Retail of woe? New report says more R&D needed for social investment to roll out to the retail market

In the context of cuts to public funding and strains on philanthropic giving, set against the persistence and growth of social needs, there is increasing interest in new models of service delivery and financing to address our most challenging social problems. The concept of payment-by-results has captured the imagination of policy makers, seeming to offer the public sector a risk free way to harness private capital to fund innovation in service delivery and only paying out if the programme succeeds in delivering outcomes: thereby, so the theory goes, creating overall savings to the public purse.

 

To date, such models have predominantly been funded by a core group of institutional investors with a dedicated social mission, and a small number of other foundations and sophisticated high net worth individuals. These investors naturally represent a limited pool of capital and, if further outcomes-based models are to be developed, then further sources of capital will have to be found. 

 

This is the challenge that Allia explored through the Future for Children Bond. With the support of Big Lottery Fund, we tested the question of whether funding for complex social investment products could be raised through a public offer to individual investors if they could be confident of getting their money back and were taking risk only on the level of return they received in order to make a social impact.

 

The answer we found was that, in a market that so far has very little awareness or experience of social investments, engaging with retail investors while at the same time protecting them from making inappropriate investments is extremely difficult. We saw substantial interest from many investors and intermediaries but found real barriers to effective distribution and capital raising. Investors were required to apply for the Future for Children Bond through a financial adviser in order to ensure that they understood the product and that it would be appropriate for them. We found that advisers generally feel ill-equipped to understand and promote social investment products and find it hard to justify the costs of due diligence. While there is evidence that a number of retail investors want to try social investing it is difficult for people to make small investments in complex products when they now have to factor in the cost of financial advice and difficult, too, for product providers to allow small investments while at the same time screening out inexperienced, unsuitable investors.

 

Our findings show that specific support from the Financial Conduct Authority might help the social investment market for retail investors to grow. For instance, advisers seek greater clarity on regulation and for guidance on best practice to help them feel comfortable with the process of advising clients on the appropriateness of social investments. There is an inefficiency and market failure in a system where each advisory firm has to conduct its own due diligence, notwithstanding it may have only a small number of relevant clients and may therefore be unable to recoup its costs. We propose that advisers should be able to rely on independent due diligence conducted by experts in social investment with the approval of the FCA. Finally, for prospective investors who do not have a financial adviser, or do not wish to pay for advice, we would propose that the FCA should work with social investment product providers to develop appropriate investor self-assessment so that such investors can independently check, and affirm to the product provider, that they understand the nature of the offer and consider it suitable for them.

 

Our experience suggests a note of caution to policy makers and developers of social investment structures. Though Allia remains positive about the potential of social impact bonds and other outcome-based models to tackle entrenched needs, we believe it necessary to consider not only how to meet needs now but also how to build the social investment market as a whole. To take a business analogy, it is good for companies to invest in R&D to develop and test new concepts but both the product and the market demand have to be sufficiently developed before going into mass production and distribution: the fact that social impact models can be created doesn’t necessarily mean they are ready for rolling out. Social investment R&D is vital, but the sector’s core focus may, for a while yet, need to be on the creation of simple, market-ready products. They may have less glamorous social impact but will start to develop distribution channels and build market behaviours for using capital for social good. If we can in this way create a real and tangible social investment market at scale, then by the time that social impact bonds have gained their track record mainstream investment markets may be ready to buy them.