Interview – Sir Ronald Cohen

Sir Ronald Cohen is a pioneer of the UK venture capital industry, having co-founded Apax Partners in 1972, which went on to become the largest private equity firm in Europe. He is prominent in the social sector, as chair of the UK Social Investment Task Force and the Commission on Unclaimed Assets, as a donor and as founder of Bridges Ventures and the Portland Trust.

In 2007, he co-founded and became a non-executive director of Social Finance Ltd, the nascent social investment bank which has developed the social impact bond. Caroline Hartnell talked to him at the EVPA Conference in Luxembourg in November about financing the social sector in Europe and the role of economic development in resolving the Middle East conflict.

I’d like to start by asking you about the social investment bank and your view of social finance and the role it should play in society.

Can I just take a step back? My involvement in this area started with the Social Investment Task Force in 2000, the impetus for which was a concern on the part of the [UK] government that while standards of living were rising in society as a whole, the gap between rich and poor was increasing. I was asked to approach the issue from the perspective of a private equity investor and we defined five specific recommendations for creating a system to support business-like approaches to the scale and sustainability of social organizations that are trying to deal with massive social issues.

The sixth recommendation was that a few years down the line we should create a social investment bank to fund the social sector. When you look at the majority of the 160,000 organizations in the sector, they can’t look beyond one year because that’s their fundraising timeframe, which means they are completely unable to build sustainable organizations. I’ll go on to talk more about that later.

In the meantime, in 2007, four or five of us came up with the idea of the social impact bond, which is proof that if you get people who are highly versed in finance as well as the voluntary sector you can come up with innovative social instruments – or financial instruments which have a social purpose.

St Giles TrustCan you describe the social impact bond and how it operates?

We approached the UK Ministry of Justice with a pilot project to reduce reoffending rates. The idea was that we would raise £5 million from foundations and charitable trusts, and we’d use it to fund organizations like the St Giles Trust which are working with released prisoners to integrate them back into society. (The picture, left, shows someone recently released from prison being met by a support worker from the St Giles Trust.) If we reduce the rate of reoffending by less than 10 per cent, we lose the capital of the bond, but if we achieve a greater than 10 per cent reduction over a seven-year period then the government will pay us interest of between 7.5 per cent and 13.5 per cent. The calculation will be based on a comparison of the fall in reoffending achieved with reoffending in a control group across the country. This could be revolutionary because for the first time you’ve got a financial instrument that is remunerated according to a social outcome.

And has the bond been taken up?

The bond is oversubscribed and we’re now thinking of additional bonds for other prisons in the UK. We’re also looking at areas in education and health where the metrics are sufficiently clear that government or a substantial foundation would be prepared to sign up for payment in case of a good outcome. With the pilot bond, if the government has to pay out, it will be paying out about a third of the savings made on the prison system.

And what about foundations?

Funding comes out of their assets. If the bond fails to pay, then it turns into a philanthropic contribution.

What role would the social investment bank play in financing the social sector?

As I said, the taskforce advocated this a number of years ago. The new UK government has now come up with a Big Society agenda, part of which is a Big Society Bank – which is their name for a social investment bank – whose role is to help the social sector achieve sustainability. If it has £250 million pounds of capital, we think it can attract another £750 million.

You can see how a social investment bank could subscribe to social impact bond issues, and the rest would get sold to institutions such as foundations and pension funds. Even private individuals might like to own a bond that may turn into a philanthropic donation but which helps to create a different system under which organizations that are driven by a social mission can access the capital markets.

So you see the social investment bank investing in bonds?

I think part of the money would be allocated to developing social venture funds such as Bridges Ventures, which have now proved their worth. We ought to have half a dozen organizations like Bridges operating in Britain, investing only in the poorest parts of the country. Second, we would like to be able to support the efforts of organizations like Charity Bank, for instance, which is there to lend to charities, something the banking system has not done.

The bank will help the sector to develop institutions which are going to be the pistons which power the social engine. If there are gaps which existing organizations cannot fill, the bank needs the ability to act directly and to use its own skills to help start organizations in those sectors.

