Partner, Senior Investment Advisor and Head of Philanthropy & Social Finance
Christopher Thorn makes impact investments happen. Connecting the often-disparate worlds of business, community and government, he has spent decades working in private wealth management, philanthropy and social investment in Melbourne, New York and Brisbane. He’s played a hand in advising clients who have created and invested in some of Australia’s landmark impact investments, is on the board of Impact Investing Australia and is a member of the Australian Advisory Board on Impact Investing.
Christopher talks to us about his journey alongside the evolution of philanthropic capital over the decades, the rise of impact investing and the opportunities for private investment to thrive alongside philanthropy.
The seeds of inspiration
I started with JBWere in Melbourne in 1984. After an initial stint as a private client adviser, which included living through the 1987 stock market crash, I moved onto a two year stint on the Institutional equities desk. I worked with a number of non-traditional institutions including charities and foundations, looking at the investment needs of these organisations, in what was a completely different environment to what we have now.
Then I was sent to New York, selling Australian Equities to major North American institutions. One of my briefs was to have a look at what the family offices over there were doing. I visited people like the Rockefellers and Bessemer Trust as well as some of the other trust companies and really had my eyes opened for the first time to structured philanthropy. I also was introduced to how families were using philanthropic entities to educate and bring through the next generation in the family business and keep the family together. That was formative. The philanthropic sector was obviously much more developed in the US – they have been working on this for generations – whereas here in Australia we are only just getting to that stage now, given the wealth created over the past 20 years. This all just got me more interested in the whole space.
A foundation for doing good is laid
In 2001, Private Ancillary Funds [PAFs] were launched by the Prime Minister’s Business and Community Partnership. One of my fellow partners at JBWere recommended I take a look at these and as I did, I could see that it was quite exciting as an opportunity to really build capacity. If we could engage with the wealthiest people in the country and help them give more effectively through these foundations, we could really make a difference. I went to the Chairman of JBWere and said I think there’s a business here in providing a service to our top clients in terms of providing advice and services on how they give their money away… and so we did it. We established the Philanthropic Services business to help our clients give their money away more effectively. As we got involved with that – setting up trusts, setting up PAFs, investing those monies – it lead to us helping not for profits create their investment policies and invest their endowments.
When I started this in 2001, there was no other mainstream financial organisations, apart from the trust companies, doing that kind of philanthropy work. We saw ourselves as capacity builders, and our attitude was to provide thought leadership to help the whole sector grow. We wanted to create a rising tide to lift all boats. So rather counter-intuitively, we gave advice to trustee companies, banks, and other wealth managers, on how to approach this market as we believed the market needed scale to encourage others to invest and offer new services, and ultimately to grow the market for all of us to benefit.
The start of doing good and doing well
We built the Philanthropic and Charitable Services business up over a number of years. However I’d always been interested in market-based solutions for achieving change, and when you are exposed to a range of not for profits, you do see duplication and differing degrees of impact. I thought there must be other ways. From my US days, I was interested in things like ‘‘program related investments’ and ‘mission-related investments’; the sort of work that F. B. Heron Foundation and others were pioneering.
That’s when we started thinking about how to move investors along the spectrum from philanthropy to social investments.
One of the early investments I supported was the creation of the Australian Chamber Orchestra Instrument Fund. Over many years, orchestras such as ACO, would approach philanthropists and say ‘We’d like to buy a Stradivarius violin. Can you give us a million dollars to buy it?’ A donor would then either write a cheque for a million dollars, or twenty people would each write a cheque for $50,000, or somewhere in between to hopefully fund the purchase. It was a gift. But if you know anything about instruments such as a Stradivarius violin, the instrument actually has a very predictable investment profile and they are insurable, so if they get lost or damaged, someone else is prepared to bear the risk. Therefore you have a security backed asset with predictable investment criteria and profile.
So instead of donors only having the option of being able to give their money – say $50,000 – to the orchestra, an option for a donor was created to “invest” their $50,000 instead and buy units in an Instrument fund. Over a period of time if the instrument doubles in value for example, the investment of $50,000, would be worth now be worth $100,000. The “Investor” has the option of redeeming their units and realising a 100% profit or they can as a supporter of the Orchestra, (which by definition the majority of the “investors” are) may donate the $100,000 which has the effect of turning a $50,000 investment into a $100,000 deduction. The difference being the capital gain that would otherwise be “locked” in the fund is released and able to transferred to the “investor”.
The point being, the supporter of the Orchestra has been given the option to restructure their contribution from a gift into a donation, utilising the capital appreciation (or loss!) of the underlying asset appreciation for the benefit of the funder. By changing the nature of the way the funding is provided or structured has therefore generated a win/win/win outcome for all parties.
