Proceedings of the Standing Senate Committee on
Social Affairs, Science and Technology
Issue No. 37 - Evidence - February 15, 2018
OTTAWA, Thursday, February 15, 2018
The Standing Senate Committee on Social Affairs, Science and Technology met publicly this day at 10:30 a.m. to examine and report on issues relating to social affairs, science and technology generally, and in camera, to study a draft report.
Senator Art Eggleton (Chair) in the chair.
[Translation]
The Chair: Welcome to the Standing Senate Committee on Social Affairs, Science and Technology.
I’m Art Eggleton, a senator from Toronto, and I’m chair of the committee. I would ask members of the committee to introduce themselves, starting on my right.
[English]
Senator Seidman: Judith Seidman, deputy chair of the committee, from Montreal, Quebec.
Senator Griffin: Diane Griffin, Prince Edward Island.
Senator Bernard: Wanda Thomas Bernard, Nova Scotia.
Senator Omidvar: Ratna Omidvar, Ontario.
[Translation]
Senator Petitclerc: Senator Chantal Petitclerc from Quebec.
[English]
The Chair: Today we continue with our study on the creation of a social finance fund. This will be the second day of our hearings.
We have one panel today, but there are many speakers on this one panel. I’m grateful to them all for agreeing to try to keep their opening remarks to about five minutes. You will certainly have an opportunity to make other points at other times in answering questions, so that shouldn’t be too much of a burden.
The witnesses we have today are Derek Ballantyne, Managing Partner of Newmarket Funds. On our video conference we have Christine Bergeron, Executive Lead, Member Experience and Community Engagement, at Vancity. Here at the table again, we have Hilary Pearson, President of Philanthropic Foundations Canada; Jane Bisbee, Executive Director of Social Enterprise Fund from Edmonton, Alberta; and from my home city, from MaRS Centre for Impact Investing, Duncan Farthing-Nichol, Manager, Research and Advisory.
We have until noon, at which point we will go in camera to further discuss moving forward on drafting instructions. That’s our agenda. With that, I will ask for the first five-minute presentation from Derek Ballantyne.
Derek Ballantyne, Managing Partner, New Market Funds: Thank you very much, senator. I’m here, as you pointed you, as the managing partner for New Market Funds, which I’ll describe to you briefly. We are an investment fund management platform. These terms are difficult, but we are an entity or corporation that operates several products. We have different lines of business.
We are a B.C.-based company, although we work right across Canada. We invest and raise capital across Canada, and we’re the product of the efforts of six charities that came together to try to create a vehicle through which they themselves could find some impact investment but that would encourage others to invest in social impact.
We have a fund that invests in affordable housing, so we put equity into non-profit affordable housing projects. We have two funds that are loan funds, one targeted to a cooperative enterprise that we’re managing and one that is a community loan fund. We work with non-profits, charities and other social enterprises in those funds, and we run social enterprise in the form of a non-profit housing development company. So we’re actually generating new housing and other social purpose real estate with this non-profit company.
In all of the activities we undertake, we have raised capital from investors. We have about 50 investors invested with us across the different lines of business that we have, some in multiple lines, some in one only. And they range from individuals — qualified individuals, I would say, because we are not accessible as a retail opportunity for investment, so we are restricted in terms of high net worth or persons who are qualified to invest with us — to corporations, financial institutions and, very importantly for us, foundations, which have been sort of the core of our investors.
When you look across our activities, we manage and invest about $65 million of capital. Through the different funds, we have aggregated about that much capital, with the intention to try to keep growing to past $100 million because that’s really the scale at which it becomes economic to operate this kind of enterprise. Volume is important to be able to be efficient and effective and to be able to actually have sufficient resources to both find those things that are most impactful to invest in and then measure and monitor those outcomes as well.
Three of us together are managing this enterprise. We’ve all had experience of managing small funds, and it is exceedingly difficult to make the economics work; large capital is a necessary condition.
When it comes to what we think the federal government might be able to do and what would be of significant assistance, we’re not very different from others in saying, well, invest in the sector. Place capital into the sector and let the sector use that capital to grow, to attract other capital into it, to reduce what is often a perceived risk of investing in the impact sector and be able to sort of what I call normalize the impact investment sector over a period of time.
We can all have different opinions about how much capital is necessary to do that. What I think is important is to first set a target that says if we want the social impact sector to really thrive and be viable in this country, in five years there should probably be an identifiable $2 billion invested in it. We have $65 million, so it’s not going to come solely from us. I don’t think currently, if we were quite honest with ourselves, we would find $2 billion in the social impact sector. I think that is a reasonable target to make it a viable and recognizable marketplace for investment.
What the federal government could do is encourage us towards a target and then invest progressive amounts of capital into the sector. I think there are two simple ways of doing that. One is to invest and put capital into those funds and those intermediaries — albeit this might be a self-interested argument — and I think you can easily find a dozen across the country that have achieved some scale, have viability and will make that government investment grow. Put that capital up, with the expectation that it’s going to leverage other capital, or make it a condition of placing that capital and leverage it up.
Second, another investment that could be held in a simple body that’s constituted for this purpose is to invest in those ideas that have potential but are not yet in place and not yet germinated. That facility might well be charged with building some of that capacity out, but it would also certainly be responsible for building out and understanding what are viable investments, what are not, and encouraging those into the marketplace.
I’m suggesting a two-track approach: Invest where there’s already investment to keep the momentum moving and the capital attracted there, and then create a facility that will really get at what I think are some interesting and big ideas in the marketplace that have not yet found root in a fund or in a particular construct.
That federal role, to me, is one we’ve played in other sectors. When we wanted to accelerate venture capital in this country, we used these kinds of approaches: fund into venture capital funds and also fund the creation of venture capital. I think that will help us accelerate investment into the sector and also help stabilize and scale those funds and intermediaries that are already in the marketplace. Thanks very much.
The Chair: Thank you very much. Next on the list is Christine Bergeron, who comes to us from Vancouver, I assume, on video conference.
Christine Bergeron, Executive Lead, Member Experience and Community Engagement, Vancity: Yes, good morning. For those of you who are not familiar with Vancity, we are Canada’s largest community-based credit union. We serve over 525,000 members and have over $25 billion in assets and assets under administration.
We are a values-based financial institution, and our goal is to ensure that all of our assets over time — we’re not there yet — are in service of impactful outcomes. We are very deliberate in our thinking about social finance and impact investing, and we are purposely allocating capital to build healthier communities.
My background is actually as a venture capitalist and also a hedge fund manager and investor looking at disruptive clean technology and innovation, so I come from a more “traditional” background but have been at Vancity now for a handful of years, and I’m very interested in how we apply that work to social finance. In my role at Vancity, I oversee our lines of business. That includes impact investing as well as our community engagement work that supports ecosystem building.
In our experience, we have seen that a capital gap exists in the market, so one of the elements in our strategies for allocating capital to impact is through fund-to-fund work. For those of you who are less familiar with fund-to-funds, we basically take some of our money, invest that into funds that then go directly into organizations that are having an impactful outcome instead of doing it directly ourselves.
