Anthony Hilton: How doing a good deed can add up to good business too

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The Independent Online

On Thursday I shared a stage with Sir Ronald Cohen, a man with a mission.

Having made a fortune in private equity he believes that harnessing those skills and using them to tap the resources of the capital markets is our best hope of solving the social problems in this country.

Private equity came of age when government realised it could not solve our industrial problems by creating more British Leylands and decided instead to open the door to private sector creativity and capital. Now 30 years on history repeats, but this time it is the problems of the social sector which find government out of cash and out of breath. Sir Ronald's answer again is to engage private capital and expertise.

Social enterprise is an irritatingly vague term which covers a whole spectrum of activities. So some social enterprises he defines as profit with a purpose: for every pair of shoes a shop sells in London it gives away a pair in Africa, or indeed closer to home. Others he defines as not for profit, because what they do can't be measured in conventional financial terms.

Part of the challenge is to find ways to measure performance in enterprises which do not make a profit, and expressing this success in terms which translate into a financial return which can be used to attract capital.

This brings us to social impact bonds. A charity devoted to cutting levels of prisoner reoffending raises the money it needs by issuing social impact bonds. Government agrees to pay the charity a fee for each released prisoner who keeps out of trouble subsequently. The higher the percentage success rate, the more it pays. Government is happy to do this because it is a lot cheaper than paying to keep the person locked up.

This income allows the charity to pay a return on the bonds which is linked to its success. The better it does, the higher the return paid to the bond holders who backed it. In this way a non-financial objective can be structured to deliver a financial return which can attract capital. Of course if the charity makes a mess of it, it gets no income and the bond holders lose their money.

This is not far-fetched. Such schemes are up and running already, and the potential exists for many more across the spectrum of social activity with many more financial models. In 10 to 20 years time, Sir Ronald predicts it will be a huge business.