Bankers are from Mars, Civil Society is from Venus – a $5 trillion Love Story?
If Juliet were a charity and Romeo a banker, what might Shakespeare have made of their relationship? The Bard of Impact Investing himself, Arthur Wood, explores the passions and fortunes of this modern day love story
Well, it is just about the season of Spring – if we get our heads above water – and love is truly in the air between the bankers (our modern day Romeo) and the social sector (our Juliet). You can almost feel the giddy excitement, as financiers flex their brains and sponsorship on social issues; perhaps those nice bankers are not so bad after all.
But hang on there… Is Romeo perhaps not being totally up front as to the object of his desires? After all, he just came out from a very bad relationship just a few short years ago.
Or indeed, is Juliet actually more attractive than she seems (even to herself) when not clothed in the dowdy fiduciary clothes of a 19th century financial construct. And, as we look to the future, has Juliet just got a single option – a single asset class (nice asset class) – or do 50 shades of grey and excitement beckon?
In this brave new world of true love, impact investing and extended metaphors, the first point to explore is what Juliet will do with her old boyfriend in Foundation funding.
Her long-time squeeze is getting a little old in the tooth – he by law has to give 5% of his assets away a year to Juliet. She knows his sincerity and furthermore he is well endowed – with assets of $1 trillion held in a closed ended Trust for Juliet.
Romeo, Romeo wherefore art thou Romeo? Well, Juliet’s new banker boyfriend knows that this is a very inefficient capital market. This has been confirmed to him by Great Aunt McKinsey. Not only does Juliet not get to use the Trust assets held by her old Foundation boyfriend, but Romeo knows that as a banker he could transact the same process at a tenth of the cost – as he does in the for-profit world. But since Romeo currently takes 20% of everything that’s given away to Juliet each year, historically he already has a pretty good deal.
But the world is changing. Juliet sees a new and worrying future for both the Houses of Capulets and Montagues. This involves inclement weather (climate change issues are likely to cost $2 trillion according to TEEB), plumbing (the World Bank water and sanitation programme identifies a cost of $625bn), even the car (Road safety - $523bn - McKinsey) without even thinking about the food and health bills.
There is simply not enough money – and it’s getting worse. Godfather Government has no more cash and the family is getting older and more expensive every day (the demographic funding crisis). Juliet needs Romeo’s money while, ironically, Juliet’s skills and her charitable concerns are becoming “a strategic imperative for business”.
What will this new social contract look like? A report by Brookings, Accenture and Total Impact notes that in India, $1 of expenditure creates $53 of economic value – and that the corporate sector has a strategic interest in developing education.
Following the example of the Nobel Yunus and his retail banking model at Grameen, one set of the suitors from Romeo’s camp (the one called “venture capital”) made Juliet swoon recently when they suggested a marriage could create a trillion dollar market in ten years in her single asset class. The line goes: “Perhaps if they could agree a metric of their marriage they could persuade Godfather Government that they were providing higher social impact for the money.” Maybe he could even be persuaded to let them have a subsidy (and in the UK, the Godfather is even being persuaded by some accountants that one should create a legal framework that establishes Romeo in charge as the ‘prime contractor’, so he can tell Juliet what to do – but more of that in a separate article).
At this stage, perhaps we should ask what value there is in this specific marriage? Let’s be clear that we are all for a profitable and long marriage for both parties – but perhaps Juliet has more value than it seems?
In fact, there are some hidden values to Juliet that Romeo and his banking sector pals call the “Alpha” values. Juliet is a little confused about these – after all, what does she know about money? It’s always been held in trust for her and she’s always been told there is only one way to use capital – a grant. But Romeo’s banking fraternity know what these four hidden Alpha values are:
1. Social entrepreneurship and innovation
Firstly, Juliet is beginning to grasp the value of social entrepreneurship and innovation, which is all to the good; the venture capital entreaties are focused here. Even here the market is even bigger than the touted $1 trillion. Is it $2 trillion that Romeo has his eye on – the venture capital (VC) / private equity (PE) pie and the $1 trillion core funds of foundations – one wonders? Or is Juliet potentially even more fecund – maybe the capital market we are looking at is well over $5 trillion if we think about other financial innovation that could be applied…
2. Financial innovation
The second attribute for Juliet is the innovation of impact investing – looked at as injecting a range of capital market solutions into social provision. These are the other suitors from Romeo’s camp for Juliet’s attention beyond just VC and PE models.
Juliet senses this, and folks like Dalberg (the global development advisors) or my own organisation, Total Impact Advisors, are doing work on who all these lovers may be, by sector.
However, it is in the last two hidden “Alpha” attributes that Juliet really needs to tread carefully:
3. Economies of scale, and
Juliet’s old Foundation boyfriends all had a “social lock”. All of them played by the same rules and, encouraged by these rules, she flirted with them one by one. But like all teenage love affairs no one really knew what anyone else was doing (bilateral funding models of grants and aid). It is in this very fragmentation and lack of scale that perhaps Romeo sees his chance.
Juliet would be well advised to look to the experience of her big sister, the Public Private Partnership (PPP). Take one PPP, the GAVI Alliance, for example, for which the move to scale and collaboration dropped the unit cost of vaccinations from $50 to $5.
Of course, in a PPP the trueness of the social mission can be hardwired. Juliet’s dilemma, however, is that while a social lock is hardwired in a foundation and a legal structure such as a community interest company Romeo the banker has no social lock. Even though her banker suitor might profess the purity of his love in the most ardent terms – can she always trust his good intentions? Some of her flirtations with microfinance in Mexico and India already show cause for concern.
Indeed, a current proposal being seriously considered is potentially to make Romeo the judge, jury and beneficiary of their love affair. This proposal, which is being touted in government circles, would make the banker (or “impact venture intermediary”, as our lover is most recently being called) the prime contractor in the investment deal. But if the prime contractor is the banker, then he also has the power to decide who profits from success and who takes the hit from failure. Any decision he makes will of course be shrouded in the beguiling words of social metrics, caring adjectives in the narrative and the storytelling so beloved of the social sector.
But both Juliet and her Godfather Government need to think like Romeo: look to the actual structure that they are party to setting up – where is the cash flow, where is the value, where will the margin go, and who exactly is taking the risk for the return, be it social or economic? How will conflicts of interest be managed?
Ultimately, the impact investing revolution can, should and will happen. There is no alternative. But this time around does Juliet get an equitable share of the equity value of the social R&D? Indeed, will this share create annuity income and leverage capital for what Juliet (and society) care about? Does this allow Juliet to maximise the plethora of finance innovation value for the benefit of the social issues that impact us all? Does this create a clean, transparent structure for Government? Or is the danger that it will just go towards another banker’s bonus?
The question is – are we watching Romeo and Juliet or Fifty Shades of Grey? Is our banker the idealistic young Shakespearean hero – or is he more akin to the likes of Christian Grey, with a darker side?
Put more simply: we must get the legal and intermediary framework right to define this new social contract – what exactly is the Pre Nup?
Let love not be blind to the charms of Romeo, and particularly to the likes of Christian Grey.
Arthur Wood is a Founding Partner at Total Impact Advisors. You can read his article, Impact investing: getting the pre-nups right, in the latest issue of Alliance magazine.
Photo credit: Dunure Castle at night by Graeme Law