Social investment is the provision and use of capital to generate social as well as financial returns.
Social investors weigh the social and financial returns they expect from an investment in different ways. They will often accept lower financial returns in order to generate greater social impact.
Some interpretations of social investment include the provision of capital without any expectation of financial return. When we refer to social investment, however, we mean investment mainly to generate social impact, but with the expectation of some financial return.
The role of social investment
Social investment provides capital which gives social sector organisations the capacity to deliver returns. These may be social, financial or both. Capital investment is distinct from, but related to, revenue funding.
Revenue funding allows an organisation to deliver defined outputs or outcomes. It covers day-to-day activities, regular service provision and ongoing projects. It often takes the form of payments for contracted services, grants and donations.
Capital investment provides finance to build an organisation’s long-term capacity to achieve its social mission. It is used in different ways:
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.
Social investment is repayable, often with interest. It provides capital to enable social sector organisations to develop new and/or existing activities that generate income. These activities generate a surplus which is used to repay investors. Social sector organisations may generate a surplus through trading activities, contracts for delivering public services, grants and donations, or a combination of some or all of these.
Types of social investment
There are three main types of social investment:
Debt finance – investment with the expectation of repayment;
Equity finance – investment in exchange for a stake in an organisation, usually in the form of shares;Quasi-equity is a hybrid of the two. It fills the gap between debt and equity or grants.
Debt finance usually takes the form of loans, both secured and unsecured, as well as overdrafts and standby facilities. Generally these require a borrower to repay the amount borrowed along with some form of interest, and sometimes an arrangement fee.
Secured loans or mortgages take security over a property or asset. This may be the property or asset that is being bought with the loan itself, or other assets held by the organisation. If an organisation defaults on its debt, the lender can sell the asset to recoup its loan.
Standby facilities allow organisations to commit to projects before they have raised all the money to meet the full costs. For example, an organisation may need to secure a property or hire key staff quickly before all the financing is in place. A standby facility often takes the form of a loan, where money can be drawn down over a certain period of time when the organisation needs it, rather than as one lump sum. Interest is charged only on the funds drawn down.
Overdrafts are borrowing limits agreed by the bank where a social sector organisation has its current account. An overdraft does not have to be borrowed in one lump sum. An organisation can borrow when it needs the funds. Interest is usually paid on the amount of money that is borrowed until it is repaid. Interest rates on overdrafts are usually higher than for standard loans. Overdrafts are often secured against an organisation’s assets, so can be difficult to get for social sector organisations without assets.
Unsecured loans do not take security over an organisation’s assets. Because the risk for the lender is greater, interest rates are usually higher than for secured loans. Unsecured loans are generally the most needed form of repayable capital for social sector organisations, because few of them have enough assets to use as security.
Equity investment usually takes the form of shares issued to an investor in exchange for capital. Unlike debt, equity finance is permanently invested in the organisation. The organisation has no legal obligation to repay the amount invested or to pay interest. Equity investors usually invest in organisations that they believe will grow. In return they expect to receive dividends paid out of the organisation’s earnings and/or capital gain on the sale of the organisation or on selling their shares to other investors.
Equity finance is less commonly used than debt finance by social sector organisations. This is mainly because the legal structures of social sector organisations often don’t allow them to issue shares or distribute profits. However, some types of social enterprise can issue shares, and co-operatives (industrial and provident societies) can raise finance by selling shares to members.
Sometimes debt financing is inappropriate for social sector organisations, especially in the high-risk start-up phase. Equally, equity investment may not be possible if the organisation is not structured to issue shares
A quasi-equity investment allows an investor to benefit from the future revenues of an organisation through a royalty payment which is a fixed percentage of income. However the investor may gain nothing if the organisation does not perform. This is similar to a conventional equity investment, but does not require an organisation to issue shares. The share of future revenues that a quasi-equity investor receives is usually linked to income and not profit, as social sector organisations are often not structured to make profits for distribution.
There are some useful introductions to social investment available:
KnowHowNoProfit’s Social investment made simple
Funding Central’s Introduction to loan finance
NCVO Sustainable Funding Project’s Guide to loans and other forms of finance
CAF Venturesome’s Financing Civil Society: A practitioner's guide to the Social Investment Market
New Philanthropy Capital’s Best to borrow? A charity guide to social investment
See our research page for more research and other reports on social investment.
Our glossary of terms also provides some useful definitions and explanations of social investment terminology