Securitization Examples for Social Entrepreneurship

lately i've been thinking more about this post on securitizing individual, small business, & natural resources i put together a few years ago on alternative securitization models & capital markets for "missing" asset classes such as natural resources, small business, and individuals. it keeps pounding & growing inside my head, like an unborn child -- my Athena, if you'll grant me the inherent arrogance there ;)

the concepts have come up in thinking about "alternative" financial markets such as microfinance & microequity, and related social entrepreneurship efforts -- and again more recently in trying to come up with a solution framework for global issues like the recent tsunami disaster, warfare in the middle east and africa, and the AIDS crisis and other disease / health issues.

once you create these alternative capital markets & asset classes, big problems suddenly become very easy to solve.  in fact, done properly securitization will make it impossible to avoid solving them.

one "big picture" example i like to use is this:
1) securitize the aggregated future revenue of a large group of individuals in Africa (or elsewhere)
2) convince a large pharmaceutical company to take an investment position in this new security
3) get the pharma company to "give away" AIDS treatment / prevention drugs to those individuals
-- which in turn will --
4) generate "upside" on their investment by extending lifespan / improving health / increasing future potential revenue of the individuals who receive these drugs
5) move to next adjacent market, rinse & repeat.

get it?

if you understand how that works, then you should be able to make the subsequent leap to see how this type of alternative equity swap can be executed in a wide variety of scenarios to create financial incentive structures that improve the overall benefit of society. securitize the ocean to clean up the water, securitize education futures to provide pre-school funding for developing economies, securitize biodiversity benefits to help preserve endangered species, etc, etc.

however, getting the ball rolling initially by creating these markets appears quite challenging, and could require a process that takes several decades, significant change in political and legal frameworks, and hundreds of millions if not billions of dollars to get off the ground. not a simple venture by any means... but certainly one worth trying to figure out.

that said, i'm not sure i've made much progress in moving these ideas forward further, other than to refine the concept a bit here & there in my head -- and to perhaps fuzzily incorporate some additional ideas from the fields of mortgage finance, junk bonds, and derivatives. i've evangelized to a few friends, but i still feel i haven't quite sprung Athena from my forehead any more than that initial post from almost 3 years ago.  i'm thinking a lot about next steps, but i'm also open to suggestion.

in the meantime there definitely seems to be a tipping point that has occurred in both microfinance & social entrepreneurship (see the Skoll Foundation's Social Edge and the Omidyar Network online for further discussions & links) in the past year.  the groundswell was certainly apparent at the WRI conference on Eradicating Poverty Through Profit held in San Francisco this past December.   i think as more events like that happen and microfinance matures as a field, there will be more fertile territory for new market-based efforts.

and maybe just posting on this blog is a tiny step in the right direction...

Comments

[Dave]

sort of, but not really.

credit cards are debt, not equity instruments. while they may securitize some aspects of small biz & individuals, they don't provide a general framework for long-term future economic performance. also, they don't typically work for aggregate structures.

as to natural resources, i'm not familiar with any significant securitization framework for them as yet... altho the Kyoto protocol and various carbon trading scenarios are attempted proxies.

if others are more familiar with any alternative sources for this info, please provide links.

[w]

Securitization for natural resources, small businesses, and individuals (vis a vis credit cards) have already been done synthetically and in a cash flow structure.

[Dave McClure]

well it would be grand if i had this all worked out already, but in fact figuring it out is kind of the whole point of writing this stuff. that said, there are numerous examples of other alternative forms of securitization for equities, bonds, real estate, and more recently derivatives of these.

if you're looking for basic definitions and explanations, check the Wikipedia definition of securitization.

re: environmental commons -- yes, a required first step would likely be to define ownership rights for ocean resources. whether it becomse 'private' property is a more involved discussion, however i'm simply outlining the theory here. securitization typically requires an owner, albeit it could be on behalf of a group or gov't.

re: securitization for people and/or small biz -- this doesn't have to occur at the individual level, although that's perhaps possible. broadly speaking, the securitization would be based on some form of financial asset and/or future revenue stream. one possibility could be retainer on a % of future earnings (see www.myrichuncle.com), or based on a secured interest in real estate or other assets (not unlike a home loan). most likely however, the securitized asset would be against a group, and an actual dividend or revenue stream might not be required (for example, many equities don't have a dividend, although some do).

and the "if this made sense wouldn't people already be doing it" straw-man is a bit short-sighted. most of modern fnancial securitization efforts have occurred only in the last 30-100 years, and the industry is still just getting started. there is plenty of room for further innovation. the venture capital industry is perhaps only 30-40 years old, and modern derivatives are only 20-25 years old. just because it hasn't happened yet doesn't mean it can't be done or doesn't make sense.

[Mike]

I wandered into this post last night while researching a paper. I'm glad to see creative thinking on the subject of reducing poverty and disease, but I think you need to give some examples and explain what you mean by securitization.

For the environmental "commons" you mentioned like the ocean: Is this making the ocean private property as some environmentalists have suggested?

If this is extended to people, what does the corporation or investor get in return? Future profits from the individuals? How is this not indentured servitude or slavery? Obviously this is not what you mean, but your concept confuses me.

If it is just a future pool of consumers, the investment timeframe is too long and direct payoff is too uncertain for the corporations you want to invest in these people or the corporations would already be doing this. No?

I just wanted to comment because I was trying to figure out the idea and haven't been quite able to grasp it.