loan-debt-crisis)
In Practice: SoFi Peer-to-Peer
Lending
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In Practice: Govt Initiative to
Development Social Investment
Intensive government involvement since 2000
Social Investment Task Force laid out blueprint
Aims to apply venture capital principles
Joins social, business and public sectors
Establishment of CDFI’s (Community Development
Finance Institutions)
(Source: “Social Capital Market for Israel,” Report of the Working Group for Social Investment, Didi Lachman-Messer with Elad Katz)
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
UK CDFI Results 2010/11
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
Number of CDFIs in the UK, 19932011
Overall
financing has
increased
despite recent
decline in
numbers.
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
UK CDFIs Reach Underserved
Groups
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
UK Proportion of CDFIs Serving Each
Market 2010/11
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
UK CDFI Loan Applicant Pipeline
2010/11
64% of loan applicants were successful
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
UK CDFI Annual Disbursals and
Porfolio Outstanding 2010/11
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
UK CDFI Loans Disbursed by Market,
by Number 2010/11
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
UK CDFI Loans Disbursed by Market,
by Value 2010/11
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
2010/11 UK CDFIs Serve Financially
Excluded Individuals
Challenges to obtaining traditional bank lending:
• Customers are perceived as high risk and likely to default on
loans small loan products are not as profitable as other
products
• The types of supportive services required by customers are
not provided
• Automated credit scoring systems’ inability to take account of
individual circumstances or reasons for defaults
• Low income, employment status, housing tenure
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
2010/11 UK CDFIs Lent £13m to to
21k Households Resulting in…
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
UK CDFIs Fill Business Finance Gap
Challenges to obtaining traditional bank lending:
• Amount of finance required too small to be cost effective for
banks to service
• Little or no collateral security to guarantee debt
• Insufficient business track record
• Poor credit rating or history
• Coming from or operating in an underserved or deprived
community
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
2010/11 UK CDFIs Lent £23m to
1500 Businesses Resulting in…
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(Source: “Inside Community Finance: Annual Survey of CDFI’s in the UK,” by Harry Glavan, 2012)
UK CDFIs Serve Civil Society
Challenges to obtaining traditional bank lending:
• Corporate structures and business models unfamiliar to mainstream
lenders (that is, ‘not for private profit’ or charitable),
• Reliance on grant funding,
• Inadequate credit history,
• Variable revenue streams,
• A low degree of investment readiness,
• Challenges in providing sufficient commercial financial return.
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In Practice: Foundations a Driving
Force
“We recognized, if you put a price tag on all the social and
environmental needs around the world, it is in the trillions.
All of the philanthropy in the world is only $590 billion. So,
the needs far exceed the resources. The one place where
there is hundreds of trillions of dollars is in the private
capital markets. So we, and others, began to wonder are
there ways to crowd in private funding to some of these
incredible needs.”
- Judith Rodin, President of the Rockefeller Foundation
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In Practice: Foundations a Driving
Force
GIIN Investors Council
Accion
Acumen Fund
The Annie E. Casey Foundation
Armonia (Lunt Family Office)
Athena Capital
The Bill and Melinda Gates Foundation
Calvert Foundation
Capricorn Investment Group
CDC
Citi Foundation
Community Capital Management
Deutsche Bank
DOEN Foundation
Enterprise Community Partners
Esmee Fairbairn Foundation
Equilibrium Capital
FMO
Ford Foundation
The Gatsby Charitable Foundation
Generation Investment Management
Gray Ghost Ventures
IGNIA
Impact Community Capital
Inter-American Development Bank Group
J.P. Morgan
Jonathan Rose Companies
Leapfrog Investments
Lok Capital
Lundin Foundation
Morgan Stanley
National Community Investment Fund
Omidyar Network
Overseas Private Investment Corporation
Packard Foundation
Prudential
The Rockefeller Foundation
Root Capital
RSF Social Finance
Sarona Asset Management
SEIU Capital Stewardship Program
ShoreBank International
SNS Impact Investing
Threshold Group
TIAA-CREF
The Tony Elumelu Foundation
Trans-Century
Triodos Investment Management
UBS
W.K. Kellogg Foundation
Wolfensohn & Company
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In Practice: Foundations a Driving
Force
“The financial industry may be providing the rocket science,
but the backing of rich philanthropists is an essential
source of fuel.”
