Riding to the rescue of Israel's third sector

Sir Ronald Cohen of Apax fame seeks to establish an Israeli social investment bank.

Even if Sir Ronald Cohen's ambitious venture to establish a social investment bank in Israel to revolutionize the non-profit sector succeeds, historians will have a hard time romanticizing the meetings that turned the vision into a reality. Unlike other revolutionaries who changed history in shiny laboratories or in dingy basements, Cohen held his meetings on the 35th floor of the Azrieli Triangle Tower.

Struggling Israelis rushing about in the sweaty streets below, who may benefit from the revolution in the future, look like soulless ants from the heights of the tower. The fact that some of the revolutionaries for the future are wearing sharply-tailored suits and talk about bonds, interest rates, and regulators, while noshing on fine pastries, does not help.

Nonetheless, these are revolutionaries who are keen to help Israel solve big problems in health, education, prisoner rehabilitation, and youth at risk. Cohen, a pioneer in British venture capital, founded Apax Partners in 1972. Over the years, Apax has invested more than $2 billion in Israel - the acquisition of control in Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) and Tnuva Food Industries Ltd. are two of the biggest and best known investments, and Cohen has been able to recruit quite a few big guns to achieve the vision.

Participants at the meetings held in the past few months under the auspices of the Portland Trust, which Cohen founded, include former Bank Leumi CEO Galia Maor; Deputy Accountant General Yair Tal; former Deputy Attorney General Davida Lahman-Messer; Allan Barkat, the founder of Dualis Israel Social Venture Fund, which invests in businesses that employ youths at risk; veteran high-tech businessman and former Comverse CEO Itsik Danziger; Michal Simler, the executive director of Israel Venture Network, which invests in economic development and educational technology; Cecile Blilious, the managing partner of Impact First Investments; and Custodian General Dr. David Hahn.

All the honored representatives share in Cohen's vision to create what he calls "a social investment bank" in Israel, which will function as an innovative pipeline to channel capital to businesses which create measurable social value. Cohen and his people say that Israel has 32,000 NPOs, financed by foreign philanthropists, which operate in various social fields. In the past few years, because of the global economic crisis and incidents such as the Madoff scandal, the flow of donations to these NPOs has greatly dried up, and they are struggling. In a world filled with financing distress, but which wants to see efficient results from the money that still flows, a new mechanism is needed to attract capital to the non-profit sector.

"Our concept says, 'Don’t just give grants to this sector, but invest in it, and get both a financial return and social value - a double bottom line, says Atuda Financial and Pension Consulting owner Itzik Ben-Sheetrit, one of the people whom Cohen has recruited for the effort. "I am a strong believer in Ronald's vision, because if you demand a financial return, you're testing the investment with professional tools, and you will see the results. Just as a private equity fund is involved in the management and oversight of the activities of the companies it invests in, the social investment funds will do the same. They want to promise investors both a financial return and a social return - the creation of social value. If you can measure social value, you can also create income from it - the state saves budgets, etc.

"This is a kind of evolution by the non-profit sector. You should remember that a business which is an NPO operates at a disadvantage. If a social venture has an idea and seeks contributions or even government funding, it is constantly seeking donations. At the same time, donations go to those who are able to raise more money, and not necessarily to those who create the most social value. The social investment fund is supposed to tell a social venture, 'Don't spend all the time raising donations, but concentrate on achieving the social targets you're supposed to reach and develop your organization.'"

Cohen has already succeeded in achieving this in the UK. Big Society Capital, a social investment bank which he chairs, has been operating since 2012. Big Society Capital, which took over ten years to set up, serves as a means for channeling money to businesses which create social value in a variety of ways. At the same time, just like better known financial institutions, it issues bonds.

This is how it works: social impact bonds raise capital from private investors to finance social organizations in a particular sector (such as boosting the participation in the labor force by haredi (ultra-orthodox) men and Arab women, lower the prevalence of juvenile diabetes, or reducing the recidivist rate of ex-cons). If the social organization achieves its objectives, the government saves expenses on these target groups. The savings are quantified and part of them are returned to the social impact bondholders by the government.

This unique financial instrument has five advantages: the investor can make a financial return on his investment; the social organization that is financed by this method will enjoy stable operations over time; the government saves expenses; the financial risk is transferred to the private investor; and the social problem is treated. There is one further, less official, advantage: all the parties do something positive.

