Retail charity bonds: catalysing investment culture shift

Ellie Ward talks to Allia’s Phil Caroe about retail charity bonds – the social investment machine that’s opening up impact investment opportunities to the London Stock Exchange regulars who want to use their money for social good.


Earlier this month £27m was raised in just 17 days to provide a housing association in the south east of England with the finance it needs to support some of the most vulnerable members of society.

In July last year, £11m was raised in under two weeks for a different charity that provides secure housing for people with learning difficulties. 

The figures speak for themselves and it’s clear that in less than 12 months, the financial innovation that has made this all possible – retail charity bonds – have firmly made their mark on the UK social investment market. 

The Mechanics

Bonds are essentially IOUs – “an investor agrees to loan money to an individual, company or government in exchange for a predetermined interest rate.”

In 2010, the Order book for Retail Bonds (ORB) was launched by London Stock Exchange as a trading platform for bonds that could be bought and sold by “retail” (meaning individual) investors in relatively small amounts. Dedicated market makers provide daily pricing so that you can find out the price you could buy or sell a bond for on any one day. 

Since that time over £4bn has been raised through retail bonds for a variety of different borrowers. 

Around the same time as ORB was launched Allia recognised that there was a growing demand from certain charities and social enterprises for debt finance and increased interest from mainstream investors in socially responsible investment opportunities. But the costs of issuing a retail bond made it unaffordable to do so for much less than £50m.

Director of social finance at Allia Phil Caroe explains that it took approximately three years to set up the Retail Charity Bond platform. “It is a bit like building an enormously complicated machine – difficult to do, but once it is built you can then turn the handle and produce the products far more efficiently,” he says.

While many of the principles from standard capital market arrangements were being applied, the platform being created by Allia in partnership with investment bank Canaccord Genuity had not been done before. 

Phil says: “We have created a special purpose issuing vehicle, which is called Retail Charity Bonds PLC. In order to list bonds on the London Stock Exchange, you have to be a public company and of course if you’re a charity by definition you’re not going to be a public company. 

“Retail Charity Bonds PLC’s only job is to issue bonds and lend the proceeds to charities. It has independent pro-bono directors with a combination of financial markets and charity sector expertise. Their role is to act as the gateway to determine whether a charity should be put through to the retail market. It’s about giving the investors some reassurance that only suitable charities have been put through.” 

The timing’s right

Prior to 2010, the retail bond market had virtually died out but following the financial crash in the latter half of the decade, it experienced a resurgence. With bank deposit rates sliding and equity funds performing poorly, investors were looking for more predictable, fixed rate income opportunities. 

Phil explains that when starting out on the retail charity bond journey, “we knew there was demand from borrowers for fixed income and for ethical investment opportunities that are structured like normal financial products – where the interest rate can be benchmarked against other opportunities in the market”. 

The demand from charities to raise capital was also apparent, but if for example a housing association attempted to raise £10m on its own, “it would be far too expensive” because of regulations and the cost of legal time needed, explains Phil.

To be considered suitable for raising capital through retail charity bonds, charities must pass an independent credit check. Phil explains that there are two key criteria that charities must meet:

  1. Demonstrate a track record of income generation. For example, through trading or service delivery. The organisations pay interest on the money they borrow every six months and need to be reliable.
  2. Show sufficient asset value on their balance sheet that would cover the amount owing. The lending in retail charity bonds is unsecured, but investors still need the comfort of knowing that if it all goes wrong, there’s enough asset value to be called upon to repay the loan.

The 2015 Hightown Praetorian & Churches Housing Association bond and the 2014 Golden Lane Housing retail charity bond both closed early due to high demand from investors. Allia and Canaccord Genuity are now working with other charities to develop more bonds, raising more capital for organisations delivering social impact.

Phil says: “Organisations involved in provision of housing are certainly a key market because very often they will have experience of borrowing previously and they have capital requirements to develop new housing.

“But, there are a variety of other organisations we will be talking with including; hospices, specialist education services, care homes, museums and arts and heritage organisations.”

Culture shift catalyst

Clearly the introduction of retail charity bonds isn’t going to fix all the gaps in the constantly evolving UK social investment market; nor is it going to solve the challenge of accessing capital for all social sector organisations. Phil is the first to acknowledge this. 

It is however a ground breaking development that will gradually help to introduce social investment into the portfolios of more and more mainstream financial investors.

Phil explains: “Part of what we’re trying to do is to establish the market behaviours of investing for social benefit. 

“Our hope is that having got a taste for social investment, financial investors will look for more opportunities to use their money to create a social impact, whilst getting a financial return at the same time.”

Since it was founded in 1999, strengthening social cohesion has been an integral element of Allia’s DNA. It initially worked to create relationships between those more advantaged in urban areas with those less so. The retail charity bond is another way to encourage and promote a culture where social return sits alongside financial return when individuals think about their money.

Phil says that retail charity bonds “bring social investment into the retail space in a way that hasn’t been done before”. 

He concludes: “We accept that it is a relatively small proportion of the largest charities this bond issuing platform is going to benefit. But the introduction of retail charity bonds is part of a broader, strategic approach of building a social investment market and creating a social investing culture that will benefit all social sector organisations in need of capital.”

To find out more about retail charity bonds, please click here.

Photo credit: Mendhak