With that capital gap, we do see and have seen over the years companies and organizations that are looking to solve social gaps and complex problems. They’re doing it through either technology development or innovative business models.
So we are putting our money to work. Although we are a fairly large financial institution in terms of credit unions, we still have limited capital that we can deploy ourselves. We have seen, again in our experience over the last few years, that we could deploy a greater amount based on the demand in the market. I would largely support Derek’s comments in terms of the amounts; we would not be able to deploy tenfold, but we certainly could be deploying more in current state.
We also believe that an infusion of capital by government, especially at this stage of development in the sector, would assist in building the ecosystem and would help to scale many of the solutions that we are seeing in the marketplace.
Those are my initial comments. I’m looking forward to the question and answer period.
The Chair: Thank you very much. Well short of five minutes. That will give the next speaker a little more time.
Hilary Pearson, President, Philanthropic Foundations Canada: Thank you, all. Thank you, Senator Eggleton, for giving me the opportunity to come to the committee today.
I wanted to say on a personal note that it’s Flag Day today, and I’m happy to be here on Parliament Hill on Flag Day, close to Parliament Hill, anyway. I was actually here on the day that the flag first went up. I was only 10 years old, so it was a big moment for me at that point. It’s just really nice to be here again on this day.
I’m here representing Philanthropic Foundations Canada. We are an organization that is Canada-wide. We’re a membership association of charitable grant makers —funders — and we include public and private foundations in our membership as well as corporate giving programs and other non-profit funders who identify primarily as grant makers.
Public and private foundations in Canada contributed about $5.6 billion in grants to Canadian charities in 2015. That’s the most recent information we have from the Canada Revenue Agency. Grants typically permit charities to start a new program, to try an unproven approach to carry out a strategic initiative or simply to carry on with their operations.
Individuals give — the numbers vary from year to year — somewhere between $8 billion and $10 billion. There are a lot of billions in there, but CRA’s data is not always totally up to date. Even if you combine foundations and charities in terms of their grants and donations, that’s not more than about 10 to 15 per cent of the financing available to the charitable sector.
Research by Imagine Canada suggests that the so-called structural social deficit or the gap between the services demanded and the revenues available to meet those needs is going to accelerate over the next few years, barring any new sources of capital for the sector.
Private funders can be important catalysts for social innovation and for entrepreneurial activity in the non-profit sector. We do think that we are at a tipping point, to use that now, I guess, clichéd phrase, but an important point for impact investing by foundations in Canada. A growing number are using this approach to support organizations and projects that share their mission. They are investing more capital to address issues such as sustainable food production, renewable energy, adjustment to climate change, affordable housing — we heard from Derek — and indigenous community development. These are all areas where impact investments are being made in organizations, companies or social businesses that are working in these areas where that capital is now being deployed. Of course, that’s capital that, unlike grants, is making a financial return. So the foundations are putting money in, which they expect to get back and hopefully redeploy.
Canada has about 10,000 public and private charitable foundations. They have combined assets of close to $40 billion. Clearly, that pool of money, if we actually can see it as a pool, would be a very important one when it comes to building needed social purpose ventures in Canada. And more and more foundations are moving to set aside anywhere between 5 and 10 per cent of their portfolios for impact investing. So I think it is a growing market, and Derek has already mentioned that.
Some of these foundations are making mission-related investments or impact investments in companies that operate in socially responsible ways. These are commercial investments in companies, and they’re doing that investing by buying publicly traded shares in those companies. Or they’re buying LP units, limited partnership units. That’s because a couple of years ago, the federal government finally agreed to allow private foundations in particular to invest in limited partnerships, which, unlike publicly traded companies, are available to non-profit organizations.
In fact, the Community Forward Fund, which you might already have heard about, is an organization that was structured as a limited partnership, and therefore it was possible for private foundations to support that intermediary organization by buying units in that fund.
A few foundations are experimenting with making program-related investments, which are typically loans made directly to charities, or they can be made to non-profits, too. They can be made to charities at below market rates. For example, a private foundation can provide financing — this is a real example, actually — for a $10 million mortgage to an education charity to finish construction of educational facilities at below market-rate interest rates, with interest repayment deferred to the end of the mortgage.
Another example, a private foundation made a loan to a human services agency to purchase a transitional house, with the loan secured against the mortgage, the title on the property. These loans are often made for housing and real estate investments because they have market valuations, and it’s possible to mortgage against that value.
Another real example, the Lawson Foundation, which is a member of our organization based in London and Toronto, has set a 3 per cent goal for its assets invested for impact growing over time. They’re building their portfolio of investments. They purchased a community bond, which was offered by an organization called Innovation Works London in London, Ontario. That organization was building a shared space for social enterprise, and they needed money to finish building the facility. The community bond allowed the foundation to invest and provide capital to that organization. That bond is repayable at 3 per cent per year interest over five years.
It’s a way for foundations to deploy assets that are otherwise sitting in their endowment for social purposes.
Despite this activity, it is clear that we’re still at the starting gate, and a majority of Canadian foundations, I will admit, have not yet set targets for investing their capital for impact. We’re helping. Philanthropic Foundations Canada and Community Foundations of Canada have put together an online guidebook for impact investing. If you’re interested, it’s actually framed in a way that is very good for people who are not investors and who need to understand investing language. It helps get foundations and foundation boards into the impact investing field. Otherwise, it’s somewhat scary.
But most foundations don’t have the expertise in house or the resources to make and manage loans directly, even if they want to allocate some of their capital to this activity.
These are the barriers they have. They lack the internal capacity to perform due diligence on loan or investment opportunities. They don’t have the size to meet the thresholds required for some social investments. There are some funds where you — oh, I have to move on.
It’s difficult to put a lot of money into some of these funds, and there are thresholds. They have restrictions on their ability to provide loans to non-charities. So we do need more intermediary organizations, as Derek suggested, to facilitate the capital flows, such as the Community Forward Fund.
I’ll finish by mentioning the regulatory barrier that we are working on right now with the Canada Revenue Agency. I come back to program-related investments or loans. There are rules around this which the CRA has put out. They did put out some policy guidance on this in 2012, but it’s not at all clear. It’s also embedded in another document about community economic development. For anybody who doesn’t want to do community economic development but who might want to support the environment or housing, that PRI guidance is not easily accessible to them.
It’s also not very clear around under what conditions you can make loans to non-charities. There are a lot of very onerous requirements on a foundation, direction and control rules that are imposed on foundations as charities to control their funds. While it is legitimate to insist that foundations make sure they understand their funds are being used for charitable purpose, these rules, we argue, are way too onerous to facilitate this kind of activity. We’d like to see some easing of those rules and some clarification of those rules. That would certainly help to start moving capital from foundations into the sector. Thank you very much.
The Chair: I wonder if you could give us something in writing as to your suggestions about how the government could act to facilitate the kind of thing you’re suggesting?
