famine or feast ? arthur wood [email protected]. the current status quo the current system is highly...
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The Current Status Quo The Current Status Quo The Current System is Highly InefficientThe Current System is Highly Inefficient
Despite Bono (or Geldoff if you are my Despite Bono (or Geldoff if you are my generation)generation)
If things are left as they are – it will get worseIf things are left as they are – it will get worse
Demographics and Aging & Health in Demographics and Aging & Health in Western CountriesWestern Countries
Compounded by Political Fudge – i.e. Compounded by Political Fudge – i.e. Maastricht CriteriaMaastricht Criteria
Unfunded Pension Liabilities raise GNP/ Unfunded Pension Liabilities raise GNP/ Debt from 110 % to 300% + in Italy or in Debt from 110 % to 300% + in Italy or in Canada $300bn> $2.2 trnCanada $300bn> $2.2 trn
To maintain current system in Germany To maintain current system in Germany tax take must rise from 20% - 40% of total tax take must rise from 20% - 40% of total tax take in Germanytax take in Germany
PEOPLE WE SERVE ARE AT THE BOTTOM OF THE FOOD CHAINPEOPLE WE SERVE ARE AT THE BOTTOM OF THE FOOD CHAIN
“The projected decline in the employment-to-population ratio will gradually become a hindrance to growth in living standards
beyond 2010”
How Bad is the Financing Structure?How Bad is the Financing Structure?
Primary Pillars of Financing – State and Primary Pillars of Financing – State and Market:Market:
State Model – Picking winners in State Model – Picking winners in developmentdevelopment Developing world $2 trillion allocated 1955 - Developing world $2 trillion allocated 1955 -
2004 (in 2004 Dollars) adding at $100bn2004 (in 2004 Dollars) adding at $100bn
50% of All African Govt Expenditure. Sub 50% of All African Govt Expenditure. Sub Saharan Africa - 80% of All Capital Saharan Africa - 80% of All Capital allocations > Capital Flight in 1 yearallocations > Capital Flight in 1 year
Top Down “Donor” Model – Government Top Down “Donor” Model – Government knows best Bretton Woods 1944knows best Bretton Woods 1944
Not a way to target capital to the base – i.e. Not a way to target capital to the base – i.e. Ashoka Fellow Fabio RosaAshoka Fellow Fabio Rosa
So 20-80% of the Capital does not even arriveSo 20-80% of the Capital does not even arrive
Market System Any Better ?Market System Any Better ?
System invented by Carnegie in 1888 and System invented by Carnegie in 1888 and crystalised in the US tax system in 1921 /35crystalised in the US tax system in 1921 /35
Market is Huge - Social Capital Market $1 Market is Huge - Social Capital Market $1 trillion + in US alone – $300bn funding gaptrillion + in US alone – $300bn funding gap
BUTBUT
In US only 3.8% of C.O/NGO have revenues In US only 3.8% of C.O/NGO have revenues greater than $10 milliongreater than $10 million
Only 0.1% of Entities Founded since 1973 Only 0.1% of Entities Founded since 1973 have achieved $50m + in Revs - Of which have achieved $50m + in Revs - Of which Foundations / Individuals account for 8% of Foundations / Individuals account for 8% of the 0.1% in sustainable funding.the 0.1% in sustainable funding.
Market System Any Better ? (ctd)Market System Any Better ? (ctd)
Everybody Negotiates Bilaterally – no Everybody Negotiates Bilaterally – no aggregation systems. No Economies of aggregation systems. No Economies of ScaleScale
Competitive Advantage in such a Capital Competitive Advantage in such a Capital market is about Innovation market is about Innovation NOTNOT Innovation in Scale nor collaborativeInnovation in Scale nor collaborative
The process results in further The process results in further Fragmentation Fragmentation
On the Funding side >>Small band aid On the Funding side >>Small band aid solutions or Large Foundation take up to 2 solutions or Large Foundation take up to 2 years + to do due diligenceyears + to do due diligence
Cost of Capital Allocation 20-50% vs. 2-5% Cost of Capital Allocation 20-50% vs. 2-5%
Irony for Donors – 50 cents on the DollarIrony for Donors – 50 cents on the Dollar
Inefficiency of the Current Inefficiency of the Current Capital MarketCapital Market
Compounds the ProblemCompounds the Problem Current allocation systems are takingCurrent allocation systems are taking
20%-50% + off before usage20%-50% + off before usage Indeed how efficient is the current Market Indeed how efficient is the current Market
allocation system allocation system even after it arriveseven after it arrives – – with a huge number of small entities with with a huge number of small entities with limited Economies of Scalelimited Economies of Scale
Or on the Governmental side driving top Or on the Governmental side driving top down through the existing status quo. down through the existing status quo.