There seems to be a gap between seed funding for the social sector and the mainstream capital markets. Does the social investment bank cover those organizations that are beyond start-up but not yet able to access the capital market?

Yes, I see it covering the whole of the social investment spectrum, which goes from traditional philanthropy all the way to full-profit, mission-driven activity, such as Bridges Ventures. I’ll give you an example. If somebody came into my office with a new model for dealing with homelessness and said, ‘I am going to refurbish buildings, and I am going to use them as hostels for people who are homeless. Once I’ve integrated them back into the workforce, they will start paying rent and move into the second half of the building, if you like, and in that way I will be able to fund a certain amount of the cost of initially purchasing the building.’ That sort of model needs equity to get started, and you would hope that the Big Society Bank would be able to steer such an organization to intermediaries in the field. And if no intermediary is prepared to fund it, it ought to be able to fund it itself.

And presumably some of these organizations would be able to raise funds in the mainstream market?

Exactly. That is one thing that social impact bonds would enable them to do.

What do you feel about the social stock exchange that’s being developed in the UK?

I think it’s a very important part of the architecture. The question is whether there’s a critical mass of potential users now. It would be important to be able to access sources of finance that are wider spread and on the whole cheaper than those that exist in private markets.

Where do you see venture philanthropy fitting into all this?

For me, venture philanthropy is bringing a powerful business approach to the deployment of philanthropic funds. In that sense it improves the impact that philanthropy achieves. You can see a continuum: an organization initially receives money from a passive philanthropic source because its model is promising; it goes to a venture philanthropy firm and brings in management expertise as well as capital. The investment by venture philanthropy enables it to scale up and to access the capital markets through social impact bonds.

So venture philanthropy is the next stage after passive philanthropy. You have a continuum all the way through to funds like Bridges, where the locomotive is the financial return and the carriages are the social returns.

There seems to be a tendency to define venture philanthropy increasingly widely. And yet, as you’ve been saying, it is very much a particular stage in the funding spectrum. What’s your view?

I think this is typical of a field that is moving from the conceptual to the actual. It doesn’t much matter what people call things, it’s what they do. So for me the term philanthropy today can cover the whole field of social investment, as I believe it does in Holland. Venture philanthropy describes an activity that brings business approaches to achieve scale and sustainability to philanthropic service providers – which I find a useful definition.

There used to be a very strong analogy made between venture capital and venture philanthropy. How useful is that?

I think actually it’s more the mindset and the approach than the activity that is being referred to when people say the two are similar. You could argue that what Bridges does, which is to buy shares in companies in poor areas, is actually the pure venture capital model applied in a mission-driven way. The inspiration came from the venture capital industry, which said that just giving money to organizations that are trying to grow, whether business or social organizations, is less effective than providing them with a combination of money and managerial talent. So I am not just being philanthropic in the sense of giving money away, I am investing time and effort in making sure that organizations like Bridges and Social Finance and the Portland Trust actually develop scale and sustainability and social impact. In that sense the inspiration of venture philanthropy is indeed very deeply rooted in the hands-on approach of venture capitalists.

The financial crisis doesn’t seem to have given the boost to social investment that was initially expected. Do you think it’s been a boat missed?

Because governments are very constrained from a budgetary point of view, they are much more amenable to discussing these issues. This had led foundations to begin to adopt a much wider definition of their charitable purpose than they previously had. So you find Esmée Fairbairn Foundation in the UK, for instance, making an allocation to social investment.
But we need a watershed. We need a guideline from the Charity Commission that says it is reasonable, even advisable, for a trustee of a foundation to approve investments that have a social object, such as those that go through social impact bonds or venture philanthropy. In Britain alone there are more than £60 billion of assets in foundations. One per cent would be £600 million, a massive boost for social investment.[1]

Could you tell me about what you’re trying to achieve with the Portland Trust?

