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Innovative Financing

Overview of the Impact Investing/Social Finance Space

Aunnie Patton

on 22 October 2014

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Transcript of Innovative Financing

Innovative Financing
Profit Focused
Mission Focused
International Development Organizations
Socially Responsible Funds
High Networth Individuals
Venture Capital
Venture Philanthropy
Private Equity
"Socially Responsible Investment"
"sustainable Investment"
"Total Return" "Blended Return"
"Triple Bottom Line"
"Double Bottom Line"
"Environmental, Social and Governance"
Social + Environmental + Financial
Socio-Economic Value
Externalized Value
Early Stage Investment Process
Cost-Effectiveness Analysis (CEA)
Calculation of a ratio of cost to a non-monetary benefit or outcome (cost per child cured of malaria)
Used when monetizing the benefits is not possible or appropriate

Cost-Benefit Analysis (CBA)
Monetizes the benefits and costs and compares them

Robin Hood Foundation Benefit-Cost Ratio
Helps determine renewal but not allocation decisions among portfolios

Acumen Best Available Charitable Option (BACO Ratio)
Used to quantify a potential investments social output and compare it to the universe of existing charitable options for that explicit social issue

William & Flora Hewlett Foundation Expected Return
Program officers test implicit assumtion against the ER number and quantify high level tradeoffs between investments within an investment portfolio

Center for High Impact Philanthropy (CHIP) Cost per Impact
How much does change cost?

Social Return on Investment (SROI)
Expected Return = (Outcome or Benefit X Probability of Success) / Cost
Cost-Effectiveness Analysis (CEA)

Cost-Benefit Analysis (CBA)

Robin Hood Foundation Benefit-Cost Ratio

Acumen Best Available Charitable Option (BACO Ratio)

William & Flora Hewlett Foundation Expected Return

Center for High Impact Philanthropy (CHIP) Cost per Impact

Social Return on Investment (SROI)
How do we value?
1.Quantifying non-financial impact of operations per unit
2.Translating into dollar terms per unit to achieve “social cash flows”
3.Summing all SCF for a specified horizon
4.Discounting SCF to present value
5.Dividing by investment to date (Olsen and Lingane, 2003)
Inputs & Outputs
Evidence Outcomes
Establish Impact
Calculate SROI
How do you assign monetary value to an impact?
Development Reports
Revealed Preference
Case Studies
Discount Rates
E(Ri)= Rf+ βBi (E(Rm )- Rf)
Time Value of Money + Riskiness
Current Standards
0% - Risk-Free Rate (HM Treasury Book)
VCs Discount Risky Ventures up to 80%
Valuation Methods
Early Stage Ventures aren't valued with DCF
Venture Capital Method
Transaction Comparables
VC Method
Exit Multiple on Projections
Discounted by Expected Return (Cost of Capital)
Transaction Comparables
Get Creative!
Linkedin = Average Lifetime Value of User X Number of Users
Build to Total Value
NPV of Social Cash Flows by Stakeholder
Projected Social and Financial Cash Flows
PV of Cash Flows
PV of Social Cash Flows by Stakeholder
What is the Cost of Capital for an Impact Investor?
Will other investors pay for social impact?
Term sheets
Cost of Capital
Term Sheets
Option Pool
Information Rights
Protective Provisions
Important Developments
Social Capital Markets
Market Mechanism allows for:
Price Discovery
Valuation and Trading of Shares
Entry & Exit Route
Intermediaries to create bespoke Investment products

"Current markets aren't there to measure or give value to social outcomes" - Mark Campanale (CEO of Social Stock Exchange)
Government and Foundation Benchmarking
Gatekeepers of Capital Demanding Change
Gatekeepers of Capital
Mission based

Market Inefficiencies

Total Return Focused

Sustainability of Funding
Social Investment Market
Social Enterprises, Charities, SMEs
Governments, Foundations, Institutional
& Retail Investors, HNW Individuals, Corporations
Debt, Equity, Grants & Contracts
Venture Capital and Private Equity Funds, Incubators, Venture Philanthropists, Retail, Exchanges, Asset Managers, CDFIs
Significant Hurdles to Social Finance Market
Meehan et al (2004)
Different products are suitable for different risk / return preferences and different stages of an enterprise's growth
Alex Nicholls, 2012
Social Impact Bonds
Also known as Social Benefit Bonds (Australia), Pay for Success Bonds (U.S.), Payment for Results (UK)
Social Impact Bonds are based on a commitment from government to use a proportion of the savings that result from improved social outcomes to reward non-government investors that fund the early intervention activities – Social Finance, 2009
Peterborough Social Impact Bond
First SIB, officially launched in September 2010 with Ministry of Justice

Social Finance raised £5m from 17 social investors

Work with 3,000male, short-sentence prisoners leaving Peterborough prison

Ministry of Justice and Big Lottery Fund will pay investors so long as there is a measured reduction in reconviction events of 7.5%
Benefits and Challenges
Increase private funding for welfare programs

Reduce state spending

Transfer outcomes risk

Measure diligently

Exploit net present social value
Realize real savings

Distort market

Undermine role of the state

Measure effectively

Allocate risk and return

Exits for service provides
Alex Nicholls & Aunnie Patton, 2012
Impact Reporting & Investment Standards (IRIS)
A common language for describing the social and environmental performance of an organization
provides an independent and credible set of metrics for organizations to use when reporting their impact
IRIS indicators span an array of performance objectives and include specialized metrics for a range of sectors including financial services, agriculture, and energy.
like financial accounting standards, IRIS provides a basis for performance reporting and organizations need only report on applicable metrics from the IRIS library.

JP Morgan/Rockefeller (2010)


Impact as a Strategy

New Efficient Frontier

Cost of Capital
Negative Screening
Socially Responsible Investing (SRI)
Ethical Investing

Layer values onto investing through negative screens
i.e. No tobacco, alcohol or oil
Full transcript