Ms. Pearson: Sure.
The Chair: I might also say that I identify with your remarks about the flag, because I was here 53 years ago when it was raised.
Ms. Pearson: We don’t want to say how old we are.
The Chair: I was a little older than 10, but I witnessed your grandfather, the Prime Minister, presiding over the raising of the flag on that day. So thank you.
Jane Bisbee, Executive Director, Social Enterprise Fund: Good morning and thank you very much for the invitation to come speak to you.
I’m going to talk to you about social finance from the trenches because that’s what I know and that’s what we do.
The Social Enterprise Fund makes loans. We loan money to social entrepreneurs and social enterprises of any corporate structure — so non-profits, for-profits — across the province of Alberta.
We were created 10 years ago — our birthday is this year — out of a partnership between the City of Edmonton and the Edmonton Community Foundation. We’ve also got some capital that was put into the pool by private individuals and the United Way, all who saw social finance as a need and banking facilities as a need for non-profits and for-profits, small businesses that are trying to scale in non-traditional markets.
So the Social Enterprise Fund has been primarily making loans. We can do equity, but we pretty much found that lending is where the sweet spot is for us and where the real need is. We fondly refer to it as the valley of death for a lot of the sectors that we’re working with.
We work in food security. We work in environmental projects, social challenges, affordable and supportive housing projects — just about anything you can think of where somebody is trying to move the needle for better inside of community.
Since we started, we’ve put money into 55 projects, although I’ll have to soon say 56 because we made another offer yesterday to a group of Somali immigrant women who want to run a daycare. That one I’m really excited about. We’ve put just about $30 million into the system.
A large part of our financing in fact does come from the Edmonton Community Foundation, which made the commitment in 2011 to put 10 per cent of its endowments toward social finance, community-based impact investment, and that’s what we do for them. They buy units in an LP that has been set up to house that money. We’re essentially a fund of funds. That’s what our structure is, if you want to talk about governance at some point.
If you think about lending, every which way that debt financing could be used, we’ve done one of them at some point or another. We’ve used money to scale companies, to stabilize organizations, mortgages for non-profits who want to buy buildings, just about every way that debt financing works.
Some observations: We know that social finance works because we’ve seen the results over and over again. Great jobs are being created for the most vulnerable people in our communities. Housing for people who are challenged to be able to live in community. We’ve seen non-profits stabilize that might not exist. We’ve been able to get them to the next place where they can actually continue their good work in community. So we know it works on that side.
Money gets paid back. I know people have a hard time believing this. Albeit we’re small, our organization is supported by the revenues that we earn through our interest rates, and we have a return which the accountants who are just finishing year-end tell me for this year is around 4 per cent after expenses. That’s not bad money.
The City of Edmonton put about $1.2 million in our initial capital pool. We’ve now made $4.8 million of loans out of that money. We just kept cleaning up its face and sending it out to play again. It goes around and around. I find these clients are probably more committed to paying back and making sure they will do what they have to do to pay back than almost any kinds of clients you can come across.
Now, we have to be imaginative as lenders and we have to be unbelievably patient. We have loans that I won’t ever see paid back. I’ll be long dead, and I’m not dying anytime soon, but that’s the kind of work that you have to do. You have to be willing to think differently. I do stuff that I’m sure would make traditional bankers crazy people, but it’s possible, and it can work. It’s a tool that can make the organizations you work with better at what they do.
Let’s see. I’m trying to think quickly. If we have time sometime, I’d love to tell you stories, which are always fun because they can show you what’s possible.
Let me make a few comments about what the federal government might best do to enter this field.
One, invest through the organizations that are already on the ground. If you want to make an impact in a hurry, let’s get some more capital out there and working. We recently, for example, were pointed at by the Edmonton Community Foundation for a $10 million investment which is to go to the newly created Edmonton Community Economic Corporation. We’re going to be working in partnership. They’re using us as the front to be able to fast-track that money. It, by the way, is matching the $10 million in land which the City of Edmonton has donated to the community development corporation to make stuff get going. They’re hitting the ground. They started in January. They’re hitting the ground already with money to invest and land.
Number two, invest in the sector that’s trying to do this, because there is capacity-building work that needs to be done, both for the existing organizations and for those parts of the country that are trying to grow. For example, I’ve watched with real joy as VERGE Capital in London, Ontario, has grown. I know the sector has done what it can to try to help them along, but the more help those organizations can have to grow, the better. There are partners out there.
Please be clear about your intention of outcome. What do you want done? I need to know what my investors need accomplished and want to see done in community. That’s really important from your point of view, to be able to define what you want to have as the end result. I know we can do good stuff out there. We can make things happen on a really basic level and really change some lives in the country. I’ll stop there.
The Chair: Well, thank you. I hope in the course of the next hour you get a chance to tell one or two of those stories, because I think they help a lot in understanding what the value is and who is impacted by it.
Duncan Farthing-Nichol, Manager, Research and Advisory, MaRS Centre for Impact Investing: Thank you very much for inviting me to speak to you today.
The MaRS Centre for Impact Investing, the MaRS Discovery District, advises government, investors and social organizations on strategies to put private capital to public purpose. We work to blend social goals and financial return.
We think a government-backed social finance fund could help lift Canada’s social organizations to a size and scale that matches the problems they seek to solve. But international examples tell us a social finance fund could only accomplish these goals if carefully designed. We’re doing a little bit of research, and we want to bring a few principles we’ve seen from international examples.
First, the fund must know what it is trying to solve. Without a precise statement of its problem, the fund risks dissipating its money among too many theories of change. The Social Impact Accelerator is a 243 million euro social finance fund in Europe. The accelerator invests in venture capital funds that then invest in start-up social ventures. It defines its problem as not enough mainstream capital in those social ventures. It believes that mainstream investors, such as pension funds and insurance companies, invest too little because they associate those social goals with poor financial performance. The accelerator aims to prove that social ventures can reward its investors just as handsomely as can ordinary companies.
Big Society Capital is a 625 million pound social finance fund out of the U.K. that you have probably heard a little bit about. It invests in funds and other intermediaries that then invest in charities and social enterprises. It defines its problem as not enough fit-for-purpose finance in charities and social enterprises. Big Society Capital attacks its problem in two ways. First, it sometimes invests on concessionary terms, for example, at a lower interest rate, over a longer period or at a smaller size than would a bank or other mainstream investor. Second, as we heard from Jane, Big Society does the same by investing in creative structures.
Ordinary financial products do not always fit social goals. As one example, Big Society Capital invested 50 million pounds in the Real Lettings Property Fund. That fund buys London apartments and then leases those apartments to a homelessness charity. The charity then leases the apartments to people who may be at risk of homelessness. The investors earn a return from the rent paid by tenants and from the apartment’s sale after seven years.
A clear theory on how to solve that problem answers a lot of the questions a social finance fund must answer. Variables such as the size of fund, the price of its capital, the length of its life and even the source of its money should derive from a problem and a theory shared across its stakeholders.
