Social investment: a revolution in financing or a bubble about to burst?


Iona Joy

Iona Joy

Iona Joy

‘I’m forever blowing bubbles….’ is how the song goes, although the conclusion at NPC’s social investment round table yesterday morning was that there is definitely no bubble in the Social Investment market. At £165m invested during 2010, the market is much too small to be a bubble, and we’re still working out how to inflate it. Nor is it a financing revolution yet—and will it be revolution or evolution? Financial markets evolve all the time, and the ‘do-good’ element is nothing new. After all, the first building society to pool funds for workers to build houses in Birmingham was formed in a pub in 1775.

But yesterday’s session, which saw about 20 key players in social investment talk about what needs to be done to get the market going, held some valuable pointers for funders.

The welcome entry of Big Society Capital in the market will provide more capital for intermediaries, but is not set up to invest directly. At our round table, everyone agreed that more direct investors are needed. Current investors want co-investors to play with—they want to share deals and risk, discuss proposals, swap experiences.

But how to attract more investors? The session highlighted some key barriers which need to be overcome so we can do this:

  • We need professionals whose job it is to raise capital for investable deals proactively on the one hand, and advisers to advise potential investors on good deals on the other. We need a layer in the social investment market that is equivalent to independent financial advisers (IFAs), stockbrokers and fund managers in the commercial investment market. This will need resourcing somehow to become sustainable in the long term.
  • We need the regulatory and tax environment to be more social-investment friendly. Financial Services Authority (FSA) regulation is making the capital-raising and advice issues somewhat cumbersome—it treats social investment as if it were for-profit investment—and few IFAs are prepared to promote social investment. At the moment, non-regulated organisations like NPC are having to think carefully about FSA compliance.
  • We need more investable deals. Potential investees must have a decent revenue stream to repay the investment with a financial return. Current commissioning practices are not making this easy for many potential investees. Expect social investment players to be increasingly vociferous on the need for government to improve the quality of commissioning if the public service segment of the market is to grow.
  • We need more investable deals (2). Even where revenue streams are promising, greater financial literacy would help potential investees to see opportunities and present cases better to funders. NPC is running some basic training for charities in social investment, to help them identify whether they might be suitable, and if so, the steps they need to take to get ready.
  • We need to be able to put a coherent price on risk and reward—both social and financial. There’s a lot of work to be done to understand and measure social impact, one of NPC’s favourite patches, but also to determine risk and how it can and should be priced.

There was some marvellous imagery in yesterday’s discussions. When one attendee suggested that basic loans for assets and working capital might be a bit dull, another provided a vivid counterpoint. Imagine a bath filled with bubble bath. It’s the water that does most of the washing, although the bubbles are a nice scented extra. And so it is with the social investment market. Basic loans are what a lot of investees need and want, and this is reflected in research showing how the market is currently dominated by four social lenders. Only a few investees are after the more complex financing packages, although developing such products to suit investor/investee needs is still valuable.

‘I’m forever blowing bubbles…..’

Iona Joy is Head of Charity Effectiveness at NPC, a think tank and consultancy dedicated to helping charities and funders make the greatest possible difference. She leads NPC’s work on social investment.

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