What happens if the bond becomes insolvent? "In that case," says Cohen with a smile, "the investment can be considered as a normal philanthropic donation."

The social impact bond method is already operating in the UK, the US, and Australia, and has proven itself.

Politicians are kept outside

During the debate at the round table which Cohen convened, a leading figure in the economy expressed concern that for the proposed social investment to succeed in Israel, it must be wholly autonomous. In other words, politicians must be kept out of the decision-making. On the other hand, such an investment house will not be established without the support of politicians who will have to amend the law for it.

Cohen knows that this is no easy task. He says that in Britain, the government agreed that independence was critical for the project's success, but demanded a business plan. "The government can decide that this issue will transcend politics, that it will be part of policy, but not part of politics. We started the investment house under the Labor government, and when the Conservatives, under David Cameron, were elected, they adopted the policy and decided to position the venture outside the political arena. Can Israel succeed in positioning the venture outside the political arena? I don’t know. My guess is that it is possible."

A guess or a bit more than that? Cohen says that he held a one-on-one meeting with Prime Minister Benjamin Netanyahu to discuss the matter, and that "he understood it completely, and wants it to happen."

"Globes": Does he also agree to the principle of independence?

Cohen: "We spoke about the social impact bonds…"

At this point, Cohen squirmed in his chair and Portland Trust's Social Finance Israel CEO Yaron Neudorfer had to come to his assistance, saying, "It is premature to talk about principles. We'll first bring a working model, and only then will we ask political questions."

"What we do know is that treating social problems is high on the government's agenda. The Prime Minister's Office organized a round table to discuss these issues. We have government support for the social impact bonds, and the fact that Custodian General David Hahn was here indicates that we're being taken seriously."

Cohen is known for his strong support for solving the Israeli-Palestinian conflict, and the Portland Trust, in whose Israeli offices we are sitting, has invested more than $1 billion in building homes in Ramallah and Nablus, and has also supported construction of the new Palestinian city of Rawabi by developer Bashar al-Masri.

Will there be peace with social investment in the settlements?

"As far as I am concerned, whoever wants to invest will make his own moral decisions. Personally, and speaking for the Portland Trust, I believe in the solution of two states for two nations. I won't be involved in the settlements, and I think that our great challenge is not the 300,000 to 400,000 people who live beyond the Green Line, but the seven million people who live within it, a quarter of whom live below the poverty line and many of whom suffer from severe social problems, such as chronic unemployment, dropping out of school, and so forth. Personally, I want to support residents within the Green Line, and through the Portland Trust, Palestinians who reside beyond it."

In August 2011, during the tent protest, Cohen did not hesitate to drop by and identify with the protestors. There was an element of irony in this. One of the symbols of the protest was the price of cottage cheese, and cottage cheese maker Tnuva Food Industries Ltd. is controlled by Apax Partners, which Cohen founded.

"The problem of the cost of living and the extent of competition which can affect prices in Israel are very important during economic hard times. It's possible to see that the rise in the prices of goods was problematic, when people's standard of living is pushed down for various reasons. Although the protestors in Israel at the time focused on the cost of living, there are other open questions. For example, equal sharing of the burden, or whether society is fair, and whether the individual bears a fair burden compared with others.

"The main problems of Israeli society are jobs for certain communities, such as haredim and Arabs, especially Arab women, who suffer from high unemployment. There are also problems of destroyed families and violence. These issues cause discomfort everywhere in the world.

"I am now 67, and my generation mainly feared nuclear war. Today's generation is worried about environmental and social problems, and it thinks that if we don't take care of them, we won't have a democratic society that will survive."

Let's get back to Tnuva for a moment. The feeling at the time, at least in the initial stages, was that Tnuva was indifferent to the protest, that it was late in responding, and that its image suffered severely as a consequence.

"Tnuva may have taken time to respond, but it paid attention, and it seems that the company has succeeded in making corrections, such as reducing the price of cottage cheese. Things appear to be all right now.

"But it is unpleasant for me to comment now about Tnuva. When I left Apax in 2005, I said that I would not look back. And I still want to say that I am very proud that Apax has invested more than $2 billion in Israel and to note that when I founded Apax-Leumi in 1993 there were no venture capital funds in Israel, and no one knew if this would work. I feel that the same thing will happen with social entrepreneurship. Today, no one knows whether this will work here, but one day it will be great and important."

Published by Globes [online], Israel business news - www.globes-online.com - on June 24, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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