To the second principle, a social finance fund must be allowed to shift its strategy. No design dreamed up in the first instance will suit the fund’s social finance market perfectly. The fund must be allowed the flexibility to adapt as it learns and as the market grows. Portugal Social Innovation is a 150 million euro social finance fund in Portugal. Portugal Social Innovation first intended, like the Social Impact Accelerator and like Big Society Capital, to invest in funds and other intermediaries and did not intend to invest in social organizations directly. It realized, however, over time that Portugal has too few investable projects to make that intermediary model work efficiently, and it is now reorganizing to support social organizations through guarantees and direct investment.
Predicting the right way to build a young market is difficult. We’ve heard some of the ambition on the panel here to go from the scale we have now to something much larger soon. The first strategy any fund takes may not be the right strategy.
We think, of course, that a social finance fund must define what counts as social investment and what does not, but too many cut-in-stone restrictions, such as on the legal form social organizations must take, the regions in which you invest or the social goals you must pursue, will stifle a social finance fund. The more constraints there are, the less likely it is a fund can champion an ever-evolving market.
A Canadian social finance fund will chart its own path to meet its own market, but the fund should learn from the U.K., the EU, Portugal, Australia, Japan and other countries moving forward on this journey together. A Canadian fund should settle on a well-defined problem and a flexible approach to solving that problem. With those pieces in place, we see a great deal of potential to have our best social entrepreneurs solve some of our most difficult challenges.
The Chair: Thank you very much. Some of you have given specific comments about what you think the federal government should do. If those of you that haven’t want to outline them in writing and get them to us, like I asked Hilary Pearson to do earlier in that connection, could you get it to us fast. We’re getting into the writing of the report and need them soon.
We have the opening comments finished. Now we will go to questions from members of the committee. We have five people here, so direct your question to a specific person on the panel, and if any other panellist wants to add something that wasn’t covered, please show your hand and I’ll recognize you on that same question.
With that, I’m going to start with Senator Omidvar, who is the proponent of this study.
Senator Omidvar: Thank you, chair, and thank you to all of you for your time on this really exciting study.
In one way or another, you’ve all touched on what government should do. That’s going to be the thrust of our report. While we recognize the time might be right, we have to give shape and structure to government, and I’m going to zero in on that.
I think I’ve heard all of you say the government should invest and put capital into those intermediaries with a proven history of success, but it should also invest in the capacity of unproven efforts and intermediaries to get them to a time where they’re ready for an investment.
I hate to make this more complicated, but I want to ask this to anyone who wants to answer. What structure should this effort take? To get more specific, do you see this federal intervention inside the government, or outside the government? We heard yesterday about Crown agencies. We heard yesterday about provincial jurisdiction, local efforts.
Where would you see this ideally situated as a federal government response?
The Chair: I need a volunteer to start. Derek?
Mr. Ballantyne: I’m happy to weigh in and start, and my colleagues can all contradict me.
First of all, I think to start it might be important to keep it outside of government for a couple of reasons. One is that there is, as Jane pointed out, at any level of investment, a need to have a certain deftness and ability to take risks and understand the risks you’re being asked to take in this area. I think it’s frankly unfair to ask government to do that, because when it is asked to do that it has to measure it against every other risk or regulation it has. I think you can task a specific agent or agency to do this.
But the other piece I think would be important is that this is a vehicle through which you can actually build true partnership with other capital. It doesn’t just have to be government capital. It’s hard to invest somebody’s capital into government, but it’s easy for two capital sources to meet outside of government and make commitments around capacity building and other pieces, which the philanthropic sector already does but might want to formalize inside one of these relationships.
I think the externality is important, which doesn’t mean that it’s not an accountable body or that it can’t be subject to a set of outcomes which are being sought about regional distribution of funds, about making sure there’s a measurable community impact. Every bit of social spending ultimately is community-based. I don’t know that it has to be governed by every community, but ultimately the results are community-based.
I do think there’s a way to structure this that provides all of the accountability and transparency that’s necessary but leaves it as a more dynamic institution than it could be, necessarily, within a government.
The Chair: Could it be a Crown corporation, like the Business Development Bank?
Mr. Ballantyne: I think it could be a Crown corporation. It could be a partnership structure with government and other entities. I’m less fussed about the absolute structure as I am about what characteristics it has to have and what it can do.
The Chair: Anybody else?
Ms. Bisbee: I would echo that, absolutely. Having worked inside of government, including delivering a joint partnership between the federal and provincial government, it’s way more possible for me to do what I need to do now outside of government.
Even though we have relationships, for example, with the City of Edmonton and we do have governance structures in our partnership which allow input from them on the path to what we’re doing, finance is the real world.
I was a bureaucrat long enough, so I can be rude about it. It doesn’t work as well as it can on the outside in a partnership relationship such as Derek has suggested.
Senator Omidvar: I was wondering if someone would comment on the idea of a Crown corporation and how that would play out in terms of provincial jurisdictional issues.
Mr. Ballantyne: In terms of the structure being a Crown corporation?
Senator Omidvar: Yes.
Mr. Ballantyne: Senator, to be honest, I haven’t thought about it much, but the Crown corporation structure will have some limitations to it. Whether those would then limit the kind of other capital that could be attracted or would inadvertently create other barriers, I would be careful about gauging that in that sense.
Ms. Bisbee: It would be worth thinking through, but I hadn’t really considered that, either.
Senator Omidvar: If you happen to think about it and communicate it to us, that would be helpful.
Ms. Bisbee: I sure will. I’ll make it homework.
Ms. Bergeron: To echo those comments, I think there is value in a structure that allows for leverage of other capital. That’s a really important point that the others have raised. As someone who would like to contribute, we put our capital to work and would like to be able to work with other forms of capital. As long as the structure doesn’t restrict that, I think that would be ideal.
Senator Petitclerc: I would like to ask whoever wants to answer first, but Ms. Bisbee, you mentioned how it is non-conventional investing. I’m curious to know, because it seems social finance for now is very organic in how it’s happening. I think, Ms. Pearson, you talked about building an ecosystem.
I’m curious to know what is done or should be done to make sure that more conventional financing actually — how do we make them buy in, I guess, is my question. Is something being done in terms of incentives or education? Should we be doing it, or who should do that?
It’s a very large question.
Ms. Bisbee: I’ll make a comment, and Christine can certainly speak to this, too.
In Canada we want a strong banking system, so it has strong regulations and we want them to behave in a certain way. As a citizen, I want my bank strong.
The sort of work I do sometimes, I think, is closer to what an angel investor would do. The kinds of risk assessment and due diligence that a banker would have to do on traditional lending is not the kind of approach I have to take.
Some of these people come to me and have never done a cash flow, or they are working without the security that would be appropriate for a banker. For example, a community league. The land the building stands on belongs to the city. They want to build a new building. They can’t possibly get a mortgage from a traditional bank because we want those rules that way.
