by John Kingston
- The main ambition of a social investor is to build the capacity of the charity in order to achieve greater social impact. They seek to generate some financial return, even if that means aiming only to recoup some or all of the sum originally invested.
- Charities and social enterprises have similar financial needs to small and medium sized businesses, but find it harder to access capital.
- Social investment is not designed to replace grants, or mainstream financial investments.
- Over the past 10 years the social investment market in the UK has grown rapidly from almost nothing to an estimated £165m in 2011 (but of which only 5% is high risk capital – the rest is secured loans).
Read more about Social investment
What is social investment?
Charities and social enterprises need income to provide services, to pay staff and to pay rent. They also need access to capital to manage cash flow, to acquire property and other fixed assets, and to invest in order to grow and develop. Social investment provides such capital as loans, underwriting, or equity. Social investment therefore complements the use of grants and earned income.
The main ambition of a social investor is to build the capacity of the charity in order to achieve greater social impact. Social investments are distinct from mainstream financial investment because they seek to generate a social return. They are also distinct from grants because they seek to generate some financial return, even if that means aiming only to recoup some or all of the sum originally invested.
Why do charities and social enterprises need it?
Charities and social enterprises have similar financial needs to small and medium sized businesses, but find it harder to access capital. Three common requirements are:
Building capacity: A mental health charity that provides counselling sessions to vulnerable adults has won a new contract to support 50 additional users. However the contract doesn’t start for another six months, and in the meantime the charity needs to recruit and train additional counsellors to meet this demand. Social investment could provide the charity with a loan to plug the gap, with the investment repaid with interest once the contract starts.
Growth capital: A social enterprise wants to invest in new machinery to improve productivity. The upfront cost of this is significant and cannot be met from the limited balance sheet reserves. However, the projected increase in income by the investment makes this a good proposition. A loan repayable monthly over four years is set up at an interest rate of 6% per annum.
Property: A charity was struggling to pay the increased rent charged for its local shop and was forced to consider moving. However a good location was essential in order to secure local footfall. When another building on the street came up for sale, a social investor was able to purchase it, and lease it back to the charity at lower than full market rent, which still affords him a steady rental income.
This diagram shows types of investment and their associated risks. There is a greater requirement for the riskier forms of financing that cannot be accessed through traditional means.
What does it offer the philanthropist?
Philanthropists may have various reasons prompting them to explore social investment. Firstly, the investor is meeting a real need: charities need access to capital. Secondly, rather than a one-off grant, the social investor can expect their money to be re-cycled and have impact a number of times. Thirdly, investors aim to build the capacity of charities – resulting in a longer term increase in social impact.
Social investment is not designed to replace grants, or mainstream financial investments. Moreover, it is a “third category” between the two extremes. Many philanthropists decide to divert some of their funds into social investment and accept lower than market financial returns, which is offset by the social impact generated.
Over the past 10 years the social investment market in the UK has grown rapidly from almost nothing to an estimated £165m in 2011 (but of which only 5% is high risk capital – the rest is secured loans). The Government has made a public commitment to supporting the development of the social investment marketplace, most notably through the launch of Big Society Capital and their projected £600m balance sheet.
Two trailblazing organisations were Venturesome (launched in 2002) and Bridges Ventures (also 2002), providing financial support to charities and social enterprises, and businesses in socially disadvantaged areas. More recently, in 2010 the first Social Impact Bond (SIB) was launched at HMP Peterborough, which took an innovative approach to reducing re-offending by funding “through the gate” comprehensive support for prisoners upon release. The SIB model has attracted huge interest throughout the world, with similar schemes in progress or development.
The growth of social enterprise is leading to more opportunities for investors to generate a social impact as well as a financial return. The recent 2013 Budget has announced the intention to introduce tax incentives into social investment. All of this makes conditions ripe to explore how an individual’s investment could have a direct impact on their chosen social issue.
Case Study: Social Impact Bond
Social Impact Bonds (SIBs) are a form of outcomes-based contract in which public sector commissioners commit to pay for significant improvement in social outcomes (such as a reduction in offending rates, or in the number of people being admitted to hospital) for a defined population.
Private investment is used to pay for interventions, which are delivered by service providers with a proven track record. Financial returns to investors are made by the public sector on the basis of improved social outcomes.
Jonathan Bruce had £100k he wanted invest through his personal charitable foundation into a social cause he was passionate about. He chose to invest in a Social Impact Bond that was funding an innovative service to support young adolescents on the edge of entering the care system.
The Essex Social Impact Bond is a five year programme providing intensive support to approximately 380 adolescents and their families. The target is to divert around 100 adolescents from entering care by providing support to young people in their home. The success of the Social Impact Bond will be measured by the reduction in days spent in care by the adolescents, as well as improved school outcomes, wellbeing and reduced reoffending. If
the interventions deliver successful outcomes, the investors might expect returns in the range of 8-12% pa. The investment is entirely at risk; should the intervention not deliver the pre-agreed outcomes, the local authority does not pay.
Jonathan was aware that this was perhaps more risky than a mainstream investment, but the attraction was that he could identify the project his money was funding, and would receive regular updates on the impact being achieved.
How do I get involved?
A growing number of resources are being developed to inform prospective investors about opportunities. This is not an exhaustive list but it is a good place to get started.
Social Finance - http://www.socialfinance.org.uk/
Ethex - https://www.ethex.org.uk/
Pioneers Post - http://www.pioneerspost.com/
Glossary: social investment, socially responsible investment, microfinance.