Financial Innovations

Speakers: Alice Albright, CEO, Global Partnership for Education Lawrence Coben, Executive Director, Sustainable Preservation Initiative Craig Courtney, Founder and Managing Partner, Tamarack Partners David Ferreira, Managing Director for Innovative Finance and Head of Washington, D.C., Office, GAVI Kari Stoever, Vice President, External Affairs, Aeras Moderator: Caitlin MacLean, Associate Director, Financial Innovations Labs, Milken Institute. Meeting the goals of global development, from improved health care to increased access to capital, requires a combination of aid and investment. Yet in frontier markets, public-sector funding has been limited and not entirely effective, while the private sector has been hesitant to engage. To overcome these constraints and attract a wider spectrum of investors, innovative models have been developed that build ties with foundations, governments, large financial institutions and corporations. From public-private investment funds to credit enhancements and donor-driven pull mechanisms, these new approaches can help to bridge funding gaps and strengthen local markets. The panel will present investment-led strategies that generate both social and financial returns while stabilizing the communities where investors have assets at work.

The United States could replace 20 percent of petrochemical consumption with bio-based products over the next decade -- while creating jobs and capturing a large share of the global renewable chemical market. The key is acting soon, before the current technological and agricultural edge is lost to other nations. Among products made with biochemicals are disposable tableware, printer ink and skin-care lotions, along with numerous compounds for industrial use. To generate ideas for spurring the industrial side of biotechnology, the Milken Institute, in collaboration with the U.S. Department of Agriculture, convened experts from the public and private sectors in a Financial Innovations Lab -- the Institute's signature miniature think-tanks for generating solutions to specific challenges. Lab participants representing finance, policy and industry identified three significant barriers to the development of new biotechnology in the United States: • Financing new projects and bringing them to scale: The development timetable for bio-based chemicals is five to ten years, significantly longer than most investors in new technology will tolerate before seeing revenue or profits. • Perceived market uncertainties: The relative cost difference of bio-chemicals is largely dependent on the cost of oil and competes with established petrochemical companies. • Policy uncertainty and complexity: The regulation of bio-based chemicals is complex and sometimes seemingly more onerous than the rules for petrochemicals, which are subject to a number of long-standing exemptions. In addition, traditional means of support from tax credits, purchasing incentives, and grants are becoming increasingly less palatable to policymakers. "With our strong agricultural and manufacturing sectors, the United States can lead the bio-economy and create good-paying jobs," said Joel Kurtzman, executive director of the Center for Accelerating Energy Solutions at the Milken Institute. "It is essential we develop new financial and policy innovations to move this cutting-edge sector forward." Take a look at the report for details.

New, effective investment models work to fund drug discovery for the developing world Milken Institute report identifies innovative financing for global health research The world of medicine has long been divided – between developed countries that can afford cutting-edge treatments and developing ones whose poor populations too often go without urgently needed care. Because the eradication of diseases like TB and malaria would make a dramatic impact on emerging economies, investors in these countries – including multinational aid providers, foundations, corporations and institutional funds – must work together in innovative ways to increase the pool of capital available to drive drug discovery. A new report from the Milken Institute, “Innovative Financing for Global Health R&D,” explores ways to broaden the flow of capital to bridge the divide – and get more treatments for diseases that primarily affect the developing world. To explore the most effective financial models to fund the development of drug treatments and vaccines, the Milken Institute convened a Financial Innovations Lab® with support from the Bill & Melinda Gates Foundation. Lab participants, who included global health advocates and public- and private-sector investors, concluded that research and development for developing-world diseases can now represent opportunities to engage investors, apart from the traditional donors, with demonstrable financial and social returns. The Institute’s report outlines strategies for improving and expanding the use of financial tools to engage the largest pools of capital available, including: • Developing more efficient ways for donors to be involved • Implementing blended-capital mechanisms that spread risk among funders with different needs • Implementing capital market-based models that can bring new investors to R&D • Exploring new private-sector models that rely on mechanisms such as exchange-traded funds and GDP-linked securities • Creating innovative partnerships that pair funding organizations with entities that have local-market expertise and infrastructure.

