Nonprofits Acquire Corporation

This is a guest post from Phil Hayes-St Clair, Chief Executive of HSC & Company, a leading philanthropy and community investment strategy consulting firm based in Australia.

By Phil Hayes-St Clair

Commentary surrounding the impacts and effects of the global financial crisis never included scenarios of nonprofit organizations acquiring for-profit businesses.

However, this is exactly what just happened in Australia. The acquisition of a corporation which focuses on early childhood education by a nonprofit organization.

So What Happened?

The Australian government-led privatization of Australian childcare in the 1990s resulted in company’s building profitable empires of childcare centers. One of these organizations and a key provider of early childhood services, ABC Learning Centers Limited (ABC Learning), was carrying $1.2b worth of debt when it fell victim to the global financial crisis in late 2008.

Private equity professionals quickly identified ABC Learning as a potential acquisition target. So did Australian social visionary Michael Traill. The founder of Social Ventures Australia, a Harvard graduate and former private equity titan, Michael was contacted by entrepreneur Evan Thornley who asked whether converting the ABC Learning business into a ‘for purpose‘ operation would be an option. What ensued was the formation of a unique cross sector, non-profit syndicate called GoodStart Limited.

As Michael explains:

“We recognized this as a once in a generation opportunity to significantly change Australia’s childcare sector for the better. It is now well documented by Australian and International research that effective early learning is vital to positive social outcomes later on in life regardless of family background. The most important period of learning is the first five years of life.”

Apart from the philanthropic potential of the project, the economics made sense. GoodStart’s winning bid – rumored to be around $100m – for 678 ABC Learning centers beat other private equity bids for the $600m annual revenue business.

The funding model included:

National Australia Bank debt package – understood to total in excess of $100m including guarantees,

A $15m loan from the Australian government, and

Investments from individuals and a group of nonprofit organizations, including Mission Australia, Brotherhood of St Laurence, Benevolent Society and Social Ventures Australia. The individuals who contributed included numerous well known philanthropists including Robin Crawford, a founding director of Macquarie Bank, Seek founder and BRW Young Rich-lister Matthew Rockman, and former Microsoft boss Daniel Petre.

Traill notes the contribution of individuals and nonprofit organizations was critical:

“What made this last capital layer so unique was that we structured it to attract these individual investors: subordinated debt with a commercial, albeit below-market, return”.

GoodStart Limited Chairman Robin Crawford later revealed that the philanthropists would be paid a non-guaranteed 12% a year on their unsecured notes (compared with commercial rates of 15% plus) and repaid at the conclusion of the eight year term. The government loan was also to be repaid over 7 years at the government’s cost of finance (then at 6.4%).

Myself, along with our team at HSC & Company believe GoodStart may very well provide Australia, and indeed other nations, with the blueprint for partnership funding that works to deliver social outcomes practically, not just theoretically.

Traill says that GoodStart is important for three main reasons:

It provides evidence that social capital providers represent the emergence of a new financial asset class: The individual philanthropists behind GoodStart are prepared to accept reasonable commercial returns below conventional market rates provided there is clear evidence of social impact. By building and educating this market it has the potential to unlock substantial additional capital. In particular, if social investment can be defined as a legitimate asset class it will attract not just philanthropists but the mainstream Australian pension fund industry.

GoodStart represents a model of collaboration and partnership: Emerging global experience in social investment highlights the need for new models of partnership across the sectors to ensure the blend of business and nonprofit sector skills, capital access, government funding and policy engagement. These collaborative models are essential to build large-scale innovative organizations that can address entrenched social policy issues.

Clarity: GoodStart founding members knew they had to apply the strictest business disciplines to run an operation with a $600m turnover. The success or failure of this social venture will depend on its ability to meet twin goals: to ensure returns to capital providers are met and that the enterprise addresses the issues of community need and disadvantage.

Is there a lack of capital for ventures like this?

GoodStart demonstrates that in fact capital is available. Why? Firstly, a commercial return, albeit below market rate, is available. Secondly, partnering with likeminded individuals and organizations is critical to establish a critical mass. Thirdly, GoodStart asked the federal government for a loan – other ABC Learning bidders did not. Finally, a clear and detailed plan demonstrated how the GoodStart syndicate would turn a previously profitable empire into a sustainable, non-profit, social-impacting business.