Make profits do good.
An ounce of prevention is worth a pound of cure.
With this in mind a new investment philosophy came to be. Fund preventive services.
Governments fund only what can produce immediate and indeed visible results, so preventive services are underfunded although they can produce big savings in the not too distant future e.g reduction of crime, reduction in the population of prisons.
A London financial company has created a new financial product, the Social Impact Bonds. The funds thus gathered go to nonprofit groups which carry out preventive programs that address problems like teen age pregnancy, juvenile crime and other such issues of a social character, which cost the tax payers money in the long run. Investors buy the Bonds and gain a good yield as the Government pays for the success of a program whose results are evident and of course measurable in terms of money saved for the Government, a part of which goes to the Bond holders as yields. If a program fails to meet objectives the Government does not pay a penny. US investors have taken notice of these investment products. According to J.P. Morgan, Social impact investments are emerging as an alternative asset class, they channel private capital for social benefit.
In Britain $300 million is already invested in social investments. The British Government plans to set up a “Big Society Bank” for impact investing, funded with about $495 million from the Banking sector. If British charitable trusts, whose assets are estimated to be about $115 Billion, invest a mere 5% of these in to social impact investments, the market for these would grow by an extra $5.7 Billion.
According to J.P. Morgan in the next decade the market for social investments could potentially grow as high as $1 TRILLION with profits of up to $667 BILLION.
The scope of the World’s social issues is such that Governments and charities are unable to fund the remedies. Private investment can take on the challenge because it can evaluate and handle the risk involved.
So far SIBs appeal mostly to individuals with a high net worth, but charitable trusts and foundations are also venturing in to such investments because they are sitting on assets of high value that are not always the income generators their Boards would like them to be. Institutional investors are closely monitoring the performance of SIBs and so are Insurance companies who perceive them as income plus the added value from social benefits with a positive impact on their finances e.g. lower crime rates.
In the US, Pay for Success Bonds as they are known will be initially funded with $100 Million from the Government to try and evaluate their use as instruments of social finance.
There is a side social benefit to the creation of the social finance market. Fledgling social entrepreneurs are now viewed as business people endeavoring to provide social benefits through for profit business ventures, like the positive contribution to the environment from the products/services which they develop and market for profit.
Should Greek Venture Funding take notice?