Should foundations be playing a greater role in social investment?
Danyal Sattar, investment manager at Access Foundation, and Chris Dadson, business development manager at the Social Investment Business Foundation (SIB), share their views on the critical role foundations across the UK can play in supporting the social investment market and their important role in catalysing change.
Just when you think you have dealt with one issue, for example, the availability of regular loans to charities, through Charity Bank, up pops another challenge – what about smaller, unsecured loans? Just when we’ve done that, through the Social Investment Business (SIB) and CAF Venturesome, along come charities and social enterprises asking “What about some finance involving equity, where I only start repaying you when the income stream we grow is up and running?”
A raft of social enterprise venture funds later, along come community groups looking to raise community shares. So how do we support that? Well, an underwriting fund, perhaps, or an exchange platform like Ethex, set up by Jamie Hartzell. Or charities look to disintermediate the banks, and issue charity bonds directly. Following the pioneering work of Triodos Bank and Investing for Good with their charity bonds, Allia have charity bonds trading on the London Stock Exchange. Then social investment for community renewable energy, for social property… the social investment market is always changing. Given this continuous evolution, what is the next step for foundations who wish to play a greater role in supporting social impact growth?
Trusts and foundations have always been supporters of social investment. Currently, some £100m of trust and foundation endowment money is ringfenced for social investment and that grows steadily year by year. Trust for London, City Bridge, Friends Provident Foundation, Barrow Cadbury Trust, Esmee Fairbairn Foundation and a growing number of others have led the way. They bring some key benefits:
They can take risk
Unsurprisingly, most mainstream investors do not like taking risks. Many aspects of financial markets are designed to take out risk – by taking security (so if your investment goes bad, you still get your money back), through liquidity (so you can sell) and diversification (by investing across hundreds of companies, you can spread your risk). Most social investment does not offer these risk reducers – some do, but not all. Social investors are prepared to take risk not compensated by higher financial return if the social return looks worth it. So if you are trying to do something that has a high social value, but is long term and has real risk involved, often, foundations are the only investors you will find. They are prepared to give up on the financial side in pursuit of the social.
There may already be a basic relationship in place
If they know your business and what you are trying to achieve through a grant relationship, the step to a social investment can be an easier one.
They might know the issue
Even if they do not know you as an organisation, they might know the issue you are trying to solve. Homelessness, inequality, hunger, for example. These issues are well known to the foundation world.
They can be ready to meet demand
The issues Access Foundation try to tackle are common to most social investment markets. Be it capacity building or investment readiness: these are known problems. The same with the Growth Fund side of Access Foundation’s role. With some notable exceptions, lenders tend to drift away from small, unsecured loans in the charity and social enterprise space. There are good reasons lenders tend to move upwards in loan size but generally, the demand for small loans continues to exist. Demand is a good guide. If the demand is not there, no need to push. But being ready with an offer if and when it arises is no bad thing.
Leveraging more money, for more impact
The Social Investment Business Foundation has a charitable objective around helping build the social investment market to generate greater social impact. In 2014 we invested into two ground breaking new funds (both managed by our FCA authorised partner, Social and Sustainable Capital):
- £10m into the Community Investment Fund (CIF), catalysing £10m of co-investment from BSC.
- £1.5m as a catalytic first loss investment into the Third Sector Loan Fund (TSLF), leveraging twenty times as much to create a £30m fund, which draws on capital from BSC and Santander Bank.
We have since leveraged £1m of European funds into a pilot Liverpool City Region Impact Fund (LCRIF) alongside a £1m Foundation investment, and a £250,000 Asda Foundation investment into a pilot First Steps Enterprise Fund (FSEF) alongside a £50,000 Foundation Investment. All of the above investments were made to meet unmet demand amongst frontline social enterprises.
Foundations should consider how their funds can catalyse greater investment towards helping vulnerable and deprived communities to tackle some of society’s most intractable issues. There are sources of finance around, from Big Society Capital, in Europe, and through large corporates, and foundations can play a leading role in unlocking these.
Building the market
Foundations have a particular role to play as market builders, which is why we share the findings and research we conduct into emerging markets. We have conducted independent evaluations into investment readiness, on our local impact funds programme and most recently on the performance and management of the Futurebuilders fund.
Given the still nascent state of the sector in some parts of the UK, there is a clear need for targeted grant support to help organisations improve their performance and maximise their social impact. This is evidenced by the great success of the Investment and Contract Readiness Fund programme, where hundreds of millions of pounds have been leveraged in investment and contracts for charities and social enterprises from just £14m worth of grants. Bringing together a broad spectrum of investment readiness support providers to help build a pipeline of support can provide a helpful and replicable model to this roll out.
If you are leading a foundation and intrigued by the opportunities social investment could bring in helping you scale up your foundation’s social impact, then get in touch with Chris (firstname.lastname@example.org) or Danyal (email@example.com).
Photo credit: Andrew_Writer