A Different Kind of Profit

Daniel Madhavan was a mover and shaker in the private sector before turning his attention to one of the fastest growing issues in the Not for Profit sector, impact investing. Madhavan is this week’s Changemaker.

Before becoming CEO of Impact Investing Australia, Madhavan held a range of high-profile roles with private wealth management firm JBWere, including Acting CEO.

He admits that he initially never even saw himself working in the Not for Profit sector before taking on his role at Impact Investing Australia.

But Madhavan is now one of the main advocates for social finance, and it is his job to get two vastly different sectors, the private and the social sectors, on the same page.

In this week’s Changemaker column he tells Pro Bono Australia News what inspires him, and perhaps more importantly, what makes him angry.

What was it that drew you to the Not for Profit sector?

I’d done quite a bit of work in the space before. I’d been at JBWere for 12 years. I started there as a graduate fresh out of university working in the call centre.

I ended up doing a whole bunch of stuff there, I was an advisor for a while, I ran a small broking business, I ended up running New South Wales, I was then COO and Acting CEO for the eight months that I was there.

So during that time, because JBWere always had a long heritage of working with Not for Profit organisations, in particular around managing their investments, I had a lot of exposure through my job and also through my parents, particularly my mum, who I think volunteers for everything she can. She’s got a heart of gold, my mum. Every time she bumps into someone she feels for, she’ll end up volunteering for something that she probably doesn’t have the time to do.

So my mum’s very active in the local community where I grew up in Pakenham and I guess those two things combined – my parents involvement in the community and the exposure I had to the Not for Profit sector at JBWere – gave me quite a bit of interest in the space.

What was the first role you took on in the Not for Profit sector?

When I left JBWere I took a few months off. I wasn’t planning on working in the Not for Profit space. My plan was to go and work in the private sector, probably at another investment bank or with a private equity fund. I can assure you I did not plan to run a Not for Profit, let alone a startup Not for Profit as my next role.

My plan was to take a couple of months off and then start looking for a new role, which I thought would probably take me six months, and in the interim I wanted to do some work for Not for Profit organisations. I just wanted to help out a few organisations that I really liked.

I started to do some work for the Foundation for Young Australians. I was advising a couple of other small international development organisations and a couple of other small medical research foundations. Then I happened to kind of end up working at the Foundation for Young Australians three days a week and that led me on this path into the Not for Profit sector.

I really got inspired by some of the young social entrepreneurs I came across. Everywhere I went I was running into these young people who were doing amazing things and they really got me to question what I thought was important.

Will Richardson of the Impact Investment Group talks about it being the life of two halves. The first half of your life you make all of your money and the second half you spend giving it all away. I probably had that view of life as well but then I was coming across all these young people who just don’t have that view of the world. They want to make a living but they want to do something meaningful that adds purpose and adds value to their community and society at large whilst they’re doing it.

Explain why impact investing is important to someone who doesn’t know much about it.

There are two different narratives here. Investment by its very nature involves two parties, there’s someone who needs capital and there’s someone who has money that they’re willing to invest as capital.

The most powerful thing about impact investing at the moment is that those two stories are lining up.

On the story of a mission driven organisation, whether that be a social enterprise or a Not for Profit, traditionally the social services that we all expect and the social change that we would like to see, traditionally that has been funded by Government and philanthropy.

I think even though both of us have been in this game for a relatively short period of time, it’s pretty obvious that the demand for funding is far outstripping the supply of funding from those two sources, and that gap is growing wider.

So it forces us into a pretty difficult set of decisions. We either defund those things, so start cutting services that we believe should be there or start defunding change that we would like to see. That would be a pretty bad outcome.

We either increase the supply of funding, which practically means increasing taxes because philanthropy can’t carry the whole burden, and most people you ask would probably say that is a pretty bad outcome and most Governments don’t have a lot of appetite for that.

And then there’s a third option, really the only other option, we can look around at other pools of money and use that money. That’s where impact investing comes in. From a mission driven organisation perspective, how could you potentially use private capital to fund parts of your mission?

And I say parts because it’s not going to be relevant for everything, it’s not the answer for everything and it’s not going to fund everything. It’s one tool that can be used as an addition to Government funding and philanthropy. We’re not arguing that those two things should disappear, what we’re saying is that there may be instances where you can use private capital instead of or on top of Government funding or philanthropy.

Would you still consider impact investing in its infancy or is it coming of age?

It’s still in its infancy. It’s a three hour movie and we’re 10 minutes in.

A lot of people ask, “how big is it going to be?” And all I can do is guess. I’m watching the same movie you are and I don’t have those answers yet. All I can do is tell you what we’ve seen in the first 10 minutes and how the story is starting to shape up.

There is a lot of willingness to want to do this and the other side of that narrative is the investor side. There’s a whole generation of millennials who don’t think about the world as making money over there and doing good over there. They don’t have those hard lines that they separate things with. That generation is going to inherit all of the wealth that has been accumulated since World War II in this country and beyond and they are going to want to think about how they use that capital in a very different way to the way that generations previously did.

