Make an investment impact with a mutual capital instrument

An innovative new ASX trading instruments allows retail investors a rare chance to explore impact investing ... but there are risks.

The Australian Unity MCI has appeal for investors who want a higher than bank hybrid security dividend and also want to invest into a structure that will use part of the funds for projects with ­social benefits.

Making up to 7.5 per cent return on a bond-like investment and at the same time doing something good for society sounds like a good deal.

Changes to laws affecting mutual organisations passed in 2019 now allow them to raise capital via long-term ASX listed equity instruments called Mutual Capital Instruments (MCIs).

We are now seeing the first ­offering come to market with ­support from Social Ventures Australia and a cornerstone investment from industry fund HESTA. The breakthrough here is the investment is open to retail investors, a rare event in the impact investment space.

In the past, mutual organisations such as Australian Unity have been forced to primarily borrow money from banks and issue bonds to raise debt funds which restricts their ability to grow.

But the new ASX-traded MCIs are a way to raise money via an equity instrument, with no maturity date, a fixed-rate non-cumulative discretionary dividend.

Although it is classified as a type of share, the MCI also has bond-like characteristics creating something of a hybrid.

Being an equity investment, in the event Australian Unity experiences financial difficulty and had to wind-up, the MCI ranks very low in the capital structure. Another issue with the MCI is that it is a “discretionary” half yearly dividend to be paid to investors.

Reading the fine print, although many factors are taken into consideration when deciding whether to pay the dividend.

One possible situation is where Australian Unity operates at a loss and decides not to pay the MCI holders a dividend to protect member reserves. And being non-cumulative, Australian Unity can clean the slate and forget about the payment, not having to make it up with a double dividend payment at a later date.

As such, it is possible Australian Unity may incur a loss in the future and the directors decide no MCI dividend payable possible.

Of course, as a “first” in the market, no doubt all stakeholders will be trying to make sure the new venture is public success. In terms of the dividend, it will be set at 5-5.25 per cent plus franking credits based on the book build, which is twice as good as some bank hybrids and about the same level as QANTAS.

Impact investing – which actively seeks to improve situations in contrast to ethical investing which largely aims to exclude certain asset classes – is growing with investment more than tripling over the past two years from $5.7bn to $19.9bn, according to a June 2020 study by the Responsible Investment Association Australasia (RIAA) and Deakin University Business School.

Retail social impact investment products are rare, which is why Australian Unity’s MCI (which will be listed on the ASX) is a unique opportunity for retail investors who will be able to access it directly. For institutional investors, family offices and high net worth investors, social impact investing can be done directly through investment in unlisted assets or via social impact funds.

There are a number of social impact funds available that ­provide investors with the ability to achieve financial returns across a diverse range of social impact areas. For example, SVA also manages the Diversified Impact Fund (DIF), a range of SIBs and the Synergis Fund.

These products invest in projects and organisations that deliver new disability housing in the case of Synergis and employment, housing and improved mental health outcomes.

The Australian Unity MCI has appeal for investors who want a higher than bank hybrid security dividend and also want to invest into a structure that will use part of the funds for projects with ­social benefits. Although for the purist investor, the discretionary, non-cumulative dividend and perpetual nature of the investment with no set maturity date may be a turn-off for some.

James Gerrard is principal and director of Sydney financial planning firm financialadvisor.com.au