Alliance Online - June 2006

Becoming an asset class?

Caroline Hartnell

EVENT Skoll World Forum on Social Entrepreneurship
Date 28-30 March
Venue Oxford, UK
Organizer Skoll Centre for Social Entrepreneurship
Attending 600 people from 40 countries and six continents

This year's Skoll Forum in Oxford at the end of March focused on building social capital markets. The aim was to look at how to harness the full range of financial mechanisms to support social change, from grant funding at one end of the spectrum to fully commercial financial instruments at the other. There was so much talk of 'asset classes', 'deal flow' and 'efficient capital allocation' that one might at times have been forgiven for thinking one had gatecrashed a conference for investment managers. 'Sometimes what we're doing gets lost behind all this talk of investment returns,' as one person expressed it to me. But the Forum is also about supporting and celebrating social entrepreneurs, as emphasized by Jeff Skoll opening the conference, and the social entrepreneurs themselves were there in force to remind us what it was all for.

The Skoll Foundation's support for social entrepreneurs was most evident in the awards ceremony, a glittering occasion where 16 Skoll entrepreneurs, all recipients of substantial multi-year grants from the Foundation, received their 'Skoll Oscars' from Sir Ben Kingsley and Robert Redford to much applause.

But the Forum itself turned attention to the other forms of support available, or potentially available, to social entrepreneurs and non-profits - particularly those not lucky enough to have received Skoll grants!

The Generation approach

First on the scene were Al Gore and David Blood. 'I used to be the next president of the US,' Al Gore introduced himself, 'now I'm a recovering politician.' He's also co-founder, with David Blood, a former Goldman Sachs CEO, of Generation Investment Management. The basic idea behind Generation is that companies that take social and environmental considerations into account in the way they operate will in the long term be more successful in market terms, largely as a result of having given themselves a more solidly established 'licence to operate'.

There was an interesting analogy with grantmaking here. Foundations are often criticized for offering short-term, largely project-based funding that doesn't help non-profits to grow. There is apparently a similar short-termist approach in the for-profit world. 'People hold stocks for only a few months,' said Gore. 'That's not investing.' Generation takes a long view, calculating profits only after three years - something that's needed if the benefits of working more sustainably are to be realized. Generation's goal is to encourage other investment companies to include externalities in their analysis and to provide information about sustainability to the capital markets.

The need for social equity

Generation is concerned with changing the way mainstream investors think about sustainability rather than with making funds available for social entrepreneurs. In his keynote address, Sir Ronald Cohen, Chair of the UK Social Investment Taskforce, looked at the capital needs of social entrepreneurs, thus setting out what were to be some of the key themes of the conference.

'What happened in business entrepreneurship over the last 30 years is happening now with social entrepreneurship,' he said. But if we want social enterprises to 'connect with deep pools of money', as happened with the development of private equity, we need to be able to measure social return.

But measuring social return is not enough, Cohen emphasized. 'Each country needs an organization that can work with capital markets and build our sector into an asset class.' He cited the Local Initiative Support Corporation in the US as the best example of an organization that gathers capital and redistributes it. It can do this because it understands both community development and capital markets. 'Once non-profits know that money is available,' he said, 'they will go out and get it. This is what happened with private equity.'

Other speakers similarly stressed the need for equity investment. One was Henry Obi of Aureos Capital. 'We need more equity instruments,' he said. 'That's what drives growth in real capitalism.'

Grants as equity?

Should grants be seen as equity capital for non-profits? Several people made the point that traditional grants are not even seen as an investment in the organizations supported, let alone as providing capital for start-ups. UK Consultant David Carrington spoke of 'perversity' in the practice of foundations that make insufficient funds available, on restrictive conditions, with high transaction costs. Having money unspent at the end of the year is something to be penalized rather than encouraged.

One criticism of the Forum might be that there was too little exploration of how this could change - given that perhaps the majority of non-profits are likely to continue to need grant funding in the long term. As Carrington put it, 'Grants are OK!' But he also encouraged foundations to see grants as 'only one part of the repertoire'. They need to 'milk philanthropic assets' through PRI - programme related investment.

This doesn't mean that loan finance is the answer. Although a long-time advocate for development of a greater range of financial instruments to support social change, Jed Emerson sounded a note of caution. 'We are not yet an asset class,' he said. 'We need third party rating agencies, clear language, and so on.' His fear is that if something goes wrong, everything could be set back for years. 'We need to recognize that not all non-profits can cope with debt,' he warned.

What is needed to make non-profits into an asset class?

According to Bill Drayton of Ashoka, it's 'deal flow'. Any financial deal needs investor and investee and intermedaries. Who will be the intermediaries in the social sector? Drayton thinks it will be the for-profit capital markets. 'We need low transaction costs, low risk, high volume, to have good deal flow,' he said.

