Thursday, February 11, 2010

Meeting the access to capital challenge for Canadian social enterprise

The following post was written by Social Investment Organization executive director Eugene Ellmen and was originally published on Social Finance.

The financing problems of social enterprise in Canada are well-known. Banks have difficulty extending commercial loans to social enterprise because they lack the security of hard assets, and private investors can't take ownership positions in businesses that - as non-profits - have no owners.

Yet there are fledgling models in Canada that have overcome these barriers. The Canadian Alternative Investment Coooperative, Access Toronto, Jubilee Fund and community loan funds in Montreal and Ottawa are some of the innovations that have successfully brought together socially responsible investors with local volunteers and publicly-funded agencies. The result is jobs and economic opportunity for low-income people in these communities.

The challenge now is to scale up. Is there a way to create an investment product that would attract not just thousands of dollars, but tens of millions of dollars to the social enterprise sector? As communities across Canada struggle with the effects of the current recession compounded by years of economic and social neglect, the need for such an investment vehicle has never been greater.

This challenge has been taken up by the Social Investment Organization in a new project called Impact Investing: a feasibility study for social enterprise financing. Announced Feb. 9 as one of a number of Ontario Trillium Foundation Future Fund projects, the SIO initiative aims to create a market-ready investment product for the social enterprise sector within two years.

Partnering with Causeway, a strong advocate for social enterprise in Canada, SIO will develop this investment vehicle with the help of an as-yet-to-be-formed advisory committee and a team of consultants. The project will draw on social enterprise projects in Ontario and, if warranted, across the country.

The advisory committee and consultants have their work cut out for them. While there are some workable models in Canada, social enterprise finance has remained small-scale in this country. One of the reasons for this is that Canadian social enterprise hasn't benefited from legislative incentives such as the US Community Reinvestment Act, which specifically mandates banks in the US to meet the credit needs of low-income communities. If this project is going to be successful, it will need to be successful under current Canadian laws and regulations. So what are the key challenges that need to be met? Here are some of the major issues:

- Creation of a social enterprise "pool" to form a base of investable assets. Individual projects across the province or across the country will need to be bundled together to form a diversified pool of viable businesses. When fully operational, the pool will need to be large enough that it can support paid staff to carry out appropriate due diligence on the projects in the pool. Without this due diligence, there won't be sufficient investor confidence to attract significant dollars. This could be done through a co-operative arrangement of some of the existing funds in this area (a fund of funds), or a new agency could be set up to manage the pool. This may require public subsidies to meet operational expenses, at least at the beginning.

- Establishment of a retail deposit product or investment note that would provide dedicated financing for the social enterprise pool. Deposits from this product (similar to the successful Calvert Community Investment Note in the US) would provide loans to the pool, which, in turn, would be used to provide loans to community funds or individual projects.

- Attraction of a mainstream financial institution interested in offering the deposit or note. There is no sense in having a well-designed vehicle if there is no efficient way of getting it into the market. A mainstream financial institution could get it into the hands of advisors, who then could talk to their clients about investing in it. Further, a deposit product offered by a mainstream financial institution would have the benefits of RRSP- and RESP-eligibility, combined with federal or provincial deposit insurance. Vancity has successfully offered such a product for years through its Shared Growth and Shared World programs, which have raised millions of dollars for Vancouver-based social enterprise and global microfinance funds.

- Enabling the institutional sector to invest in the pool, possibly through a separate fund designed specifically for high-net-worth or institutional investors. Many foundations, for example, are becoming aware of their power to invest in social enterprises that meet the same "mission-based" objectives as the foundations themselves. Finding an easily-accessible way for these institutions to invest in the social enterprise pool will be key to its success. Community Foundations of Canada is leading this work in the foundation sector.

The challenges will not be easily overcome. If they were, there would already be such a fund operating in Canada. However, the SIO is confident that using the existing know-how of the Canadian social finance sector as well as useful models from around the world that we can create a financing mechamism to enable social enterprise to reach its future potential.

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