Pension-Sized Impact: Healthcare of Ontario Pension Plan and

Social Capital Partners’ Impact Investment in Employee

Ownership

Pension plans such as the Healthcare of Ontario Pension Plan (HOOPP) are known to be relatively risk-
averse. After all, the $100 billion pension plan has 40,000 healthcare workers’ retirement savings to lose
if they are not careful. On the other hand, entrepreneurial impact funds like Social Capital Partners (SCP)
are more optimistic about risk. Impact investment funds invest to create a positive environmental and
social impact, along with some financial return. For Social Capital Partners, impact means addressing
income inequality by increasing access to business ownership and quality employment. Ambitious
impact funds are optimistic about the possibility of a better future.

This January, the unlikely pair, HOOPP and SCP, jointly invested in California-based Taylor Guitars.
Investment in Taylor Guitars is significant because it is the first time a pension fund invested in an
Employee Stock Ownership Plan (ESOP). ESOP is an employee benefit plan that gives employees an
ownership stake in the company. By allowing employees to become owners, ESOP encourages talent
retention and motivates employees to care about the company, which increases profitability and
productivity. In Taylor Guitars’ case, the retiring founders did not have suitable heirs to inherit the
business according to an interview on KUSI News. The two founders were aware that if their company
were to be sold to a private equity firm or a 3rd-party financial firm, it was likely to be re-sold again for
more money in several years. This was against the founders’ desire to have their legacy company
protected for the next 100 years. The founders also did not want to sell to a competitor having spent 50
years building guitars to outshine the competitor. The only viable option was to sell to employees who
helped to create the success of Taylor Guitars, making the company the perfect candidate for
transitioning to a 100% employee-owned company.

Why would a risk-averse pension plan like HOOPP invests in an impact investment such as Taylor
Guitars? Because it was low-risk. Taylor Guitars is profitable, stable and has 1,200 employees in the US,
South America and Europe. Due to the pension plan’s long time horizon, it was able to provide Taylor
Guitars a 10-year debt capital with no principal payback during the 10-year term. The typical length for
similar debt is 5 years. ESOP has tax advantages for owners, employees and the corporation because it is
a qualified retirement plan for employees in the US. The investment fulfilled both HOOPP responsible
investment requirement and SCP’s impact requirement for more equitable distribution of wealth to
employees.

Currently, ESOP only exists in the US. Canada does not yet have the ESOP structure. This is reflected in
the lack of employee-owned companies in Canada. Retiring founders are often forced to sell their
companies to large conglomerates due to the hard, complicated process of transitioning to an
employee-owned company in Canada.

SCP’s Managing Director, Jon Shell, has started to make a case to the Canadian government to allow
ESOP in Canada. According to Jon, many successful independent businesses fall into the hands of large
conglomerates due to the lack of employee ownership structures like the ESOP. As an example, Jon
mentioned the recent sale of the independent Longo’s grocery chain to Empire Company Limited, a
Canadian grocery conglomerate. Without a structure like ESOP, history is likely to repeat itself.
However, in my conversation with Jon, he is optimistic about having an ESOP in Canada. He thinks the
Canadian government is committed to exploring options to remove barriers to employee ownership
trusts in the latest federal budget. Jon believes that a quick uptake of ESOP will happen in Canada due to
its benefits to owners and employees.

HOOPP is not the only pension plan interested in deploying large, patient capital in the world of impact
investing. Canada Post Pension Plan recently added an impact investment professional to its Sustainable
Investment Team. Pension plans can take advantage of low-risk impact investment opportunities that
are too large for the traditional impact investors to fund and create pension-sized impact in the process.