Growth of charity bond market being fuelled by demand from retail investors
Social impact bonds have been getting a lot of ink recently, but it's time the growth in charity bonds grabbed our attention says Whitni Thomas from Triodos Bank.
Social impact bonds (SIBs) have attracted lots of attention in the press, showcasing how financial engineering can enable investors to help to finance the delivery of social outcomes. The Big Society Capital annual report states that 14 social impact bonds have been closed and funded to date. SIBs are an exciting new development and Triodos Bank has helped to raise capital for two social impact bonds, one with Greater Merseyside Connexions Partnership and the other with St Mungo’s.
Attracting much less attention has been the growth of bonds issued by charities. Charities issuing bonds is nothing new. One of the first charity bonds dates back to 2003, when Golden Lane Housing, the housing subsidiary of Mencap raised £1.7m from the public with the support of Triodos Bank. Over 500 people invested in the ten year bond, which was repaid in April this year.
In 2012, Scope raised £2m through a three year bond; this was the first listed bond for a UK charity. The bond is listed and tradeable on a Luxembourg exchange.
Earlier this year, Golden Lane Housing working again with Triodos Bank, issued a five year bond, paying 4% interest p.a. The minimum investment was £2,000 for new investors. To date the bond has raised over £8m which will enable Golden Lane Housing to purchase freehold properties to house people with a learning disability, enabling them to live independently in the community.
Through the bond, Golden Lane Housing has secured investment from a wide range of charitable trusts and foundations, as well as asset managers and wealth advisers. But most excitingly, the bond has generated unprecedented interest from retail investors. Individuals have invested over £6m in the bond, providing the majority of the investment raised.
We believe the success of the Golden Lane Housing bond is due to three main factors:
The quality and track record of the charity and its management team. GLH has been in operation since 1998 and has built a freehold property portfolio of £74m. The simplicity of the investment offer, including the very tangible social impact and the transparency of how the money is being spent. The charity bond was structured much as a corporate bond would be with a fixed interest rate payable annually and a single repayment of capital at the end of five years. It is clear that money raised will be going directly into properties which will house people with a learning disability - the social impact of the investment is therefore very easy to understand.
A balanced risk/reward profile. The bond is unsecured and – as with all investments – the capital is at risk. But we believe that the interest rate paid provides a reasonable risk adjusted return for such a bond, especially when taking into account the high social impact that GLH generates.
With so many people looking to put their money where their ethics are, it is vital for the growth of the social investment market that we are able to offer social investments that have a risk/reward profile that is appropriate for a broader retail audience. All investments carry an element of risk and charity bonds are no different. But buying a bond from a well-established charity with a strong balance sheet and experienced management team can be a good first foray into the social investment market for those investors who value social impact, are looking for a simple to understand social investment and of course can afford to put some of their capital at risk for a set period of time.
Like all financing options, raising capital through a bond issue will only be appropriate for some organisations in the third sector. Typically these will be charities with a profitable commercial business model, a strong balance sheet, and a clear social impact proposition. A household name also helps, particularly in attracting retail investment.
The growth of charity bonds is an exciting development for the social investment space as it opens up an avenue to engage retail investors, while providing some charities with cost effective access to capital to pursue their charitable objectives. For further bond issues to be successful, we need to build on the retail appeal through more successful engagement with intermediaries such as IFAs and wealth managers. We also need more forward thinking fund managers who can and will allocate part of their SRI funds to these illiquid but more impactful charity bonds.
We also need to develop the liquidity for these bonds in the secondary market. Liquidity is an important feature in order to attract further investment from institutions and intermediaries. We are hopeful that Ethex, an online marketplace for positive investments, supporting both investors and businesses will be able to help in this regard.
We believe several more charities will issue bonds this year and that they will make a big contribution to the growth of the social investment market. Most importantly these bonds will enable these charities and social enterprises to finance themselves cost effectively in order to achieve greater social impact.
Charity bonds explained
A charity bond is a simple fixed income, investment product. It is similar in structure to any standard corporate or government bond where the borrower enters into a formal contract with investors to repay a loan at maturity, with interest paid at fixed intervals over the life of the bond. The bond itself can be issued as either secured or unsecured debt.The payment of interest and repayment of capital isn’t tied to specific social outcomes as it would be for a social impact bond.