When Michael Traill, investment banker turned social entrepreneur, went touting for funds to make a bid for the collapsed childcare group ABC Learning 10 years ago, more than one person told him it was a flight of fancy.
Why would hard-headed investors put their money into a venture based on the assumption, as Traill recounts it, that "a bunch of do-gooder non-profits could run a very large-scale business and do social good". Traill surprised the doubters: the money from charities, private investors, banks and government that he helped bring together into a winning bid created a highly successful social enterprise called Goodstart.
The new company paid $95 million for a stripped-down version of ABC Learning, which at its peak had more than 1000 centres, and raised another $70 million to fund its ongoing operations. A non-profit outbidding private rivals was one surprise. Another has been the success of combining an unsentimental business approach with a soft heart.
Today Goodstart is the largest provider of childcare and early learning in Australia, with 665 centres catering for 75,600 children and employing 16,700 people. In 2018-19, its revenue grew by 8.2 per cent to $1.1 billion. The surpluses it earns as a not-for-profit are invested in raising the quality of early learning and supporting centres in disadvantaged areas.
That's not to say everyone is happy. Particularly in the earlier years, staff complained about cost cutting, minimum staffing levels and having to pay for needed resources out of their own pocket. More recently, an employee posted a comment that "a lot is expected to be done out of goodwill" and another that staff were "not being recognised and rewarded for their hard work". But Goodstart argues it has been steadily improving its performance.
According to John Cherry, the company's advocacy manager (and a former Australian Democrats senator), the number of Goodstart centres meeting the national quality standard - which measures such things as staff-to-child ratios and staff qualifications and is administered by state and territory governments - has grown from about half in 2012 to 93 per cent. It's now higher than the average among preschools, which have been regarded as the high-quality end of the early learning sector. Fee increases have been below average for the past four years, in contrast to those of ABC Learning, which were above average.
Cherry says Goodstart pays above award wages, has spent about $100 million on professional development and has increased the number of teachers it employs by about 300, bringing the total to 1300. Its social inclusion budget - which helps disadvantaged children get access to early learning - has risen from $1.5 million to $12 million in the past four years, though arguably this is still a modest amount in proportion to its revenue. Goodstart's policy is not to turn any child away, and it provides speech therapists, occupational therapists, psychologists and other support.
What would Goodstart be worth now? "You would probably list it for over $1 billion if you wanted to run it more commercially," Traill, who chairs the company, says.
As part of the original deal, three charities - Mission Australia, the Benevolent Society and the Brotherhood of St Laurence - each put in $2.5 million, an investment that returned them 12 per cent a year, as well as another 15 per cent in the form of a dividend based on the success of the business. Another $22.5 million was raised from 41 investors, who put in amounts ranging from $100,000 to $3 million and also earned 12 per cent a year, with the money repaid after seven years. The National Australia Bank lent $50 million and the federal government a further $15 million - debts that have also been repaid.
Traill is driven partly by his upbringing in Morwell, a disadvantaged town in country Victoria, where he witnessed bright kids missing out on the opportunities that his own parents were able to give him. He went to Melbourne University and then to Harvard for an MBA, before joining Macquarie Bank, where he spent 14 years during the 1980s and 1990s. He was co-founder and executive director of the bank's private equity arm, Macquarie Direct Investment, which boasted a gross rate of return of 32.3 per cent.
Deciding there was more to life than getting rich at the millionaires' factory, he left in 2002 to start Social Ventures Australia. A not-for-profit, it has supported more than 50 projects that deliver social as well as financial returns, and has a busy consulting arm.
Achieving a return on investment in its broadest sense remains central to Traill's thinking.
"We know that waiting until a child begins formal schooling is the least effective intervention if a child's development is falling behind their peers, both for the individual and from a return on investment point of view," he wrote in an introduction to the Goodstart's 2018 annual report. "If as a nation we begin to place an emphasis on early learning - as nations as diverse as Finland, China and New Zealand are already doing - we will reap the rewards for this and the following generations."
A wealth of evidence attests to the ability of children to soak up learning in the first five years of life. A report to federal and state governments in 2017 argued that children who received high-quality early education were more likely to complete year 12 and less likely to repeat grades or require additional support.
