£60m for social enterprises, but retail investors unreachable
As the government ploughs £60m into the social investment market to get charities and social enterprises investment ready, current regulations highlighted in a new research report by the City of London Corporation mean social enterprises won't be able to effectively promote themselves to mainstream investors.
The UK government has accelerated its support of the UK social investment market, with a £60m fund to get charities and social enterprises investment ready and two new social investment bonds in Worcestershire and Birmingham.
The support is welcome in a sector that struggles to access finance, but a new report commissioned by the Social Investment Research Council, shows that UK financial services law is stunting the growth of the market, meaning the UK government and the UK’s financial regulatory framework are working at crossed purposes.
Action is needed to enable retail investors to be offered the opportunities to invest in social enterprises and be part of their growth story.
The Marketing Social Investments: An Outline of the UK Financial Promotion Regime report highlights the implications of the UK Financial Promotion Regime for the growth of the social investment market. It finds that the current law is barricading social enterprises into a niche, making it difficult for them to promote themselves as investment products to investors and communicate the nature of the investment opportunity.
The regime dictates how social enterprises are able to promote themselves to potential investors, and applies to most forms communication designed to encourage investment activity of less than €5m over a 12-month period.
According to the report the regime restricts the amount of investment offers communicated to ordinary retail investors, which minimises the awareness of social investment opportunities among retail investors.
Ordinary retail investors therefore remain an untapped pool of capital for social enterprises, despite an appetite to work with and include social enterprises. “Many individuals want to invest in social enterprises they have a connection with. However this connection is often cut short by complex and disproportionate regulation,” says Nick O’Donohoe, CEO of Big Society Capital.
Mark Boleat, policy chairman for the City of London Corporation, says: “There is scope for adjustment within the Financial Promotion Regime in order for it to support the growth of the social investment market…Action is needed to enable retail investors to be offered the opportunities to invest in social enterprises and be part of their growth story.”
Meanwhile the government has announced a £60m fund to get social enterprises and charities investment ready and two new social impact bonds.
The £60m investment will come from the loan book of a fund called Futurebuilders and is specifically ring-fenced to support high potential social ventures that struggle to access finance and which could benefit from business capacity building support in preparing to bid for social investment.
The announcement of two new Social Investment Bonds in Worcestershire and Birmingham, are part of a longer-standing effort to grow the market, through the £600m social investment bank, Big Society Capital and the recent Social Investment Tax Relief.
The SIB in Worcestershire will target 20-30% of the lonely population in the area, aiming to reduce loneliness among the over-50s to reduce dependency on health and social care services. This is the first SIB to tackle this particular issue in the UK and is being commissioned by Worcestershire County Council and local Clinical Commissioning Groups.
The second SIB, in Birmingham, will provide bespoke support to vulnerable young people with a focus on youths aged 11-15 taken into residential care or who are at risk of entering care.
Globally the UK government stands out for its commitment to growing the social investment market. The UK is now home to the world’s most advanced social investment market, which is growing by over 20 per cent each year according to the 2014 progress report published by the Cabinet Office today. But the City of London report finds a counter-productive misalignment between the government's pioneering efforts and the failure of financial services law to recognise the specific needs of many social investment contexts.
The report also found that rules dictated by the UK Financial Promotion Regime fail to support investments that are often small in scale, localised, involve personal associations and where financial return is often a secondary consideration.
Compliance costs were also found to be disproportionately high for the majority of social enterprises who seek to raise relatively low amounts, and the multi-layered nature of the regime was found to be over complicated, causing uncertainty as to what rules apply to whom and making it a challenge for both investors and investees to understand.