The United States is missing opportunities to lead in renewable energy, representing billions of dollars in lost technology exports and contributing to continued dependence on energy imports. Market dynamics -- notably, the very low cost of natural gas -- have created challenges for renewables, despite their importance to climate stabilization and role in reducing U.S. dependency on foreign oil. Another obstacle to the development of crucial renewables in the U.S.: the government agencies charged with promoting energy infrastructure improvement have been stymied by political gridlock and fiscal constraints. Meanwhile, other countries, like China, are out-investing the U.S. in this area, causing a drop in our global competitiveness. To look for ways forward, the Milken Institute, in collaboration with the U.S. Department of Agriculture's Office of Energy Policy and New Uses, convened experts from the public and private sectors in a Financial Innovations Lab.

The Rio Grande Valley of Texas is one of the poorest regions in the United States. More than one-third of the population lives in poverty, and access to capital and credit – necessary to create economic opportunity – is severely limited. Meanwhile, investors with plenty of capital struggle to find new opportunities to earn even modest returns in today’s low-interest-rate environment. A diverse group of leaders has come up with some potential solutions that could help. The challenges faced by both the Rio Grande Valley and investors can be addressed by innovations that bring together Wall Street and Main Street, according to “Increasing Access to Capital in the Rio Grande Valley.” The report identifies barriers – including lack of infrastructure and traditional lenders’ misperception that residents present too great a risk – and goes on to suggest a number of policy and financial innovations that can move capital off the sidelines and help the Valley break out of poverty. The report summarizes the proceedings and findings of the Financial Innovations Lab® the Institute held last October in Weslaco, Tex., with support from the Ford Foundation. Labs are pop-up “think tanks” that convene investors, business development non-profits, bankers, academics, and policy activists to focus on an issue. The solutions from the Lab, though developed with the Rio Grande Valley in mind, can also be applied to other capital-starved regions. Among the solutions described in detail in the report: • Establish a regional leadership council in the Rio Grande Valley • Promote education at all levels, from job training to personal finance • Continue and expand federal programs that provide additional capital to communities • Deploy the next generation of program-related investments by foundations – typically in the form of below-market loans or credit guarantees and equity investments

Richard Sandor wants to make it clear that "derivative" is not a dirty word. It's one motivation behind his latest book, "Good Derivatives: A Story of Financial and Environmental Innovation." It's a case that Sandor is well-equipped to make. As a young economist at the Chicago Board of Trade, he helped create interest rate futures-derivatives that revolutionized worldwide finance. Later, he pioneered the use of emissions trading to reduce acid rain and greenhouse gases, creating the Chicago Climate Exchange and affiliated exchanges in Europe and China. At this Milken Institute Forum, Sandor will discuss how financial innovation has been a force for good in the last 40 years and how its vast potential can address environmental, health and social challenges in the next 40 years. "This book represents the work of one of the world's most brilliant, inquisitive, and visionary minds," according to Clayton Yeutter, former USDA secretary and U.S. trade representative. "Richard Sandor knows this subject as an economist, a trader, an executive, an entrepreneur, but most of all, as a teacher. No one else in the world could have written this book." Sandor is chairman and CEO of Environmental Financial Products LLC, which specializes in inventing, designing, and developing new financial markets with a special emphasis on investment advisory services. EFP was established in 1998 and was the predecessor company and incubator to the Chicago Climate Exchange (CCX), the European Climate Exchange (ECX), and the Chicago Climate Futures Exchange (CCFE). Sandor was honored by the city of Chicago for his contributions, and he was one of Time's "Heroes of the Environment" in 2007. A Milken Institute senior fellow, Sandor is a Distinguished Professor of Environmental Finance at Guanghua School of Management at Peking University and a lecturer at the University of Chicago Law School.

The biopharmaceutical industry needs novel approaches to early-stage drug development that better manage risk, lower capital cost and improve research effectiveness, create diverse portfolios, leverage risk-tolerant capital, and access new capital sources. With these issues in mind, the Milken Institute and FasterCures hosted a Financial Innovations Lab on July 19, 2011, in New York City. The Lab was convened to address an industry-wide gap in funding for drug development - the so-called valley of death. This report, "Fixes in Financing: Financial Innovations for Translational Research," highlights various approaches for managing and financing translational research that were discussed during the Lab, including: Virtual product/portfolio development companies Venture philanthropy and government-backed investment vehicles Innovative investor tax incentives Securitized research-based obligations