This type of approach has been used with other property assets, in the aged care, and environmental space. If we can think differently about some of the other problems we have facing us – whether it’s tackling the ice epidemic, Indigenous education or returning water to the environment – we need to look at ways we can monetise solutions to these most pressing social and environmental issues, so we can attract capital to fund interventions that align interests and in turn lead to systematic changes. This is not just increasing funding for individual philanthropic programs, it’s about changing the mindset… it’s about reconsidering how we approach the way we finance and structure these challenges, measuring the outcomes and thinking about social and environmental issues in new ways.
Grants vs investments
Philanthropic capital is perhaps the most precious capital of all. It’s high risk and is legally prohibited from returning a financial return. If you can’t measure something or identify how to generate a financial return – and there are some things you’ll never make a return on – then a making a grant may well continue to be the right answer.
But what we’re seeing is that we’ve got this small pot of philanthropic capital being used to fund activities that could be funded from other sources, for example to do things like construct a building. Why would we encourage a genuine philanthropist to put $5 million towards building a $50 million hospital, when the hospital could borrow the money from the bank at say 5% and pay it back within 10 years? That’s quite a straightforward loan transaction.
This could become a form of social finance if the debt is layered with other capital that is willing to take a lower position in the risk or capital structure, which may lower the cost to the borrower or address other barriers such as the inability to offer appropriate security. This is often the case where NFP organisations are not able to offer property as security, if the intent of the lender is to make a social impact, this willingness to negotiate different terms can significantly increase the flexibility of the NFP to raise funds, even though the absolute interest cost is not that different.
If this form of finance replaced more of the philanthropic capital then the $50 million of philanthropic capital could be preserved for medical research, for example, that no bank is ever going to fund. Now that’s being smart. It’s about saying we have these different pools of capital; we’ve got to use them appropriately. Let’s not waste precious capital doing stuff we could finance privately.
The need for market infrastructure
With investment markets, you can’t advise your clients to make an investment unless you have a reasonable basis for the advice. Therefore you’ve got to do the research and justify your recommendation, which normally means satisfying a process and generating a whole lot of compliance documentation. If an investor or adviser has no idea about the sector or the activity, they don’t have the ability to assess it. For example, if someone comes and says I want you to invest in out of home childcare for abused children, how does an investor who’s got no connection to the issue rate that? How do they know the risk?
For us as an investment house, to go and take these opportunities to clients, the cost of performing due diligence is normally too high. This is a real barrier for impact investing at the moment. We’ve got this gap that we can’t get across. We are at this point in the market where it’s hard to commercialise many initiatives.
The work we are doing to build a large Australian Social Impact Fund and the other market-building activity going on is an attempt to create mechanisms that help people get over that gap and to create the size, the momentum, the sustainability and the financial incentives for professional market participants to do the due diligence and take more impact investments to clients.
The role of the intermediary in impact investing
As an intermediary we work to bring together the suppliers of capital to an organisation that needs the capital, and structure an investment in a way that the provides the risk and return profile the investor is looking for, while providing capital to the organisation on appropriate terms. One of the current challenges with impact investing is that investors, the suppliers of the capital, don’t know who’s on the other side of the transaction, or what their needs are, the risks or how to engage with them. It’s a similar scenario for the person or group seeking capital. That’s where an intermediary who understands the needs and objectives of each party can add great value by bridging the gap described above, between say, a not for profit organisation and a potential investor.
And once again, that’s where a Social Impact Fund can be very valuable. From my perspective, if the Fund can demonstrate how to satisfy the need in this space for informed, aligned capital, and acts as an exemplar to stimulate other commercial funds to hopefully emerge, it will have done its job. The Fund is really about showing people the way, potentially acting as a cornerstone investor to bridge the understanding gap and opening up some of these opportunities for investment.
The future for impact investing
I’m optimistic. There are many things to be encouraged by. Obviously government plays an important role, and I think the NSW Impact Investment policy is significant and helpful in bringing along other governments. The fact that NAB, QBE and others in Australia are putting commercial funds into impact investing…. QBE’s $100 million is a lot of money to start! The fact that we’ve got this Social Investment fund happening… And globally too, we are seeing an increasing stream of new initiatives and opportunities emerge. With the international Social Impact Investment Taskforce, the right people are at the table; they are influential with government and business and they are getting focused. That’s what we are trying to do with Impact Investing Australia. It’s like using a mirror to light a fire. Once you’ve got the mirror and the sun coming in at the right spot, the fire ignites. At the moment there’s a whole lot of mirrors trying to get that light into the right spot. It can be a bit diffuse and then it goes a bit dark, but ultimately I think it’s getting brighter.
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