Innovations in Philanthropy: Social Impact and P3’s

July 22, 2019

By Gray Hammond, Associate

The growing numbers of foundations and non-profits in the world have generated a lot of innovation in philanthropy. Two of the most creative ideas are in Social Impact Investing and Public-Private Partnerships (“P3s”).

Social Impact

Social Impact Investing is not about making donations or grants, but investing assets. Normally a foundation gives 5% of its accumulated assets every year to support public service. Impact investing takes a “portfolio” view, like a pension fund, investing a substantially larger proportion of the asset base in socially worthy ventures, hoping to generate both a financial return and a societal return.

This concept was born to promote institutions’ values (e.g. no tobacco, no global warming, or no apartheid.) In a way, Social Impact Investing is the “flip side” of Ethical Investing. Knowing what you oppose means you won’t invest in tobacco companies, or carbon fuel producers, or you didn’t invest in South Africa – but where can you invest to support your values? A family foundation interested in environmental sustainability might invest in alternative energy R&D, like fuel cells or tidal power. A hospital endowment could invest some of its assets in biotechnology.

The McConnell Foundation classifies Social Impact investments in two categories:

  • Mission-Related Investments (MRIs) are investments made in either for-profit or non-profit enterprises to achieve mission-related objectives and normally earning market-rate financial returns. Financial instruments in this category include bonds and deposits, loans and mezzanine capital, public equity, private equity, and venture capital investments.
  • Program-Related Investments (PRIs) are investments made to charities, for-profit or non-profit enterprises to further the Foundation’s program objectives. Unlike grants, they also aim to generate financial returns, with a tolerance for below-market returns.

The MaRS Centre for Impact Investing has worked with the Heart and Stroke Foundation and the Public Health Agency of Canada (“PHAC”) to structure a social impact bond. Heart and Stroke signed a performance-based contract with PHAC to deliver a hypertension prevention initiative. The amount PHAC will pay is linked to how well the program delivers on targets for patient participation and blood pressure levels, with better results triggering higher payouts. Importantly, PHAC will only pay out once it has proof from an independent evaluator that the program has delivered. With the agreement in place, Heart and Stroke was able – with the help of MaRS Centre for Impact Investing – to secure private sector investment to fund the $4-million program upfront. If the program performs well, Heart & Stroke will use the funds it receives from PHAC to repay the investors, with a reasonable rate of return. However, if it doesn’t meet expectations, investors stand to lose most of their capital.

Public-Private Partnerships

In a P3, private foundations or operating charities partner with governments or non-governmental organizations (“NGO”) to deliver Socio-Economic Advancement to specific communities. P3’s take many forms, and each is established for a specific project or issue; some have finite lives, while others continue for many years.

According to the Canadian Council for Public-Private Partnerships: “A Public-Private Partnership is a co-operative venture between the public and private sectors, built on the expertise of each partner, which develops or improves facilities and/or services needed by the public through the appropriate allocation of resources, risks, rewards and responsibilities.”

Major philanthropic institutions like the Gates Foundation and the J Paul Getty Trust use P3 models around the world, conducting and exchanging research and sharing resources, to solve problems and deliver services more effectively and efficiently than the private or public sectors could do alone. In Africa, the Gates Foundation uses P3s to build sanitation systems.

For decades, P3s have been used to develop and contract major Infrastructure projects. The private sector is responsible for – and rewarded for – things like financing, contracting, risk, and operations. Projects like highways and airports can include tolls and concessions handled by the private sector for several years. Hospital P3s have included post-construction facility maintenance by the private sector for several decades.

Senator Elizabeth Warren, currently a US presidential candidate, proposed the Affordable Drug Manufacturing Act, which would mean greater opportunity for P3s involving life sciences companies. Companies with little incentive to manufacture cheaper generic drugs could find this attractive: a private entity developing a new, lower-cost product could build the P3 into its business strategy from the onset. If successful in securing a contract or partnership with a government agency, the company would gain access to steady funding and regulatory guidance if it can meet the agreed-upon performance requirements.

SOURCE: Wealth by Stuart E. Lucas. Mr. Lucas is a fourth-generation heir of the Carnation Company’s founder, and holds an MBA from Harvard. Additional material researched by Gray Hammond, Associate at Constructive Edge.