This allows something different to happen that often is true in the kind of world we’re working in.
The other thing is I work with industries, new upcoming industries, environment, food security, that kind of stuff. The bankers don’t know what the norms are yet, so they have no comparisons to make, which is traditional in their risk assessment process.
Sometimes they call them Jane’s crazy projects because I’m bringing things to my assessment committees and saying, “I think we should take this risk. I think this is something that is actually going to do something different. This organization may look like they’re a non-profit, but they’re going to take over the world in some areas.”
So we have to look at things in a different way, I think, than traditional. I know Vancity is leading the way. There are traditional organizations. ATB in Alberta is starting figure out what it can do to become more engaged in this kind of work. We’re partnering with them.
For example, we partnered financing in one project with BDC, so there are ways to start doing things together. And sometimes if I go first, then other people say, “Okay, we’ll take a look at that, then.”
Ms. Pearson: I think this is really an important question, because clearly there are huge pools of money available in the world for all kinds of things. We are seeing — and you probably heard this yesterday — that there are pools of money being held by funds, such as BlackRock and other big investment funds, not banks. Now I’m really talking about the pools of capital available for investment in anything that essentially makes a good return.
Those funds, typically, will invest in things that are new or innovative but that are promising and have some proof of concept that looks like they will be paying back a significant amount to investors.
Up until now or up until recently, these funds have not invested in what one would call social purpose investments, but I think the lines are blurring here. This is also something that maybe we need to understand about the landscape. Whether an enterprise has primarily a social purpose or has a blended business and social purpose and therefore is an interesting investment for an investor that doesn’t itself have a social purpose, that’s becoming more common.
To take an example, alternative forms of energy production, solar energy, wind energy, et cetera, those things are now becoming very interesting from a commercial perspective in the United States, so you’re seeing large pools of capital being attracted to that. Is that social investing, or is it simply the development of an area of the economy that actually contributes to sustainable growth, sustainable development, and therefore has a social purpose? It’s hard to characterize.
I’ll just say one more thing. I think efforts have been made in Canada to educate companies on environmental, social and governance aspects of what they do. For instance, SHARE is an organization that educates foundations and other investors who own shares in companies to use those shares as a way of demanding better operations, more sustainable, environmentally friendly, socially friendly and good governance practices in those companies. That’s starting to have a significant impact.
So I think you’re beginning to see the business or commercial sector much more interested in responsible investment and from responsible investors, which could include foundations or pension funds or other institutional investors.
It’s an interesting part of this. This is a broader piece than of course just a question of what can the federal government do, but I think it’s important to understand that context.
Ms. Bergeron: I would agree with my colleagues. It’s a very big question, and I think it’s very difficult to undo the systemic structure that we have for traditional conventional finance and that links to large dollars that need to deploy into very large projects. It’s difficult for pension funds and large pools of money to go in and help fund smaller organizations that are addressing critical social gaps through innovation. So you are seeing big trends on the large-dollar systemic issues, like BlackRock, as Hilary mentioned, and others who are looking at those outcomes. But the dynamics of their return profiles and mandates are in contrast with trying to be able to fund smaller organizations, more specifically intentional social purpose.
It’s actually similar to funding gaps we see in venture capital today across Canada, or in lending, like Jane mentioned. There are pockets where even in conventional dollars it doesn’t make sense even to look at conventional investments. When you add in the framework of social, environmental and the myths still associated with that, it causes a bit of a rub.
I think things that help are data and track records and performance. We’ve demonstrated now over the past five or six years, with quite a bit of data, that it’s not riskier to do impactful lending, it’s not riskier to do socially responsible investments. However, the scale of that and the efficiency of that may not be at the level a more traditional investor is looking at. So there are some pretty big systemic pieces that are quite difficult to undo, but I think it’s also about this stage of where the investments are needed and how do you deploy that capital.
Ideally, yes, over time, as some of my colleagues have said, social finance and impact finance should actually just be finance, but we’re not there yet, so there are still those pieces where we need to start at the earlier stages of development for the enterprises.
Mr. Ballantyne: Maybe I can add a little bit to that. I completely agree with Christine. Scale is a big issue. Anecdotally I’ll tell you we’re not shy about asking people to come invest with us, and we went to see large pension funds. They said, “It’s a fabulous idea. We would love to do this. The problem is every day we’re investing $42 million. I can’t stop to think about a $5 million investment in your fund.” We’re in different scale environments. I think that’s why building scale is important if we want to absorb more conventional capital into the sector.
We also operate a loan fund, so I know what the esoteric end of a social investment is, but there are also conventional investment products that have high social impact. Housing is one of them. You can get market return in those back to investors, but really nobody has yet found a way to scale enough of that to be able to do it, so it’s hard to attract larger pools of capital. And even for financial institutions, it’s hard to allocate large enough amounts of capital to it because nobody wants to own more than 10 per cent of anybody’s fund. It’s a good risk management tool. If you want a $60 million investment, you need a $600 million fund.
Mr. Farthing-Nichol: From a Big Society Capital point of view, and speaking with some of their investees and also their management, their co-investment requirements, it seems like more money would be better and more leverage is better, but not necessarily. Certainly from Big Society Capital’s point of view, the restrictions they find most binding are those that come along with trying to bring other investors along with them into their investments. It’s not necessarily the legal structure or different conditions of the government but actually what their co-investors are looking for.
When you speak to some of the people, the funds they’re investing into, they’re frustrated sometimes with the level of formality and due diligence that, as Jane was mentioning, mainstream investors can bring to the table that they don’t feel is appropriate for the kinds of projects they’re investing into and doesn’t seem like a good use of time given the scale of the investment.
Co-investment, if you can make it work for some of these property deals, especially, more money is great, but I think it’s something to be careful about, and look carefully back at what the fund is trying to accomplish before setting too high a target on leverage.
Senator Seidman: Thank you all very much for your presentations.
I would like to direct my question to you, Mr. Ballantyne, because you spoke directly to an issue that is obviously going to preoccupy us as we write this very focused report after very few hearings on this. Perhaps it’s just the beginning of trying to really deal with this issue, but you said you worked for two years with sector partners on what actions governments can take that would be beneficial, so you obviously have been looking at this for a period of time. You said government intervention should have three objectives, and you listed them very crisply.
Now I would like to get back to the point Senator Omidvar was exploring with you, because it is a preoccupation, and that is how to manage the capital. You say the capital should be managed by an arm’s-length body able to make investments that meet agreed criteria and measurable impacts. Of course, the agreed criteria and measurable impacts are always an issue.
You also said, in response to Senator Omidvar, that you were less concerned with the type of body when we talk about a Crown corporation, and more important is what characteristics it has to have and what it could do. If you could please elaborate on that, I would appreciate it.
Mr. Ballantyne: Sure. On the question of what it can do, I think it needs, whatever this body has, two or three abilities. One is the ability just to transact with an existing system and work with it. I think it also needs the ability to take some of that capital to areas not currently explored in social finance in Canada.