A recent PwC study that attempts to quantify the returns on investment in early childhood education calculates that every $1 spent produces about $2 in benefits, taking into account factors such as children's higher future earnings, extra income for parents and carers from additional work, higher government revenue from taxation, lower welfare and healthcare costs, and reduced criminal activity.
"I think we are regarded as a bit of a global exemplar," Traill says. "My hope has always been that Goodstart becomes a precedent, and not just in early learning."
He sees its application in areas such as aged care, further education, and social and affordable housing - areas where there is scope for the superannuation sector in particular to invest in low-risk, long-term ventures with many of the same characteristics as infrastructure projects.
One of Traill's other hats is as chair of the investment committee of Sunsuper, an industry superannuation fund that has put $200 million into an investment trust for aged-care housing - money it says is a good property investment that also delivers social benefits. The HESTA industry super fund has a $70 million social impact investment trust managed by Social Ventures Australia and recently allocated $20 million to a Melbourne apartment project to provide affordable housing.
Traill is exploring further opportunities in aged care, where he sees many similarities with early childhood education. The hearings of the royal commission into aged care, certainly, are reinforcing the need for high-quality, ethical care, as are the financial difficulties the sector is facing. Traill argues that returns in the order of the 12 per cent achieved for Goodstart investors should be attractive, particularly in the present circumstances of a low-growth economy, and that it would be a comfortable level of risk for a well-run company.
He adds that as a board member of Sunsuper he has a legally enforceable responsibility to maximise the return to fund members. "If these businesses are run ethically there is no reason they should not be able to generate a long-term rate of return." He also sees potential in the further education sector, where private colleges "have lost sight of the quality agenda".
Traill says there is no need for stratospheric executive salaries, with Goodstart showing that a business can achieve a depth and balance of skills without having to pay "nosebleed" packages. "People are paid well by non-profit standards, but nothing like the seven-figure bonuses people of comparable talent would be getting in the private sector."
Of course, aged care is not the only sector that has suffered reputational damage. There are the banks. And there's business more generally, in the wake of a global financial crisis that has led to a debate about the very future of capitalism.
One of Traill's lecturers at Harvard, Michael Porter, has argued, "We need a more sophisticated form of capitalism, one imbued with a social purpose.
"But that purpose should arise not out of charity but out of a deeper understanding of competition and economic value creation ... It is not philanthropy, but self-interested behaviour to create economic value by creating social value."
This not only challenges the traditional obligation of the corporation to act solely in the best interest of shareholders but greatly expands notions of corporate social responsibility. Traill says consumers, particularly young people, are increasingly insisting that businesses behave honestly and transparently.
And then there is government. Why is it, Traill asked in a speech five years ago, "that despite a generation of economic growth and in many areas quite significant funding growth, the data tells us that we haven't made much progress on the core moral and economic issue that we face in this country - that many Australians live in a cycle of exclusion and cannot fully participate in the community?"
Traill quoted two examples: at age 15, the poorest 25 per cent of students were nearly two-and-a-half years behind the most affluent students; and, based on 2014 statistics, more than 1.6 million Australians were without work or without sufficient hours of work. "Our conclusion is simple and powerful: money isn't flowing to the right places to achieve social impact."
Traill's ambition is to shift the traditionally conservative mindset of the superannuation funds and unlock the $2.8 trillion that they manage. Just a tiny fraction of that would be enough to fund hundreds of Goodstarts. That requires a wider acceptance of the idea of capitalism with a social purpose, or capitalism 2.0, as it has been dubbed. It suggests a profound change in business culture that will be a challenge to achieve.
But, at least rhetorically, change is in the air. Some large businesses in Australia are more openly promoting social and environmental values, even at the cost of offending conservative politicians. In August the US Business Roundtable, representing big business, declared a new purpose - not just serving shareholders but also investing in employees, fostering diversity, inclusion, dignity and respect, dealing ethically with suppliers and supporting the communities in which businesses operate.
It may only be words at this stage, but it at least suggests that even big business feels under pressure to change the way it sees its role.
- Mike Steketee, a former political editor of the Sydney Morning Herald, is a contributor to Inside Story, where this article first appeared.