To harness a fraction of the $2 trillion currently managed by Canada's institutional investors, we need two things. We need more capital providers that invest in order to make a social contribution in addition to market or below-market rates of financial return. We also need more intermediaries capable of delivering the different blends of value that these investors are after.
Currently a promising number of intermediaries are active in the Canadian community investment market. To improve their performance, four structural issues must be addressed.
First, most institutional investors do not want to become experts in community development. They seek qualified intermediaries who can sell them standard financial products (fixed income products like GICs, term deposits, or equity instruments such as debentures and share offerings) that meet their fiduciary duty and their asset allocations.
Second, these intermediaries must be able to stand behind their products either through a demonstrable expertise in the field or through an implicit or explicit guarantee or credit enhancement on the investment. Third, these opportunities must be at a scale large enough to justify the time and resources that institutional investors must devote to the necessary due diligence (at least $50 million). Finally, these intermediaries must insulate the investors from the potential risk associated with failed investments.
Without such intermediaries, social finance will remain a nascent force without the capacity to grow beyond a set of niche players.