Very little social finance is finding its way into the indigenous communities at this point. It’s not for lack of ideas or lack of points of intervention, but nobody has yet been able to assemble sufficient capital and target a particular set of outcomes.
We are working on a couple of projects, so I don’t want to say nobody is thinking about it, but if I look at the landscape, nothing particularly exists, because there are certain other kinds of risks that come with it. I think this body has to have that ability to be able to take those kinds of risks.
Secondly, back to the point Christine made, it has to have the ability to allow for other capital to come in alongside it. As a point of leverage, if the government invests, it does so quite intentionally so that other capital comes and it’s not just government dollars at play but partner dollars that amplify that impact, I think.
When I say arm’s length, it’s easier for me to imagine those characteristics existing in an agency appointed to be able to deliver this than it is inside a government department, to take the other extreme. I do have some experience, having worked in government structures, to understand the construct, particularly around risk and particularly around flexibility of deal structuring and so on, is constrained for all sorts of valid reasons within government because of the precedent it sets, but it could exist more easily outside of it, if that helps you frame it.
Senator Seidman: That deals with what it can do. Did you say what characteristics it has to have? Were you thinking of something in particular when you said that? This body, this arm’s-length body to make investments?
Mr. Ballantyne: Obviously, it needs capacity to understand the environment. It needs skill to understand what a good investment it is. It would have to understand how to do due diligence and structure investments. Jane will tell you no two deals are similar when you make these kinds of investments. They have to reflect the circumstance into which you’re investing and the outcomes you’re looking for. It needs those kinds of capacities within it.
Ms. Bisbee: Imagination.
Mr. Ballantyne: It needs imagination and it needs financial discipline. It can’t just be a wanton exercise of spreading wealth. It has to be really smart about how to do it.
Senator Seidman: Imagination and financial discipline, the two together, which is clearly a huge challenge. You need people with that ability to coalesce.
If I could also just get, then, to the annual investment being made contingent on meeting target accountability for leverage of government investment both at the fund and at the transaction level, as well as predetermined impact criteria. So now we’re getting to some kind of measures of outcome in order to keep putting money in. Is that correct? Could you elaborate on that, please?
Mr. Ballantyne: In a real thumbnail sketch — and I think I admitted this was a thumbnail sketch, and we could write long papers and theses — I see two dangers. The first is too much money entering the system, which could not cause enough proper results. I don’t think you want to overinvest until you really understand how the capital is being absorbed and where it’s being placed. Because we don’t have a very well developed social finance intermediary structure, flooding the system with a huge amount of capital may well lead to inefficiencies and inefficient behaviours. “We should invest, so let’s just invest in anything.” I don’t think that’s a good answer, because that will not give us sustainability over the long term.
I’m suggesting an initial investment and then subsequent investments, which could be annualized, but make them contingent on the outcomes that were initially sought, whether it’s on the basis of leverage, whether it’s seeing growth in particular sectors. Does it have a regional dispersion and results that we can quantify? That being the opportunity then to say fine, the next tranche is eligible for investment back into the sector.
Ms. Bisbee: If I can add one thing to that, leave it in for a longer period of time, less in the up front, and a longer period of time. I think one thing in this field that we weren’t realistic about in the beginning was that we thought three to five years. Well, five to seven, and seven to 10 is probably more realistic. I agree; absolutely. Not a lot up front, and be patient and understand that this is going to take a while. It will allow the people making the decisions and the deals to respond and work with the organizations in a way that’s realistic about life on the ground.
Mr. Farthing-Nichol: To add something to that point, not having too much money at the beginning is important, and we have seen that in Social Impact Accelerator in Europe and Big Society Capital, and frustration among some about sitting on the money for quite a while. I think it’s important to balance that with the signalling effect of having a large sum of money and a long-term commitment.
If there’s this arrangement in which you are continually opening up tranches based on results, that is something that’s set in stone and something the investor and therefore the market can count on for a long period of time. Even though Big Society Capital hasn’t invested all of its money yet, having 600 million pounds sitting in one place for one purpose has sent a signal to everybody in the market that this is something the government is serious about doing, that it believes in it, and that it will be around forever, and therefore they should take the risk of getting involved themselves.
The Chair: Good point.
Senator Griffin: I’m not sure which witness to ask; this may apply to all of you. In terms of the barriers, what’s the most important thing the Government of Canada could do to promote the development of these funds?
The Chair: We’ll start with Ms. Pearson.
Ms. Pearson: I have to say, my expertise is not financial expertise. I tend to know more about how charitable foundations are engaging in this market or not.
I’ll answer your question of what the government can do perhaps more from that aspect. I’m sure others will have more comments they want to make.
The charities and foundations that I represent are, in most cases, registered charities and are governed by the Income Tax Act restrictions on charities. Most of those are legitimate, but they don’t always take into account the realities of the investment marketplace and of social finance, and some of that blending of the social and the business that I was talking about earlier.
The Income Tax Act makes the assumption that charities are in one corner and businesses are firmly in the other and there will be no mixing of the two, which makes it difficult for foundations that are doing something that might go beyond a very straightforward kind of investment. It makes it difficult for them to innovate and to take more risk.
In fact, the Income Tax Act doesn’t, strictly speaking, talk much about investment policy for foundations. Actually, provinces are the ones that constitutionally have the responsibility for that. The Income Tax Act, though, is intrusive and does affect the investment decisions of foundations, partly through the kind of rules I was talking about earlier, the rules related to making loans to charities and to organizations that are not charities.
So there is a need for clarification, which speaks to a broader need for modernizing the whole framework governing charities. That’s another, much bigger issue and is tangential to today’s topic. But it does certainly affect foundations. It is important for the government to take that into consideration as they’re thinking about whether they want to encourage more philanthropic capital in ventures that are not necessarily recognized by the Income Tax Act or that might have a level of innovation or risk that typically governments don’t think charities should take on.
Those are things I think the federal government could do, and if they undertook some fundamental rethinking of the rules that govern the way charities operate, that would help a lot. I can give you more specific examples and suggestions, and I think Duncan can too, about how those rules related to program investments could be improved.
Ms. Bergeron: This is one barrier. In our experience, what we’ve seen in trying to support funds is that there are more in this sector that tend to be what are called first-time funds, where they haven’t raised two or three times, so they do not have a track record. It doesn’t mean that the individuals involved are not experienced, but the fund itself does not have that track record.
This is where it relates to some of the previous questions around conventional, traditional frameworks and how that affects how you invest into impactful and social finance funds. More capital that’s specifically dedicated to early-stage funds or first-time funds that are in development, we’ve seen that to be a very large barrier for those raising the capital. Again, it links to Derek’s comments and mine previously around the amount of money and the percentages that people want to own. It creates a lot of problems to raise a $10 million fund that might actually be the perfect size to address the impactful outcomes that fund wants to address, but it makes it extremely difficult to go and raise half a million from one and one from another. It’s too small on some levels, yet it can be the exact right size for the outcomes they’re looking for.
