An emerging social investment market
In the last 20 years, the social sector has moved away from being funded solely by grants and philanthropic donations to a more sophisticated and diverse financing model.
Growing numbers of organisations have looked for ways to make ‘repayable’ finance work more effectively and efficiently for the social sector. They have aimed to either:
‘Recycle’ money by investing financial returns generated by social investment in other social sector organisations, creating more impact across the sector, or
Generate a financial return for the investor which makes it possible to raise more capital to go into the sector.
There is now an emerging social investment market which is gaining a track record and building expertise. It is developing new ways to connect socially motivated investors with social sector organisations in need of capital. There are a number of independent players in the market:
See our glossary of terms for useful definitions and explanations of social investment terminology
Social Investment Finance Intermediaries (SIFIs)
SIFIs are organisations that connect those interested in investing for social impact with social sector organisations that need capital to achieve positive social change.
SIFIs make these connections in different ways, including:
Creating and raising investment for funds that provide loans or invest equity in the social sector;
Managing funds on behalf of others;
Designing and structuring financial instruments that, for example, enable social sector organisations to deliver public services under payment by results contracts;
Providing platforms and exchanges that directly connect investors and social sector organisations;
Supporting social sector organisations to develop their business models and skills so that they can take on new types of investment.
Social investment finance intermediaries can broadly be divided into three main categories:
Social banks that hold a banking licence and take retail deposits and savings. They use that money, alongside their core equity capital, to lend to social sector organisations. They are regulated and operate in the same way as mainstream banks but their lending is limited to organisations delivering mainly social and environmental benefit. Loan sizes average between £50,000 and £400,000, mostly secured against property. Social Banks do not generally provide any grant funding.
Social banks include:
Unity Trust Bank
Ecology Building Society
Non-bank Social investors lend to and/or invest equity and quasi-equity in social sector organisations. They also develop and structure funds and financial instruments, and act as fund managers on behalf of other investors. So far, the largest funds in the social investment market have been government-sponsored, combining loans with grants. They have been managed by independent, socially focussed fund managers, appointed through competitive tender. There are also smaller funds offering a variety of debt and equity-like investment products, where the organisation managing the fund has also structured the fund and raised money from a variety of sources.
Non-bank social investors include:
Big Issue Invest
Social Investment Business
Bridges Social Entrepreneurs Fund
More links to support providers
Support providers to social sector organisations offer: business support; investment readiness support; investment structuring and broking; investor and fund advisory services; networks and events; crowd sourcing and online platforms where investors can buy and sell shares in social sector organisations; and incubator space. These services are often also provided by social banks and social investors.
Find the most relevant SIFI for you in our directory.
Government has been the biggest source of finance for the social investment market so far. Central and local government, alongside other public sector institutions, have provided finance through various repayable grant and loan funds. A key consideration for government is the link between finance and delivery of public services and policy initiatives, such as payment by results.
Trusts and foundations also provide some finance for social investment. They generally invest between £200,000 and £5m on a long term, patient basis. Trusts and foundations want their investments to achieve social impact and transformational change alongside some financial return.
Individual retail investors will invest small amounts of money (£10 to £50,000) into FSA-regulated and authorised social banks. They tend to look for security of capital through the Financial Services Compensation Scheme, competitive rates, access to funds and a clearly articulated and reported social impact.
Wealthy individuals will invest amounts of between £50,000 and £2m in a portfolio that mixes a diversified approach to investment in SIFIs with direct investments into specific social sector organisations. They tend to look for financial returns linked to investment/social impact risk. They also look for some access to funds, engagement and a direct, personal link with the social impact being delivered.
Mainstream banks and commercial institutions are beginning to enter the social investment field. However, most of this funding is through their corporate social responsibility (CSR) programmes. Among the UK high street banks, tentative entry into the social investment market is mainly through signposting services for high-net-worth individuals or secured lending alongside other social banks. This activity is dwarfed by their mainstream lending activities.
Social sector organisations as beneficiaries
The social sector in the UK plays an important role in driving positive social and environmental change. It has grown and evolved over the last ten years and includes a diverse range of organisations delivering social and environmental benefits. These include voluntary and community organisations, charities, social enterprises, cooperatives and mutuals. Social sector organisations are not limited to a specific legal form or particular types of activity, but work on certain key principles:
They exist to deliver social and/or environmental impact;
They mainly reinvest any financial surpluses to further their social/environmental mission; and
They are independent of government.
There is a growing trend for social sector organisations to operate in markets and generate income from trading and contracts. This partly reflects government policies that have allowed the sector to increase its involvement in the delivery of public services. It also reflects the sector’s increasing desire to become more sustainable by diversifying income streams. This often happens by becoming more market-orientated and earning income through trading in both public sector and consumer markets.
Social sector organisations are similar to mainstream businesses in that they need to manage their income and expenditure and cash flow. They also need to carry out financial and business planning for the future. They need to build organisational resilience to manage irregular income patterns and deal with unexpected events, which has an added dimension when there are vulnerable people depending on their services.
As with businesses in the commercial sector, access to finance is important to build capacity and resilience. In particular, social sector organisations need capital:
To invest in asset acquisition;
As working capital – to manage time differences between spending money and receiving it and so continue ongoing activities;
As development capital – to invest in growth and expansion;
As reserve capital – as insurance to protect against the unexpected.