About eight years ago, Sir Harry Solomon, who built up Hillsdown Foods in the UK, and I talked about the Middle East conflict. We came to the conclusion that while a lot of effort was going into achieving a political settlement, no effort was being spent on the economic dimension of the conflict, which is obviously very important. So we set up the Portland Trust to work on the development of the Palestinian private sector and to relieve poverty on the Israeli side. In Israel we are using some of the same techniques we’ve been talking about; social venture funds, social impact bonds, social investment bank, etc. We have offices in London, in Tel Aviv and in Ramallah, which is quite unusual.

Helping the Palestinians develop their private sector has involved originating and facilitating ideas for financing programmes, such as a loan guarantee scheme that will provide $300 million of loans for businesses that want to borrow $0.5 million or less. It’s similar to the small company loan guarantee scheme in the UK, where 70 per cent of the risk is laid off on international institutions. Over $60 million in loans has gone out, so that gives a boost to small and medium-sized businesses.

We started to work several years ago on helping Palestinians create private sector pension schemes, which are the bedrock of long-term finance for an economy, and we had a project in the microfinance area, helping microfinance organizations to become more effective. We also realized that we ought to look at very significant drivers of the economy on the Palestinian side and try to get Israeli and Palestinian commitment to them ahead of time. And we alighted on affordable housing as one area that provides a huge economic stimulus while improving the lives of people.

So we got in touch with entrepreneurial landowners on the Palestinian side who might be prepared to develop their land into large communities of several thousand homes. We helped by funding an initial generic architectural plan of a new Palestinian city and also liaising with both the Palestinian and the Israeli authorities for approvals. A number of affordable projects have now started breaking ground across the West Bank, including a new Palestinian city. It’s several hundred million dollars of investment, and it’ll boost GNP on the Palestine side by 1 per cent a year for each of five years.

So is the role of the Portland Trust largely brokering?

I would say the key things it provides are two: the thought leadership of the design and the initial small amounts of capital that are required to get these things to a state where they can attract funding.

Has the fact that you are Jewish been a problem working in Palestine?

I don’t believe so. In fact, it is the strength of our connections to Israel that makes us particularly valuable to the Palestinians – the fact that we’re able to help get approval for certain projects, for instance, which the Palestinians by themselves couldn’t anticipate starting.

And it shows the potential role of the private sector. Our latest project is what we’re calling a grant leveraging facility, which means basically that we will make a 15 per cent grant for private sector projects in Palestine that can attract 85 per cent from sources other than the government. We’re talking of a hundred million dollar facility focused on industrial zones and the private sector in Palestine, which would attract $600 million  to £700 million coming into a $4 billion dollar economy. Similarly, on the Israeli side we have helped create a $150 million facility to deal with poverty in the southern part of Israel, and a $12 million facility in the north.

We’ve been working with a microfinance organization and working on social venture funds such as Bridges, a social investment bank, and social impact bonds. Israel is a very entrepreneurial society; it’s a great culture for adapting and adopting.

You’ve been very close to Tony Blair and Gordon Brown. Do you anticipate building a similar relationship with Ed Miliband?

I am a centrist. I joined Labour because it became New Labour. I was a Liberal for 30 years before that, and I’m very interested to see which direction Ed Miliband is going to take the party. I’m policy-driven rather than politics-driven.

If you could give one message to people about what to do to make social finance a success, what would it be?

I think it’s to create a system in each country, such as that described in the first Social Investment Task Force report – with tax incentives for investment in poorer areas; matching finance from government to encourage the formation of social venture funds; charity regulation of the kind that we were talking about; banks obliged to disclose what they’re doing in poor areas; and a sector organization to train people and represent views to government (in the UK, we have the Community Development Finance Association). And when all that’s in place you need to create a social investment bank – which will now be called the Big Society Bank.

Unless you create a system like that, it’ll be very tough to do for social entrepreneurs what the private equity industry has been able to do for business entrepreneurs. It’s notable how much this conference focuses on help to developing countries, but the issues raised within our own society are just as great. The fact that our system takes care of its economic financial consequences but not its social consequences means that there is a massive need for a powerful social sector to operate alongside the government. Unless we can create that, maintaining social cohesion and the sense of equity in our society is going to be extremely difficult.

1 Since this interview, on 14 December, the UK Charity Commission published its consultation on new guidance for trustees on investment powers to explore these issues.

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