- The Economist
(Source: “A Place in Society”, The Economist, 25 Sep 2009)
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In Practice: Foundations a Driving
Force
The Gates Foundation created a $400m facility in 2009 to
see if various financial innovations can entice considerably
larger sums (two to five times as much) from governments
and private investors to help the organisations to which it
gives grants.
• Guarantee to charter school bond issuance
• Insurance against non-payment of promised donor aid
• Encouraging private-equity and venture capital
investments in countries where it is making grants
(Source: “A Place in Society”, The Economist, 25 Sep 2009)
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In Practice: Kellogg Foundation
US$7.6 billion in assets
Complex Challenges
Northeast Brazil
 ½ young people illiterate
 Lowest life expectancy, highest infant mortality rate, and highest percentage of
families whose children go hungry
Southeastern Mexico
 Infant mortality is the highest, literacy rates and per capita income the lowest,
and 70 percent of the indigenous people are malnourished
US Michigan, Mississippi, and New Mexico
 19 percent poverty level in Michigan, 28 percent in Mississippi, and 25 percent in
New Mexico
 Food insecurity in Mississippi and New Mexico exceed the national average
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In Practice: Kellogg Foundation
Mission-Driven Investing Program

Aligned with program elements, approaches
and geographic areas of focus

Expectation of market or near-market performance
Specific criteria for investments focus on demonstrated potential for
successful execution
 Proven record of success (2-4 years)
 Fund/enterprise owned and operated by a strong team
 Established anchor investor
 Credible plan for execution and scale
Pillars of MDI ROI: Social, Environmental, Financial, Knowledge
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In Practice: Kellogg Foundation
Financial targets/metrics:
• Investment range is $500,000 to $5 million
 Generate market risk adjusted by asset class rates of return
• Loans and fixed income investments: 6-10% return, a maximum
term of five years, strong collateral and cash flow coverage, and
fully amortizing instruments with current yield
• Private equity investments: 15-25% return
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In Practice: Kellogg Foundation
Mission and Social targets/metrics includes access to:
 More and better jobs for family caretakers
 Mainstream and alternative financial services
 Quality childcare and educational institutions
 Healthy foods and/or health services
 Stable and affordable housing
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Keys to Social Finance Growth
Recommendations from Capital Markets for Impact at
Scale Conference, Oct 2012
• Partnerships (between philanthropic funds, federal funds,
city and state government, and private industry)
• Intermediary Infrastructure or Platforms that aid in
bringing parties together (like Fundwell, a platform that
matches small businesses with grants and capital)
• Measurement Tools to actually assess what social impact
is being made (like the tool that the Rockefeller Foundation
developed called Iris).
(Source: “Impact investing: the power of two bottom lines,” by Lisa Kozlowski, Forbes, 10/02/12)
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Social Finance and Your Organisation
Keys to ensuring your organisation is ‘investment ready’
“1. Ensure the board/management committee are happy to explore new finance
options
2. Think about the direction of the organisation
3. Be clear of what the organisation’s goals are and how they will be achieved
4. Decide how to become visible and attractive to new potential customers – what is
the organisation’s unique selling point – compared to competitors?
5. Understand income streams and how they will be managed in the long-term”
(Source: “Understanding Social Investment,” 2010, by The Social Investment Business Group)
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Social Finance and Your Organisation
Keys to ensuring your organisation is ready to invest
“1. Establishing a proper investment agenda,
2. Establishing the right internal investment structure to
institutionalise proper consideration of the agenda,
3. Ensuring an adequate investment appraisal process and
systems for considering social investment opportunities
systematically rather than ad hoc, and
4. Establishing suitable investment criteria and decision points.”
(Source: “Understanding Social Investment,” 2010, by The Social Investment Business Group)
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Social Finance
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