Imagine a world where the might of private capital could be harnessed to address society's most intractable problems. It sounds obvious, but social issues are so complex they make it mind-bogglingly difficult to do. But Toby Eccles is convinced he can crack the problem.
The former UBS Warburg corporate financier has already launched the world's first ever Social Impact Bond. And that single pilot scheme could become a thriving, mainstream market funding everything from drug rehabilitation schemes to keeping children out of state care within as little as 10 years, he says.
Social Finance – the organisation Mr Eccles set up in 2007 to bring investment banking expertise to bear in the social sector – is running the first ever social investment conferences this week to try to get the message out there. Some 400 public sector commissioners, social service providers and potential investors will gather in London today to thrash through the details of this newest of financial products.
"The problem is that the organisations dealing with most complex issues in the country are the least financially certain," the ebullient Mr Eccles explains. "The question is how to connect that social economy to broader pools of capital to build a better financial world for them."
Social investment as an industry is barely born. There may be plenty of interest in bringing the two worlds together, but there are none of the much-needed intermediaries that exist in the world of conventional investments. "When you talk to investors, they don't know where to put their money, and when you talk to people trying to raise funds, they can't find investors," Mr Eccles says.
Social Finance is trying to create the bridge. After years of hard graft on intractable questions such as how to measure success, or how to treat payouts in government accounting, the first ever Social Impact Bond closed just weeks ago.
Some 17 investors put up £5m between them to fund a scheme to cut recidivism rates amongst prisoners released from Peterborough prison. The money will be spent targeting three cohorts of 1,000 former prisoners, and if re-offending rates come in lower than a 1000-strong control group from the Police National Computer, the Government will pay investors from the money the state has saved.
If all goes according to plan, the scheme could prove the long-held hypothesis that money is better spent trying to stop ex-convicts re-offending, rather than locking them up when they do. It will also pay its investors a comfortable return. If re-offending comes down 10 per cent, the bond will pay out at 7.5 per cent – and the Government has capped the return at 13 per cent, just in case the programme team's efforts prove too successful.
"For investors, it probably feels most like a private equity fund," Mr Eccles says of the bond. "It is a limited partnership, with money paid in, and then draw-down requests over time, and outcome payments in years four, six and eight."
It is far too early to judge the scheme's success. But the concept is rapidly gaining traction with governments across the world looking for better ways to handle complex social problems, but either unwilling or, increasingly, unable to bear the financial risk themselves.
"One of most startling things is to have David Cameron taking on these ideas, and then Barack Obama, and now the new government in Ireland as well," says Mr Eccles, who has set up a four-person US branch of Social Finance in Boston in response to the blossoming interest on the other side of the Atlantic.
Prisoner rehabilitation is a good place to start, he says. But drug addiction schemes and programmes to support "chaotic families" are also ripe for funding through Social Impact Bonds. And Social Finance is already working on a feasibility study with local authorities in Essex, Liverpool and Manchester looking at whether intensive family support could cut the number of children taken into care. Mr Eccles is cagey of giving too much detail so early in the design of the scheme. But he is confident that it will not prove impossible to calibrate. "I'll be disappointed if we are not raising money for two or three more Social Impact Bonds by this time next year," he says.
The hope is that by proving the concept, Social Finance will open the floodgates for an entirely new asset class. "We are trying to build a marketplace," Mr Eccles says. "We don't want it just to be us – quite the opposite – we want broad and thriving market because that will have more social impact."
One side of the equation is the Government, where the biggest challenge is not so much designing programmes with measurable outcomes, but challenging age-old divisions between different departments. "Metrics and savings are hard, but joined-up government is harder," Mr Eccles acknowledges.
But the current climate of austerity may give an extra boost to plans that proved simply too difficult in more affluent times. "This is a huge opportunity for us," he says. "We are finding a more open door, in both local and central government, than there would have been two or three years ago."
The other side of Social Finance's work is with investors. All the Peterborough bond backers are either charitable foundations or the philanthropic super-rich.
It is a good start, says Mr Eccles, particularly if foundations can be encouraged to invest from capital rather than grant-making funds, thereby doubling the impact. But he has much broader ambitions.
The next stage is to approach the broader "mass affluent" category through private banks and wealth managers. Since the launch of the Peterborough bond last autumn, private bankers are showing much more interest in the concept of Social Impact Bonds. At this stage there are issues of scale – even a large social investment fund would be far too small for inclusion in a private bank's portfolio.
Once that problem is cracked, the next stage is to exploit tax wrappers such as ISAs or Venture Capital Trusts. Further out still, there could be a market involving major institutional investors – particularly if local pension funds were able to invest specifically in local social programmes, for example. Ultimately, Mr Eccles can see banks offering pensions with a commitment to hold 3 per cent of their assets in social investments.
"At the moment, investments are split into putting money into anything at all, or at best into anything that isn't embarrassing," he says. "This would be a more active opportunity, providing people with an investment they can be proud of and excited about in the same way that they are now about the charities they give to."
The former prisoners in Peterborough are just the beginning.
CV: Toby Eccles
* Toby Eccles started his career at UBS Warburg, focusing on M&A.
* In the hi-tech boom, he joined Data Connection, where he worked on "how to give money away in interesting ways".
* After the dot.com crash, he moved to Ark, the childrens' charity, as programme director.
* From there, he went the Commission on Unclaimed Assets, set up to recommend how money in dormant bank accounts be used to benefit society.
* In 2007, Mr Eccles set up Social Finance to apply investment banking expertise to funding social programmes.
* Mr Eccles is married, with two children, and lives in north London.Reuse content