The flexibility to look at a fund without having to see the 20-year track record and instead perhaps look at individuals, look at a few other factors that come into play, would give you a good view on outcomes. I think that same framework applies to potential returns.
Again, in a traditional sense, if you think about investing into companies, a firm will always tell you they’re targeting 30 per cent plus returns, which very rarely ever occurs, but it’s what they will tell you. So being able to have flexibility on returns, not suggesting there should not be any, but that it is actually commensurate with the overall outcomes that you’re having, the flexibility in those two elements would be very helpful in terms of the barriers we see.
Ms. Bisbee: I have one small piece to add to this, and it comes out of something Christine said. You have a small perfect fund in a region that might be exactly what they need. The transaction costs and operating costs of a fund that small are really challenging. How you put a staff in place to do the work on what you can earn out of that small fund is really challenging, so that might be a role that is needed as well. How do you support the operating costs until you can break even?
We were really lucky; I had a net. Not every other fund is going to have a net the way we did until we broke even. We pay for ourselves now, but that took a while.
Ms. Bergeron: Good point.
Senator Bernard: Thank you all for your presentations this morning. I want to get to some of those stories, so my question is for Ms. Bisbee.
I liked the way you started, “social finances from the trenches.” One of the concerns I have, if this fund is established, is how do we ensure that the most vulnerable even of the vulnerable have access? I believe you may have some wisdom and guidance from this based on some of the stories, particularly about where you are in Edmonton. I’m thinking about indigenous populations, refugees and former prisoners trying to reintegrate and rebuild their lives. If you have any stories that particularly relate to any of those communities, that would be great. If not, then just share what you have.
Ms. Bisbee: I’ll talk first about an organization in Edmonton called the Jasper Place Wellness Centre. It is a drop-in centre in the west end of Edmonton started by a man who had been a businessman who, when his daughter said, “Yeah, but, dad, what are you doing to make the world better,” sold his business and started this drop-in centre. But the entrepreneurial DNA will out; you can’t stop a guy who’s used to doing a deal. He started thinking what these people really need is jobs. What they really need is income. We can build all the supportive housing in the world, but if they can’t pay even the supportive rent, what does that do?
So he started several businesses. The one he came to us for was his junk for good hauling business. It turned out to be going crazy because he figured out a sweet spot in the market, namely, middle-aged women who had garages full of crap that they needed to get rid of. He’s an expert at Google analytics, but he started this business, which was employing more and more people, so he came to us for a loan for more trucks. So good jobs being created.
He then figured out that mattresses was where it’s at. You’ve got to recycle mattresses. This year he figures they’ll recycle 100,000 mattresses. He has the contract from the City of Edmonton, a little social procurement going on there. He keeps mattresses out of landfills. He also has the contract for Sleep Country and several other municipalities around. He’s operating his organization, giving jobs, some to people recently out of prison because they end up in that neighbourhood, some to refugees and First Nations people who have also worked their way up and through his company. That’s one story I love.
I’ll do one from Calgary, a for-profit company called CommonGood. Their ongoing business is laundry service to small, locally owned restaurants and small hotel chains. Their partner is the Calgary Drop-in & Rehab Centre. They provide day labour in the laundry to residents from the Calgary Drop-in Centre. They’re paying living wage in Calgary, which is $18 an hour. They’re doing whatever they can to help any of those people change their lifestyles as well. They were working with a man recently to get a driving under the influence off his record so that he could be their delivery man because they figured out he was good with people and was going to be able to do that kind of job.
The last story I’ll tell you is from St. Paul, Alberta. St. Paul is up in the northeast part of the province, a town of 6,000 people. St. Paul Abilities Network was started 50 years ago. It’s a charitable organization started by parents who wanted to change the lives of their children who had disabilities. Eventually that became adults with disabilities because they’d been around long enough. They run seven different social enterprises and fund most of their operation through those social enterprises. It started out with a thrift store. They have the largest industrial laundry in northern Alberta and serve oil camps and the Armed Forces up in the North. They have a catering company and a trucking company, because if you’re carrying around laundry you need trucks. We gave them a loan for a project that will open in March, which is a hotel. They have decided they’re going into the hotel business. They’re the first charitable organization to hold a Hampton Inn & Suites franchise. They are going to use that hotel as work for the six First Nations reserves that surround St. Paul, which have 65 per cent unemployment on them, work for their own people, for their own clients, more work for the catering company and more work for the laundry company. They’ll be able to also provide certificates in hotel management to people in the community through work with a local community college. They are social enterprise on speed. It doesn’t mean that they’re still not really well known for the excellence of the work they do around assisting people with disabilities and brain injuries. They’re known across the province. There are families who moved there because of the help they can get from the St. Paul Abilities Network.
This stuff works if we can give these people the right tools. They weren’t able to go to a traditional bank to get construction financing for a hotel, so it’s BDC and us. We’re the mezzanine financiers, and BDC did the first part of the financing. So there are ways to partner to get these things done.
Senator Bernard: Thank you.
The Chair: Does anyone else have stories? That will set off another hour. Nobody else is coming in on this. I’m then going to go to Senator Mockler, who is a guest senator with us today subbing. You’re the Chair of the Finance Committee, and we’re talking about a finance issue, so you come here.
Senator Mockler: Thank you, Mr. Chair. I have to admit first that I’m very touched by what you do because I’m the son of a single mother born on welfare, and I never thought I would be here asking you a question.
With that said, do you share your best practices across Canada? There are a lot of good stories on it. Being a former minister in New Brunswick, I was part of the Saint John Community Loan Fund, as was our government. There are a lot of good stories like the ones you just shared with us.
We have regional agencies across Canada. In Atlantic Canada, it’s ACOA; in Western Canada it’s Western Economic Diversification Canada. Do they participate in your programs?
Ms. Bisbee: Do you mean the other organizations that work in this, like the Saint John loans?
Senator Mockler: No, Western Diversification, and across all provinces we have regional development agencies.
Ms. Bisbee: We haven’t worked with Western Diversification. I don’t know whether any of the others have.
Mr. Ballantyne: We are an intermediary. They don’t work with us, but we have run into a situation where we’re funding projects in Nova Scotia at the present time through one of our loan funds, and there are transfer agents in the indigenous community that are actually participating with us. So development funds come into play, but it’s at the project level, not at the fund level or the intermediary level.
Ms. Bergeron: Quite some time ago we worked with Western Economic Diversification in some of our riskier loans, but I believe the mandate has changed.
As a separate comment, I was on the board for the Women’s Enterprise Centre here in B.C., and they are an organization that would work with that type of agency. They have a small loan fund that’s specific to women entrepreneurs; it’s small dollars, that is, under $200,000 that they would loan out. We at Vancity don’t often work directly with those agencies on funding. We know them and certainly support different enterprises alongside at times, but not in a formal setting.
