With the recent launch of the Government of Canada’s groundbreaking Social Finance Fund (SFF), the social finance sector in Canada is set for significant growth. One of the SFF wholesalers sets out what you need to know about this important new initiative.
What is the Social Finance Fund all about?
In brief, it is about creating a much stronger social finance market in Canada that is better able to deliver positive social and environmental outcomes. The Social Finance Fund is a Government of Canada $755 million initiative. It is part of its Social Innovation and Social Finance Strategy, launched publicly in 2018. In May 2023, the Government announced three fund-of-funds managers (wholesalers) to manage portions of the fund: Realize Capital Partners, Boann Social Impact and Fonds de finance sociale – CAP Finance.
What is the structure of the Social Finance Fund?
Fund-of-fund managers have been allocated money to use as investable capital as well as funding to build the market. Each fund-of-fund manager has its own strategy and structure for deploying capital and for market building. Broadly speaking, capital flows from the fund-of-funds managers to social finance intermediaries (fund managers and structured products) and then through to social purpose organizations (ventures, companies).
At Realize Capital Partners, we’ve structured our fund (targeted raise: $405 million) as a conventional limited partnership and will be investing across private market asset classes. Through this approach, we can aggregate investment needs across smaller emerging and established impact-focused fund managers, while operating at an investable scale for even large institutional investors. The Government of Canada has provided conditionally repayable contribution funding to meaningfully de-risk private investment in this structure. It is participating on a “first in, last out” basis with its capital being deployed prior to private investors and only being repaid after private capital has been repaid with a minimum return.
How significant is this for the Government of Canada, and for the responsible investing sector in Canada?
This is a significant development. We believe it is a clear demonstration by the government of its interest in enabling markets to drive better social and environmental outcomes in tandem with public policy. It is a clear recognition of the need for private capital to be engaged at a meaningful scale to enable the growth of existing and new solutions.
It is also meaningful for the responsible investing sector in Canada because it supports the mainstreaming of what has been a relatively niche part of the broader capital markets led by foundations, some family offices, and pioneering asset managers. Impact investments demand a stronger accountability for impact measurement and tangible outcomes, and the industry is already looking to progress in this area with themes such as climate and diversity, equity and inclusion.
This initiative is significant because it will support the maturity of more existing private market fund managers and product issuers, building both the scale and the track records necessary for more meaningful engagement from established actors in the capital markets.
Accredited and institutional investors will be investing alongside fund-of-funds managers, either into the funds or the underlying holdings directly. This provides a turn-key mechanism to invest in a larger, widely diversified strategy that will invest in a variety of impactful private market strategies. It will produce positive outcomes in communities across the country.
We expect that asset managers who may have been thinking of developing more impactful private market products but have been unsure of potential demand, will now consider bringing these opportunities forward.
Why is social equity such a focus for this initiative?
We believe the Government of Canada is trying to create a more equitable society through this initiative. All fund-of-funds managers are focused on this goal. Social equity is a strong focus of Realize Fund I because we believe this lens is both necessary to drive more impactful investments in communities across the country, and because we believe there are opportunities for a social equity lens to drive real financial alpha.
A social equity lens contributes to the selection of more impactful investments because it reflects the fact that social and environmental issues are rarely felt equally. Too often, communities facing greater socio-economic marginalization will face other issues more acutely. For example, those in economically precarious situations may be disproportionately impacted by the lack of affordable housing and access to care. By using a social equity lens, investments will directly or indirectly affect equity-deserving communities, and opportunities that deliver positive social or environmental outcomes should be prioritized. We’re clear that we consider this the responsible, just thing to do.
We also believe that this lens can correct for biases in our own investment process and allow us to invest in opportunities that may drive better financial outcomes. In some underserved markets our partners will often be first or second movers and have the advantage of being able to work with remarkable, undiscovered businesses that just lacked better access to capital to thrive. A social equity lens can enable us to look at opportunities from multiple perspectives, informing a better understanding of if there’s a difference between real and perceived risk. By creating a focus on underserved markets with untapped opportunities and informing a more complete view on risks, a social equity lens can also support financial outperformance.
How will the Social Finance Fund combat “greenwashing” and “impact washing”?
The Social Finance Fund requires active impact measurement and management across all investments. This creates a good opportunity to create a greater level of standardization around common requirements for impact measurement. This also means there will be more accountability for delivering positive outcomes across a range of dimensions. By acting transparently in our investments, holding fast to our requirements to monitor investments over time, we’ll avoid “impact washing”, and demonstrate authentic benefits to communities in Canada.
Author
Lars Boggild
Portfolio Manager
Realize Fund I