Post 1980 is this how we now drive Post 1980 is this how we now drive change ?change ?
BUTBUT Grounds for Optimism Grounds for Optimism
Largest ever transfer of Human wealthLargest ever transfer of Human wealth - $41 - $41 Trillion in US alone with 1% transferring 60% Trillion in US alone with 1% transferring 60% of this wealth – the Gates effect >> Private of this wealth – the Gates effect >> Private BanksBanks
Growth of Philanthropy – Values, Globalization Growth of Philanthropy – Values, Globalization – I.T.– I.T.
The Third Pillar - Growth of Market AllocationThe Third Pillar - Growth of Market Allocation
Social Entrepreneurship – Social Entrepreneurship – 500m people 500m people impactedimpacted
Venture Philanthropy - Venture Philanthropy - $400 m$400 m
Investment / Asset Mgmt / Banking Investment / Asset Mgmt / Banking Engagement Engagement - $6.5bn- $6.5bn
Microfinance – Yunus – Microfinance – Yunus – Estimated Market Estimated Market 3bn users3bn users
Growth of Citizens Organization and Growth of Citizens Organization and EntrepreneurshipEntrepreneurship
THE SAME HISTORICAL FORCES ARE AT WORK INTHE GERMAN HEART OF EUROPE
Source: McKinsey analysis of data from Johns Hopkins Nonprofit Sector Series
German Employment Indexed to 1960German Employment Indexed to 1960German Employment Indexed to 1960German Employment Indexed to 1960
Number of Organizations Indexed to 1982Number of Organizations Indexed to 1982Number of Organizations Indexed to 1982Number of Organizations Indexed to 1982
Source: The Independent Sector: The New Non-Profit Almanac in Brief (2001), IRS (2002)
CITIZEN SECTOR GROWTH IS ACCELERATING IN THE US
““Providing capital to poor Farmers at LIBOR Providing capital to poor Farmers at LIBOR or below”or below”
Currently Investors in the Social Sector primarily offered Currently Investors in the Social Sector primarily offered only two options – Negative 100% IRR or Plus 5% IRRonly two options – Negative 100% IRR or Plus 5% IRR
But conceptually Best Practice / Metrics / Investors in But conceptually Best Practice / Metrics / Investors in reality between these two Pointsreality between these two Points
Reallocation of existing subsidies. A Capital market where Reallocation of existing subsidies. A Capital market where two players already accept -100% - UHNW’s & Supra-two players already accept -100% - UHNW’s & Supra-nationalsnationals
The tools of 2008 not 1888 - Leverage Structured Risk The tools of 2008 not 1888 - Leverage Structured Risk Return / Derivative productsReturn / Derivative products
>> >> Improve the RISKImprove the RISK Products - Credit structure – Products - Credit structure – CCC>>AA CCC>>AA
>> >> Increase RETURNIncrease RETURN - provide High Contingent Returns - provide High Contingent Returns
>> >> Risk ManagementRisk Management – Insurance models – Insurance models
>> TO BRING PRIVATE CAPITAL AND IDEAS IN SCALE >> TO BRING PRIVATE CAPITAL AND IDEAS IN SCALE INTO THE MARKETINTO THE MARKET
Minus 100% IRRMinus 100% IRR Plus 5% (and Plus 5% (and beyond) IRRbeyond) IRR
“Not For profit” Foundation
Grant model
“For Profit” Iterations of
Venture Capital models
Social Investing Ventures
Breaking down legal
structure CIC & L3C
Entry of banks with Capital
Market Instruments
THE IMPORTANCE OF COLLABORATION AND CHANGE
To solve the problems on a systemic basis requires:
Collaboration from the social sector
Creation / Evolving of Intermediaries to create Collaborative behaviour
Foundations – Leverage Capital, Increase Innovation but HOW to draw in more Private capital
Governments to change legislation – Tax treatment and Legal structures
Banks to bring their skills to bear
PRI / LLC
Expanding the Product Range