Sir Ronald Cohen: capitalism has its consequences
The man who started the private equity industry 40 years ago, is plotting to harness entrepreneurship to act as an agent for social change.
In 1969, a 24-year-old Ronnie Cohen graduated from Harvard Business School and looked at the opportunities for a young, ambitious alumnus of the world's most prestigious commercial faculty.
After three years as a management consultant, Cohen hit on his big idea in the then nascent world of private equity. Along with some friends from Harvard, he launched Apax Partners, which grew to become Britain's largest venture capital and private equity firm and earned the title of the "father" of the industry.
Forty-one years after his graduation, the knighted Sir Ronald Cohen, one of the most politically-connected financiers in the UK, with a fortune of £200m, has been back to Harvard and a clutch of other top universities to tell the students about the next big thing in the business world – social finance.
"If I had been leaving Harvard in 2010, this would be the area I would want to be going into," says Sir Ronald, sitting in a meeting room at the offices of Social Finanace, the social investment bank he co-founded.
Sir Ronald hopes to sell the concept with the same success that helped him pioneer private equity investment in the UK, helping create an industry that today owns and runs some of the country's largest companies, ranging from directory services (Yell) to amusement parks (Merlin) to chemists (Boots) and coffee shops (Pret a Manger).
"Private equity arose because professional private equity firms came into existence and began to get institutional investors to invest in venture funds," says Sir Ronald.
"We want to do the same thing for social entrepreneurship. We want to connect the capital markets to the social sector.
"I think it is going to be similarly powerful because the impact of the recent crisis on peoples consciousness has emphasised the importance of dealing with the social consequences of the [capitalist] system."
Sir Ronald is fervent in his belief that this is more than just the latest business fad, but a crunch-point moment for the entire Western market-based system.
"It is not enough to increase the standard of living at the high end. It is right at the same time to worry about those who are left behind," he says.
"I think societies everywhere will come to the conclusion that an important part of the capitalist system is having a powerful social sector to address social issues, because government doesn't have the resources."
His thoughts chime with those of many finance industry leaders who have called for industry to take greater note of its social responsibilities.
Stephen Green, chairman of HSBC and a lay minister, has spoken frequently of the need for social values and many of Sir Ronald's pronouncements are similar to those of Mr Green.
As a high-profile supporter of the Labour Party, Sir Ronald has given millions of pounds to the party in recent years, but he is loathe to discuss last week's emergency Budget in which the coalition Government announced £11bn of welfare cuts.
It is clear, though, that these are precisely the times in which Sir Ronald's new form of benevolent and engaged capitalism can take some of the load off the state sector.
"Part of the problem in terms of the scale of social issues is financing, so we applied our expertise in the financial world as well as our expertise in the social sector with the same intensity as David [Hutchison, chief executive of Social Finance] did at Kleinwort Benson and I did at Apax. From that process came the social impact bond," says Sir Ronald.
"The social impact bond is a very clever financial instrument to fund social activity directly and to derive a return from social impact. Government has no money to invest in preventive measures to prevent young offenders from reoffending. The social impact bond raises that money from charitable trusts and wealthy individuals."
There is cross-party support for Sir Ronald's bond, with the Treasury Select Committee giving its backing to Social Finance, while Prisons Minister, Nick Herbert last wek singled out the organisation for praise in a speech to the Policy Exchange.
Speaking of a "rehabilitation revolution", Mr Herbert outlined how Sir Ronald and Social Finance's ideas were at the heart of Government reforms to the way prisoners are dealt with on release.
"Now we have the opportunity, through rigorous payment by results mechanisms, to capture the savings to the criminal justice system by preventing reoffending, make effective rehabilitation services a reality, and cut crime," said Mr Herbert.
"Government is not particularly well-placed to run organisations that are entrepreneurial and that brings new approaches," says Sir Ronald.
At HMP Peterborough, Social Finance will in August face its first test. Offender support organisations, funded by the company, will attempt to cut a reoffending rate of over xxpc to below 70pc. If they are successful, investors in the scheme through a Social Finance bond holding will receive a return.
Taking on a group of about 500 prisoners in its first year, the aim is to help them avoid returning to a life of crime. Investors in the project could earn a return worth as much as £8m over the life of the scheme, based on an estimated saving to the state of about £24m.
"You are reducing the reoffending rate and getting paid out for doing that," said Sir Ronald. "That is a major innovation, but it is not a private-sector solution, it is a social-sector solution."
Sir Ronald is adamant that what he is attempting should not be confused with previous privatisation schemes.
"It is not a privatisation because it isn't being shifted to the private sector," he says. "It is a socialisation, but maybe we don't want to use a word like that. It is moving to an entrepreneurial approach to deal with these issues, just as with business entrepreneurship we changed the mindset over a period of time."
Social Finance's chief executive David Hutchison interjects at this point:
"What government is increasingly having to do is focus its budget on the consequences of interventions not being there," he says.
"If we are successful, then government will have to spend less on acute services. They're spending on different parts of the chain."
Mr Hutchison is a good example of the type of person Sir Ronald thinks Social Finance and other social enterprises will attract. Until 2009, he had a highly-lucrative job as the head of UK investment banking at a major firm.
"Some of the most talented people are being drawn to it," says Sir Ronald. "We are appealing to peoples' sense of social obligation and of social mission.
"We want to preserve a decent society. We're going to see an entrepreneurial wave in the social sector now. People who have been highly-trained to manage organisations that are growing fast applying their skills to dealing with social issues."
About a fifth of recent Harvard Business School graduates have been drawn to social enterprise type organisations, according to Sir Ronald. Sceptics might counter that some of this is because there are fewer well- paid jobs in the mainstream financial industry.
Only a fool, though, would bet against a man who foresaw one of the biggest shifts in finance of the last century – and who is saying that social finance is equally significant.