What are doing in your role to try and drive greater participation and greater interest in impact investing?

A lot of it is about raising awareness, and that goes for both sides.

If you’re a mission driven organisation, if you’re a social enterprise or a Not for Profit, why would you want to use private capital? In what circumstances would that be useful to you? So helping people to understand that is really important.

Often a lot of Not for Profits need access to an asset to be able to deliver their mission. If you’re providing housing for a group of disadvantaged people you need access to a house. You’re mission is to house those people but you don’t need to own the house. If someone else bought the house, ie someone else invested in the asset, and they gave you access to that asset, then you would be able to complete your mission, and you could do it without ever owning the house.

There’s plenty of examples. The Australian Chamber Orchestra is a great example, their mission is to deliver beautiful music and to expose people to that music. Do they need to own a Stradivarius violin? No they don’t need to own it but gee they would love to have access to one so that people could hear the music that comes from it. So they did exactly that. They raised the funds, investors invested in them and the investors own the Stradivarius but the orchestra gets to create music with it.

If you’re supplying housing to disadvantaged people do you want to tie your money up in owning a property or do you want to use the money that you could have used to buy the property to actually deliver your mission?

How do the views on impact investing differ from the private sector and the Not for Profit sector?

On both sides there is still a relatively low level of awareness. I think on both sides people may have heard the term or have a basic understanding of what it is but there is not a high level of awareness of how is this relevant to me.

It’s ok for people to say “it’s not relevant to me” but I don’t often people have enough of an understanding of impact investing to make that decision. It’s not an informed decision in this point in time for most people.

There is still some bridging that needs to happen between both the corporate side vs the mission driven side.

I call it the French Dutch Conundrum. It’s like the two flags of those countries. If you remember the flags, the stripes are the same colours just one is horizontal and one is vertical. It’s kind of like that concept. We’re both saying the same things but not really. Often from the corporate side people are saying “I want to do some good” but they’re looking at it from much more of a business perspective. On the other side, the social side is saying “I want to deliver my mission but I understand I need to fund that somehow”.

We need to be careful that neither side tries to impose its own view onto the other side because that just won’t work. We need to find the commonalities between the two sides where people are on the same page.

How do you assess the potential for impact investing to change the way social programs are funded in Australia?

I think it happens on a few different levels. I don’t think it should set out to change the way that programs are delivered. We’re looking at it from the wrong starting point if we look at it from that way. What I mean by that is financing and funding is a means to an end, it’s not the end itself.

Ideally we should start from the point of having a social issue or a service that we want to provide and there are many different options of how we fund that. For many of them, Government funding or philanthropy will be the right way of funding them, but for others private investing will be the right tool to use. That investment itself is not the end we’re aiming for, the investment is the vehicle we can use to get us to the end to drive the change that we want to see.

On a personal note, how are you enjoying the role?

It’s great. Despite the fact that it might be what I thought it would be, it feels differently when I’m in it.

It’s really intense. The mechanics of it I sort of anticipated but the intensity was something I wasn’t expecting.

Running a Not for Profit was something that wasn’t on my list of things to do next, running a startup wasn’t on my list of things to do next and I ended up running a startup Not for Profit.

There’s been some serious challenges. You take for granted the resources you have when you’re in a large organisation. It’s not just money, it’s people, it’s expertise, it’s all of those things that you just take for granted.

I’m having to be the CEO and the printer mechanic at the same time.

What inspires you to get up in the morning and keep working on all these issues?

It’s probably two things. There’s things that inspire me and then there’s stuff that makes me angry and I want to change it. They kind of both give me energy.

I hope that I’m not an angry young man and that I don’t do too many things out of anger but there’s tonnes of stuff that just makes me angry and I’d like to see it change.

The things that inspire me are when people do something that goes beyond their self interest. It’s either when they’re going beyond their self interest and doing something that’s in the best interest of everyone or others, or where people have been able to stretch themselves and get a result that maybe they themselves couldn’t have seen at the outset.

Particularly working with young people where you watch them grow from a place where they’re doing something that six months, six weeks or six days ago they couldn’t have imagined they were capable of. I find that really inspiring.

So what kind of things make you angry?

I think there’s just some really wicked problems that we’ve been trying to solve for a really long time and it makes me angry that we haven’t solved them yet. We seem to be trying to deal with the same issues for a long time.

I’m not suggesting that anyone hasn’t done their job but it just makes you mad that we haven’t cracked some of these issues yet.

From a personal experience, I went to a state school in Pakenham and amongst my five best mates in the world there was a lot of problems with drug addiction, family violence and depression. There was some pretty heavy things happening in my friendship group and some of those social issues are just things that it makes me angry that young people have to go through.

It makes me angry that a lot of luck comes into it. When I look at my own career there is a lot of luck involved. There are friends of mine that I went to school with that I would think are just as smart as me, just as capable as me and just as able as me but maybe they didn’t come from the same stable family environment or maybe there were just little things that went in my favour that didn’t go in theirs and that does make me sad and angry at times.