Max Martin of UBS agreed with him. We need mechanisms for establishing more systematically and more cheaply who is a high-performing social entrepreneur, he said. There are plenty of non-profits and there's plenty of capital around, but who do you give it to? The need is for better transmission, lower transaction costs (now 22-43 per cent).

What has been missing is work on metrics, said Simon Collings of Resource Alliance. But we need to look at what can't satisfactorily be measured and understand the limits. Social value can never be measured as simply as profit.

According to Melissa Berman of Rockefeller Philanthropy Advisors, we need more knowledge/analysis rather than data. We need a more shared language between donors and non-profits, she said, a better way to assess impact and performance. 'We don't have indicators people are comfortable with,' she pointed out. 'The business world has non-financial indicators such as market share that they are comfortable using.'

But, as Jed Emerson remarked, we know a lot already but we don't share it. 'We need better knowledge management.'

Financing emerging markets

Inevitably much attention at the Forum went on initiatives in northern countries, where the development of new financial instruments is more advanced - albeit not very advanced - than in developing and transitional countries. With grant funding drying up, new funding streams are very much needed.

The Forum heard from Artur Taevere (Charities Foundation) about the beginnings of venture philanthropy in Estonia . Given there isn't enough money to go round, it's worth being sure that those supported are as good as possible. 'Funders should be concerned with impact rather than innovation,' he said.

Atis Zakatistovs talked of the Social Responsibility Forum in Latvia. The problem, he said, is that 'in emerging markets leaders don't always follow the rules' - a problem also mentioned by Olga Alexeeva of CAF, who felt that it was 'very hard to develop social entrepreneurship where government doesn't play by the rules'. Non-profits can find themselves driven to 'the murky world of business', she said, and finding themselves needing to give bribes. 'Maybe we shouldn't always aim for a money-making model of social entrepreneurship,' she suggested. In any case, unless we get local donors to invest in this, it's going to remain a 'fancy toy of foreign aid'.

Creating a social stock exchange?

Is this something we should be aiming for or is it a 'distraction', as Peter Wheeler, chairing a panel on the subject, suggested? Muhammad Yunus, founder of Grameen Bank, is one who believes in the idea of a social stock exchange. 'There's a category of non-loss, non-dividend enterprises that are bringing social benefit (social benefit enterprises?),' he said. Rather than waiting to form our own stock market, we could use mainstream markets and people could choose to invest in the companies that are doing the most good.

One big issue for a social stock exchange seems to be liquidity: if investors want to sell, who sets the price? And how? Should interpreting of social benefit enterprises be done by mainstream advisers or by specialists, someone asked. Yunus himself 'prefers that it should not be done by bankers - who will continue to think like bankers. People thinking afresh can think about what people will be looking for, how they should be judged.' This is of course the same principle that he has applied in the Grameen Bank, where the policy has always been not to employ bankers, with their pre-existing bankers' mindsets.

What do we really want? Wheeler questioned. Are we looking for some sort of matching mechanism to put investors in touch with NGOs, or do we want social benefit companies to be able to register on a social stock exchange in order to raise stocks in the normal way? Or is it the various things that go with a stock exchange that we're hankering for - systems for producing information on NGOs, 'proper' metrics, intermediaries?

One speaker pointed out that a social stock exchange will inevitably favour organizations that deliver services that can raise revenue rather than, for example, advocacy organizations. Yunus agreed. There is a category of NGOs that can compete that have potential to operate in a business way - in fields such as microfinance and affordable housing. 'It won't necessarily work for all organizations.' As another speaker emphasized, some services for the poor will always need to be subsidized.

In the final session Matthew Bishop of The Economist provocatively dismissed the idea of a social stock exchange as 'mad', the result of a wider confusion between 'actual capitalism' and the 'metaphor of capitalism', which is often based on a misunderstanding of capitalism. In 'actual' capitalism, people invest money and know what they're going to get back. This isn't true in the social sector. While intermediaries (city analysts, etc) are the most disliked aspect of capitalism and widely seen as parasites, in fact they're the driver of capitalism and need to be developed for the social sector.

Social entrepreneurs or social workers?

The term social entrepreneur also came under fire. The definition is unclear and perhaps distracting, said Henry Obi. 'Jeroo Billimoria is a social worker and that's fabulous!' An assertion with which Jackie Khor of the Rockefeller Foundation seemed inclined to agree. 'Isn't it good enough in the 21st century to be a social worker/social activist?' she asked.

But the term was strongly defended from the floor: 'For social entrepreneurs it's inspiring to have this new framework and not to be called social workers.'

But it's also an elitist term, in that it excludes too many people and perhaps places too much emphasis on individuals, said another.

For more information, visit:
www.sbs.ox.ac.uk/skoll/forum
www.skollfoundation.org/skollcentre/skoll_forum.asp
www.socialedge.org

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