The Australian government has put $8 million into getting social enterprises ready for investment funding. New Zealand must follow its lead, says impact investment expert Jackson Rowland
Comment: The current Covid-19 Delta outbreak is a reminder of the scale of the social and environmental challenges our world faces. Climate change, inequality, or mental health: the negative impacts of these and other challenges continue to increase.
A big part of the job of the Government is to tackle these challenges – departments like the Ministry of Health and the Ministry for the Environment exist to create better outcomes in people’s lives and for our environment. But, what is becoming clear is that businesses are an increasingly effective way to create good social and environmental outcomes too.
The Australian government has committed $8 million to a targeted investment-readiness programme for businesses which tackle social challenges. The money helps companies get ready for commercial or ethical funding that will allow them to scale up their operations in the future.
In New Zealand, pilot programmes have proven this can be done effectively here too. But, despite that, our Government isn’t proactively supporting the Kiwi companies which are out there addressing our most challenging societal and environmental problems.
It should. Business has always been a powerful vehicle for change.
Increasingly we are seeing companies aim to tackle social and environmental challenges, whilst also delivering a profit. Social enterprise, impact business, or just plain old ‘business’, whatever you want to call them, there’s no doubt that more and more businesses are working on solving some of the biggest problems our communities are facing.
Take LearnCoach, a company providing online learning to New Zealand high school students, or Mint Innovation, which is recycling precious metals from e-waste, or Mentemia, a wellbeing app aiming to improve people's mental health. The number of impact businesses is growing, as are the positive outcomes they create.
Not only are these businesses tackling challenges effectively, they are also creating strong, profitable and productive businesses in the process. So much so that investors are stopping to take notice. And increasingly there’s no shortage of investors looking to put money into the right social enterprise.
One Australian impact investment fund took two years to get the investment capital on board that it needed for its first fund. When, recently, it went to establish its second fund, it raised the money it wanted in just four weeks. Globally, more investment capital was raised for clean technology funds in the first months of 2021 than the total amount raised across the previous five years.
And in Aotearoa, new research has just found that our impact investing market was $3.3 billion in 2020, a significant increase from 2018, when the market was just $358 million.
This growth is showing no signs of slowing either, with Millennials and Generation Z increasingly looking for impact focused businesses to invest in. With an estimated US$70 trillion expected to be transferred from older generations to younger generations in the US alone over the next 20 years, this trend is only going to grow.
"The Impact Enterprise Fund has invested in eight businesses across four years, but has considered over 550."
The growth conundrum
But, that’s exactly where we strike a problem in New Zealand. While the amount of money available for investment into impact businesses continues to grow, the rate of impact investments made is not increasing in step. That's because not enough businesses are ready to receive this money.
New Zealand’s first impact investing fund, the Impact Enterprise Fund, has invested in eight businesses across four years, after considering over 550. In order to increase the number of impact investment deals made in Aotearoa, more support is needed to prepare impact businesses for investment.
Currently, the only initiative in New Zealand dedicated to increasing this pipeline is the Ākina Impact Investment Readiness Programme, which is supported by funding from The Tindall Foundation, Kiwibank, Foundation North, WEL Energy Trust and Rotary Club Wellington.
The programme, now in its sixth year, provides funding to businesses to engage professional support to get them ready for investment. It continues to see huge demand from businesses, with over 150 applications for support received this year.
However, the size of the funding pool means the programme can support less than 10 percent of them. Which matters; previous recipients are going on to raise millions of dollars in investment funds, thereby increasing the scale of the social and environmental outcomes they create.
Ākina has discussed the success of this programme with people in the Government on multiple occasions, but they are yet to take action.
There are two main reasons why our social enterprises aren’t ready for investment funding in New Zealand:
The first is there is a dearth of experience to guide those impact businesses and the people who lead them. Because impact investing is relatively new, there’s a limited number of businesses which have successfully raised investment capital in the past, and therefore there are limited success stories for others to learn from.
The second problem is a lack of experienced advisors for these impact enterprises. The cost of professional help is often too high for an early-stage business, so these key intermediaries in supporting businesses are not getting exposed to impact businesses, and therefore not developing the capacity to support them.
"In Australia, recipients of investment readiness funding often go on to receive $1 million or more in investment funding."
Australia has successfully delivered an Investment Readiness programme similar to the Ākina programme that solves these exact problems, but on a much larger scale. Across the ditch, government funding of $8 million enables businesses to receive up to $140,000 each, to help them prepare for impact investment.
The Australian programme has been running for several years now and is a proven success. Recipients of investment readiness funding often go on to receive $1 million or more in investment funding, and 100 percent of recipients surveyed say without support they would not have raised the investment they needed, or would have raised less, or it would have taken longer.
Additionally, 94 percent of professional advisors engaged by the programme recipients said without the support of the government funding they could not have worked with these businesses without cutting back on time, or sacrificing fees.
So, where does that leave us here in New Zealand?
We have a growing amount of money ready for investment into impact businesses, a demonstrated need for increased investment readiness support, and a successful precedent for how to remove the barriers and supercharge the growth of impact businesses in New Zealand.
We need scale
Now we need scale. We need to lift the amount of support available for impact businesses to get ready for investment, so they in turn can scale their business. Remember, we’re not just talking about any business here – these businesses are improving lives and the environment. They’re reducing waste and tackling mental health. They’re employing people who find it hard to find work, and giving them the chance to thrive.
The Government pays for these sorts of outcomes through other programmes, with varying success. What it needs to do is trust that for-profit businesses, not just social programmes, can contribute solutions. And then it needs to work proactively to help those businesses succeed. This would also support the Government’s own goals of a cleaner, healthier, more equitable Aotearoa New Zealand.
Back in April, as part of the Government-funded programme The Impact Initiative, we recommended that the Government fund an impact investment readiness scheme like the Ākina programme. So far there’s been no word on when, or if, that’s likely to happen.
If the New Zealand Government was able to contribute even a fraction of what the Australian government does in this space, we would see some of our most exciting businesses achieve significant growth, increasing their contribution to the pressing issues we’re facing, while growing our economy at the same time.
The scale of the challenges our world faces means the solutions cannot come from government alone – but government can and should do more to tackle these challenges with businesses, together creating a thriving, resilient, post-Covid Aotearoa New Zealand.