Senator Mockler: Mr. Chair, I think we could tag on to ACOA, the Atlantic Canada Opportunities Agency; they’re playing a certain role for community-based funding. When we ask about the role that governments can play, I think it’s certainly an instrument that we should be envisaging. Given the fact that BDC plays a role, the other arm should play that role, too. I think it’s an opportunity. I know in Atlantic Canada they do.
How many investors are now involved in your fund, Ms. Bisbee? What benefit do they receive from their investment?
Ms. Bisbee: At this point, we are primarily holding funds from the City of Edmonton, the United Way. There are about a half dozen private individuals, but far and away most of our investment comes from the Edmonton Community Foundation. At this moment we would have access to $55 million from them because that’s the proportion of their endowment that they have named that we would be able to call on. That endowment fund has many investors in it. Some of them are even now coming and investing because they are interested in impact investing and social finance.
The other piece is we’re starting to have private individuals, individuals of net worth, as they’re called, who are interested in what we’re doing and are approaching us. We’re starting to think through that piece at the moment. But the question really is the expectations of investors of return and how long they’re willing to leave money in the fund. At the moment, our investors are all content that the returns stay in the fund, so what we earn in interest goes back into the principal and then is loaned out again. So we cover our expenses and then roll the money over so it hasn’t been taken out.
Right now we’re having the interesting conversation about what it means if we have others come to the table. Some of this was sparked by the legislation passed by the Alberta government recently for an impact investor tax credit. They’re still working through the regulations, but some of that has sparked the conversation inside our operations about what that means for us.
Senator Mockler: Last night in preparing for the meeting, I was reading your website and you mentioned the “Dragon’s Den.” What is that?
Ms. Bisbee: It’s a television program on CBC. When I first got this job, I was explaining what it was to a friend of mine and she turned to me and said, “Oh, so it’s ‘Dragon’s Den’ but for good.” That’s kind of a good explanation. It’s closer to that kind of equity investment approach than traditional banking.
The Chair: Okay. Thank you. I’d like to ask Derek Ballantyne about something he said in his presentation. You talked about 50 investors that you have at New Market who are seeking social impacts as well as financial return. Tell us a little bit about the characteristics of these people. What kind of financial return are they looking for? What kind of social impact? What’s driving them into this investment fund with you?
Mr. Ballantyne: All of our investors share the characteristic that they’re motivated in having some other impact than purely a financial one, so I think that’s a starting point. The degree of interest in that varies between the investors, but they’re all interested in their investment producing some result that is not purely a financial result. Is it in the creation of more affordable housing? Is it in a non-profit being able to be funded to carry out certain activities? Is it a theatre that’s been able to undergo renovation and therefore offer more community programming and so on? All of the investors have that characteristic.
I’ll give you a range of what we offer. In the loan funds we return about 3 per cent per year to the investors. In the investment fund that goes into permanently affordable rental housing, it’s a 6 per cent return over the life of the investment, which is about an 8- to 10-year duration, so 6 per cent per year over that period of time. I will not take you into the details of the structure. There is some yield, but it’s not 6 per cent through the horizon, and then you get a substantial payment at the end.
In the enterprise activity, we raised capital to fund its activities, and we asked investors to take a pure risk on the enterprise. We’re giving back at the low end of what an equity return would be, which is around 12 to 13 per cent, if the enterprise works. If it doesn’t, they’re not seeing their money back, so they’ve taken a pure risk.
That is probably the range you will find in the marketplace. The investors come in based on how much impact do they want and what is the measured return they’ll take for it, and they will select themselves either across all of the products or within certain products. I think that’s fair.
We do try and offer a financial return that is commensurate with the risk that we’re asking the investors to take. We don’t want a big concession on the part of the investors; we want to give them a fair return. But we do point out that the risks are going to be measured differently in the kinds of funds we operate than you would find in conventional finance. I don’t know if that gives you a sense.
In our investors, we have other investment funds. There are financial institutions who have decided that they want to support these kinds of platforms and investment funds. We have individuals who are motivated to place some of their money to have this kind of effect. Foundations are a core investor group across the entire fund. We are the creation of foundations, and those foundations have come and invested with us as a way of getting a bigger impact in their mission by being able to use their capital to extend their mission through the investment.
Senator Omidvar: Ms. Pearson, you talked about the $40 billion in assets that private foundations hold. That’s a chunk of change.
Ms. Pearson: Private and public.
Senator Omidvar: I’ve worked in the private foundation field for 15 years, and I know my colleagues there quite well. While some of them are progressive on this front, I would suggest that the largest number of your membership or that of private foundations are rather timid, especially when it comes to the management and growth of their assets.
The CRA regulations provide for a floor on payouts every year on charitable donations, so it’s 3 per cent, if I remember.
Ms. Pearson: Three and a half, yes.
Senator Omidvar: Three and a half per cent. Should there be a similar floor for investment for their asset management? Let’s imagine a CRA regulation says that 3 per cent of your assets must be invested in this new ecosystem. That’s a question for you.
Ms. Pearson: CRA administers the Income Tax Act, and I’m not sure the Income Tax Act has any provision in it that would allow for the framing of a regulation around investments. They can shape your granting, but they can’t shape your investments. That really is a provincial responsibility.
The Province of Ontario has been the one most detailed in its framing of expectations around the investment behaviour of charities, but the prudent investor rule is the one that has applied up to now. It’s expected that charities will be managing their assets prudently because charities are organizations set up for public benefit, and therefore the assets have to be invested prudently for public benefit, not too much risk taken.
Luckily Ontario has moved forward recently and has changed and clarified its definition of what it means by prudent investor and has made it clear that foundations can actually take more risk than many of them have thought they could and still remain within that overall admonition of being prudent with funds that are meant to be used for public benefit.
Things are changing. At the provincial level, there are governments willing to indicate and signal that you can take more risk in your investments and still be on side.
I come back again to the rules that CRA has articulated around loans. One can argue about whether they have jurisdiction to make policy in this field or not, but they have taken on that mandate, and they are trying to articulate the financial relationship they see between a charity and a non-charity and impose what they call “direction and control rules” on that relationship. They are trying to ensure, as they have in saying to foundations, you must give your grants only to qualified donees, so only to other registered charities or to organizations that fit in the qualified donee. That’s why foundations can’t make grants to support the setting up of intermediary organizations, for example. But you have this area that’s grey, an area where a foundation as a charity can make a loan — that is, not a grant, but a loan — to a non-charity, as long as it operates under these direction and control rules.
What we’ve been saying to them is that the direction and control rules overall are extremely onerous and overly prescriptive to ensure that funds are actually being used for charitable purpose. So it does go beyond the scope, perhaps, of what you’re looking at right now, but I think it’s an important element when looking at how charitable foundations can deploy their assets more effectively.
The Chair: I’m sorry. We’ve run out of time. But we have had great dialogue, and all five of you have brought different perspectives and been quite helpful in the comments you’ve made to us. Thank you very much.
Colleagues, we will continue now with an in camera session to further discuss this matter in terms of instructions to the staff.
(The committee continued in camera.)