Is this social investment’s moment?
This is a hugely exciting time to working in the world of social investment. In the wake of five tumultuous years for financial services, if there was ever a time to be excited about the potential for a new wave of investors motivated by social change as much as financial return to help transform the sector’s capacity it’s now.
Over the last decade we have proven the concept that social ventures make responsible investees, while generating demonstrable social impact. But the market is still relatively small, only around £165m in 2011. Our role as intermediaries is to grow the base of investors and supply of investable organisations. How will we do this?
Big Society Capital will provide a key source of new capital into the market. It has quite rightly set some challenging targets around the leverage their £600m of funds must bring to ensure that they don’t dominate the market. Co-investment into the funds is likely to come from a variety of sources.
Firstly, charitable foundations are playing a more significant role. Changes in Charity Commission rules should give foundations more confidence that they can invest for a mission related reasons. Similar opportunities will exist for service delivery charities too.
Secondly, European funds may provide a new source of capital to help grow the market. The Social Business Initiative is a core part of the Commission’s Europe 2020 strategy and exciting opportunities exist with how the next round of the structural funds are spent.
Institutional investors such as pension funds and wealth managers are also increasingly looking at the social investment space too. The growth of the evidence base and indexes that measure the market will strengthen the position of social investment as an asset class so that institutions can more easily relate to it.
Finally, the tapping of the retail investment market is where social investment can be really transformational. The growth of web-based micro-finance funds illustrate this potential. To seize this potential we need to raise the profile of social investment as well as developing simpler products.
So there are a wide variety of ways more capital will come into the market. But where will be money be invested, and in what ways?
It is the supply of investment-ready deals that is the biggest challenge facing the market at the moment. There are a number of initiatives to address this investment readiness challenge, including the £10m Investment and Contracts Readiness Fund which we are running on behalf of the Cabinet Office.
New public service markets present an opportunity for investment products to help social ventures to access contracts. Many providers delivering payment by results contracts are obvious candidates for investment to help them scale, and cover some of the cash flow challenges of PbR. The opening up of other new markets such as personalised health care and alternative education provision are also attractive for investors.
We can also expect to see community enterprise continue to grow. Others in the sector are using social investment to grow their fundraising capability, such as the innovative charity bond issued by Scope, with the help of our friends at Investing for Good.
There may also be a widening of the definition of what constitutes social investment from simply an investment into a social organisation. Arguably any investment which helps to generate more demonstrable social impact can be classed as a social investment and this may include for profit legal forms in cases where organisations have been unable to attract finance to grow their social impact. That may also open the opportunities for more equity investments rather than simple debt.
To enable all this there is still a key role for government. Over the last decade government has been a major source of capital into the market through initiatives such as Futurebuilders and the Social Enterprise Investment Fund run by DH. With the growth of Big Society Capital, and the concept of social investment proven, they are understandably moving away from this, but government’s role now is to create a regulatory, tax and legislative environment which best supports the development of the sector.
As with other social finance intermediaries, we share concerns about some aspects of the current legislative agenda. The Financial Services Bill doesn’t yet properly take account of the motivations of social investors and therefore the rules around investor protection may stifle the growth of the market. Tax incentives also need addressing.
The Social Investment Forum has come together to support the development of social investment finance intermediaries through knowledge sharing and promoting the industry. This year we will be holding three events in partnership with the New Statesman at the party conferences discussing how best social investment can help stimulate growth.
Seb Elsworth is director of partnerships and communications at the Social Investment Business.
The New Statesman and the Social Investment Forum will be hosting fringe events at this years party conference, the Liberal Democrat event is taking place on Sunday 23 September at 6pm in the Napoleon room, The Grand Hotel, Brighton