Welcome to Soundbites, the Heron podcast. This is Deirdre Hess with Heron.org, and I am here today with Shamez Alibhai of Cheyne Capital from the UK. Hi, Shamez. Thanks for joining us.
Hey Deirdre. Thank you very much for having me.
Before we get into Cheyne Capital and the social impact fund that you have going on there, would you like to tell me a little bit about yourself and what got you into the space?
I’ve been in financial services and investment management now for about 10 years at Cheyne Capital and prior to that I’ve always been interested with the idea of how can capital be more responsible? We had a great business at Cheyne doing traditional real estate investments. That business grew from 25 million dollars to 2 billion. It was a great track record, but I wanted to really see if we could explore this idea of making socially responsible real estate investments.
I approached the founders of the firm after being at the firm for about 7 years and we had reached a good point in the main real estate fund and I said, “I’d like to try something completely different. Would you support me on this?” I was expecting a much different outcome; I had my bags packed by the door, but the founders of the firm were hugely supportive of this idea of being able to create a dedicated fund that is impact focused, that invests in socially responsible real estate in the UK.
What do you think led them to be so enthusiastic against your expectations?
There is sometimes a prejudice that in people in finance aren’t interested in doing things that are socially responsible. Perhaps that was a prejudice that I had generally. It turns that if you can demonstrate a good investment thesis for investment professionals, and at the same time you can demonstrate a socially responsible outcome, people find that very compelling. That’s something they want to get behind. I think that’s what the founders of the firm saw, the opportunity to make attractive, scalable investments for investors, but at the same time achieve something very unique which is the socially responsible outcomes in real estate space.
It seems like the UK offers a unique situation. Can you give us a bit of background about what that situation is and what that opportunity is?
Sure. If you look at the area of low-income housing in the UK, it is an area which was historically funded by government or promoted by central government, and that’s a phenomenon that existed effectively after the Second World War.
That all changed in 2012. Coming out of the financial crisis this ability of governments to give away money—i.e. zero percent interest, perpetual—was no longer tenable. In 2012 you had a substantial change in the grant program in the UK for low-income housing. It fell by 80 percent.
You had a situation where, with that announcement of this substantial retrenchment of government involvement, government went from explicitly crowding out the private sector to one in which they were encouraging the private sector and private market solutions to develop low-income housing.
So that private capital, as I understand it, partners with social service organizations and nonprofits and still in some part there’s still some government money involved. Is that correct?
We’ve done an investment approach where we wanted to make sure that we were an impact fund. We felt that it was very important that if you were investing in social property you had to maintain, within the structure of the fund itself, a socially responsible outcome. We’ve done that in a number of different ways.
The first is, as you said, we work with social sector organizations. They’re the ones closest to the ground; they’re the ones that understand the needs of their community or their constituents. In terms of our role with government we actually work with government bodies, but we don’t rely on government grant or government subsidy to achieve our returns. We want to be able to demonstrate that you can make these financial returns without any form of subsidy from central government and that these stand alone as real estate investments in their own right.
How does it work? How do the partnerships work? How do you end up investing in housing or properties that serve low-income people or high need populations?
We will go out and we will approach social sector organizations, so it could be local councils who are looking for low-income housing in their community or perhaps assisted living for the elderly. Once we have this organization we try to figure out, what type of property do they need? Do they need us to build it? Do they need us to buy it? Etcetera. And we’ll work with them side by side to develop what they need. So we put up the capital, and then we will lease that property to that social sector organization on a long-term socially responsible lease.
They’re going to be taking these properties and renting them out to individuals. Those individuals will have their sources of income, so if it’s low-income housing it would be an individual who has a low-paying job and they can afford housing, but they just can’t afford open market rent.
Why do you feel that this important to do it as an impact investor?
There is sometimes a prejudice that in people in finance aren’t interested in doing things that are socially responsible... It turns that if you can demonstrate a good investment thesis for investment professionals, and at the same time you can demonstrate a socially responsible outcome, people find that very compelling.Discuss
There’s a checkered history of real estate being involved in low-income housing, where that housing has been re-profiled, re-positioned to effectively improve the return of investors. We wanted to have a different approach; we wanted to make sure those pressures, those external pressures to increase rents above what is affordable or to re-profile assets—i.e. move people of low-income out and bring in people of higher income—that we wouldn’t be exposed to those pressures. So we made sure that we had the governance structures in place to prevent that from happening.
But also it’s a huge competitive advantage when dealing with local councils, when dealing with housing associations, to be able to sincerely say you have a vested interest in the people that they’re trying to help. That is a huge advantage.
That’s fantastic. Looking toward the future, what do you envision for your work and for your sector more broadly?
I think in the first instance I’d like to see more real estate impact funds in the space.
So you want more competition?
I want more competition. The problems are huge. By our estimates we think there’s about 100 billion pounds of investment that's required in the UK alone. Those are big numbers and while I think I’d like to run a 100 billion pound fund, I think there is room for others, for me to share that pie. So I think that would be a great outcome, to see more impact-related funds. We are starting to see some traditional real estate funds get involved in social property in the UK. But they haven’t really had an impact focus, and I think I’d like to see that change.
Do you have any favorite stories from facilities or organizations that you’ve invested with?
One of the investments that I think has been transformational at various levels has been our investment with a group that we call Thera. Thera is a not-for-profit organization that helps people with acute learning disability. So these are adults who need 24/7 care in many instances, and the historical model for those types of individuals would have been to put them in a mental hospital.
Thera has always, since its founding, been promoting this idea that people with acute learning disability have the right to dignity, they have the right to independence, and they have the right to be in control of their own care and outcomes. So when we found Thera they were a really incredible organization, very well run financially. As dedicated to making sure that their organization maximizes every dollar that they have of income, in terms of delivering outcomes, but also remaining very true to that idea that people with acute learning disability deserve all those things that I mentioned: dignity, independence, control.
What we’re done with Thera is we buy homes and then we lease them to Thera so people with acute learning disability can live in those homes. So it becomes a very domiciliary care model. So you have a three bedroom house, two people with acute learning disability living in it and a one bedroom being used for the care staff. The financial outcomes are incredible because you save the system so much money, because you don’t have to worry about depression, obesity, diabetes, because these individuals live fulfilled lives. They live satisfying lives. They go to rock concerts. They go to football matches. They do all the things that you and I do, but just they need a little bit of help doing it and Thera are incredible in delivering that care. They really are the heroes in the story.
With our investment in Thera, for the first time we’ve allowed Thera to compete with private equity organizations. I think that’s been the most exciting bit, to see social sector organizations, well run, efficient, not-for-profit organizations competing with private equity and winning. Organizations like Thera, they pay bottom of the top quartile, so they pay a living wage to their staff. They’re well remunerated and you have very limited staff turnover. You have less staff sicknesses. You have more training for staff. And all of these things contribute, in our view, to better care for individuals.
Thank you so much for joining us.
It’s been an absolute pleasure.
With Heron.org, this is Deirdre Hess, signing off.