The Big Bang theory: how social investment can go mainstream
The past few years have seen major progress in social investment, but there has been no big bang yet to create a fully functioning ecosystem.
There have been a few major social investment related headlines already in the UK this year, and it’s only just turned April: the Cabinet Office announced its latest beneficiaries of the £10m Social Incubator Fund, which will help scale up social ventures; the Chancellor unveiled the social investment tax relief to the world in this year’s Budget; and earlier this week, we learned about Big Society Capital’s (BSC) £14.5m investment into Charity Bank. With such a promising start, it would be tempting to say that 2014 will truly be the year for social investment.
But then, 2013 saw the roll out of social impact bonds across the UK, the launch of a Social Bond open to retail investors, the opening of Social Stock Exchange and the G8 Social Impact Investment Forum, hosted by the UK. That year also has a claim to being the year for social investment. And what about 2012? That was the year Big Society Capital launched and the market was tipped to grow to £1bn by 2016. You get the idea: the sector enthusiast could argue that each of these years represents the Big Bang moment for social investment.
For frontline organisations directly tasked with delivering social good however, all these claims may seem distant. For them, social investment’s time will only come when they can readily access appropriate and affordable finance from a range of investors. Only then will social investment really go mainstream.
We all know, perhaps anecdotally, that this is what charities and social enterprises want. However, a new report from CAF Venturesome, the social investment arm of the Charities Aid Foundation, supports these assumptions with the following findings relating to borrowing over the next five years (taken from interviews with over 250 charities):
• 32% of charities, that are unlikely to borrow, cite unaffordable costs as a barrier
• Two thirds of charities are hoping to raise less than £250k in repayable finance
• Charities will increasingly want to borrow for a wider range of reasons, with borrowing moving away from traditional lending products such as mortgages and towards higher risk, unsecured products
The key question is: how can the social investment sector square the circle of providing affordable, higher risk capital at lower amounts? The findings above relate to the charity sector but the challenge is equally pressing for the vast majority of social enterprises.
Some might say that the sector can’t have it both ways: that the risk taken on by the investor must be rewarded with an appropriate level of return. This market logic will ring true for many social investors. But are we working hard to develop market efficiencies so that ‘appropriate return’ is an accurate reflection of the risk being borne by investors? And what about capital structures that circumvent the traditional risk-reward relationship?
To answer that first question, we must collectively support efforts to create a more efficient social investment market. This means sharing information about what investments work, how social impact is measured and streamlining transactions to reduce cost. The Social Investment Research Council is currently funding valuable work in this area but wider support is essential. The overarching aim should be to have an improved ability to price risk and drive down the cost of capital.
In terms of alternative capital structures, philanthropic funds are one solution as they can generally tolerate a higher level of risk (because it’s donated money anyway) and a lower level of financial return. Corporates and high net worth individuals can have a greater role to play here, and indeed, they already make up a solid backbone of support for CAF Venturesome’s funds. A number of grant-making trusts and foundations, such as Esmée Fairbairn, have also got involved in this space, earmarking a proportion of their endowment for social investment.
Philanthropic funds can be used to leverage in commercial capital too. The Cabinet Office’s work on this ‘co-mingling’ concept offers some interesting examples of what this fund structure can look like, whilst BSC’s recent investments in these funds comes as a welcome step.
In terms of providing capital at lower amounts, crowd-funding platforms such as BuzzBnk allow social ventures to raise smaller funds for specific projects, whilst Ethex allows for individual investments directly into organisations with amounts as little as £50.
In short, these are just some of the solutions to the challenge of providing affordable capital to charities and social enterprises, at lower amounts, whilst accepting a higher level of risk.There have been two waves of innovation in the way we finance the social economy since the millennium. First, the dawn of social investment in the early 2000s. The second wave heralded the development of new financing structures such as quasi-equity and SIBs. What we need now is the third wave that tackles the biggest financing issue for frontline social sector organisations: the provision of affordable risk capital at appropriate sums. That would be the real year for social investment.
Download In Demand: the changing needs for repayable finance in the charity sector here.