In 2012, Big Society Capital became the world’s first impact investment wholesaler dedicated to providing finance to the social sector and building the impact investing market. A year later, it was joined by the Social Impact Accelerator, a new entity within the European Investment Bank. In 2018, we expect two more to open. In 2019, it could easily be another four
Wholesalers are pivotal to scaling up impact investment by building a market that extends far beyond their direct activity and developing strong intermediary structures, as we examine in a report to be formally launched at the Global Steering Group (GSG) for Impact Investment Summit this October.
Social enterprises provide targeted solutions to the world’s pressing social and environmental issues, but to fulfil maximum potential many need investment that mainstream financial providers are often unable to provide. To fill this gap, wholesalers have emerged to secure initial funding at appropriate scale for their goals and mandate.
Wholesalers invest into funds and other intermediaries, sometimes alongside other activities, while drawing in investment from other organizations, such as institutional investors, thus catalyzing wider investment flows. They seek to develop a broad impact investment market – to “build a market” rather than “be the market”.
For instance, BSC and co-investors have made £1.25 billion ($1.6 billion) of capital available to date, with nearly £800 million taken up by over 1000 social enterprises. In six years, BSC has boosted the availability of often highly important risk finance by six times, helped increase the number of intermediaries with over £50 million in assets under management from one to eight, and helped create Access – The Foundation for Social Investment to, among other things, lend small amounts at affordable rates to small social enterprises.
Following a series of interviews with wholesalers, co-investors, intermediaries, social enterprises and government officials, representatives from twelve countries put their heads together to come up with a vision for wholesale impact investment.
Firstly, a wholesaler must be agile in responding to the circumstances in its country and remit. There are some initial points for analysis: how many intermediaries are already in place? how many social mission organisations are there to take up the funds, and are they ready to consider investment? But however careful the planning, market conditions will change, and engagement with co-investors and investees will show the way forward.
Secondly, a wholesaler must recognize where it can help best and where it cannot make a worthwhile impact. Not all social problems can be addressed by social enterprises and not all social enterprises will benefit from impact investment. Wholesalers will need to keep testing and learning to achieve maximum impact. Further, impact investment is just one tool, and most social challenges require more than one tool. Partnerships may be crucial to success.
Thirdly, a wholesaler must champion and develop the impact investing market and the wider ecosystem for impact, without ever becoming the market. A creative, innovative market will only emerge if every actor owns the market and feels able to push the edges and introduce new ideas. No single entity, however talented, can replace the energy of a broad network.
Finally and most importantly, wholesalers must consider their theory of change. What are they trying to achieve and how can that be accomplished? Two common theories of change are breaking into underserved markets, and supplying flexible capital. Let’s look at these more fully. So the first is a “make change, hand over to conventional investors, and move on” view of impact investment: “achieve impact now via any capable type of enterprise, to break through areas of market failure”. The second sees the value of developing a mission-led sector of non profits and social enterprises that are dedicated to social impact for the long term: “capitalise social organisations for deep, trusted, lasting impact”. These require quiet different methods, different co-investors and investees, probably a different balance of impact and financial retusns. Nonetheless some wholesalers – including BSC – include more than one theory of change.
Pioneer work shows that wholesalers can achieve substantial growth in investment flows, new financial tools and methods, shifts in culture and understanding, and, above all, greater capacity in social enterprises to achieve impact for people and planet. It takes time to develop a well-functioning impact ecosystem. A combination of agility and resilience is essential for success.
Institutional investors have a major role to play through co-investing. A wholesaler that wants to attract institutional capital may tend toward safer, larger deals than a wholesaler investing that wants to attract foundations. It may introduce elements of the institutional investor world, such as extensive due diligence, tough negotiation and standardized investment structures, that do not always fit the size and nature of impact investment deals.
A wholesaler seeking institutional co-investors may also charge more for its capital. To attract a co-investor, a wholesaler must hit a price that satisfies both co-investor and enterprise. The pressure, especially from institutional co-investors, to earn a satisfactory return can influence the price of a wholesaler’s capital more than the wholesaler’s own return target.
Threading the needle between the rate co-investors want to earn and the rate social enterprises want to pay is among the wholesaler’s most challenging tasks. To some degree, a wholesaler may rely on its financial acumen to engineer products able both to pay a return and grow social enterprises. But co-investor preference between return, impact and risk will play an influential part in defining how the wholesaler invests.
There is still much more we can learn about how impact investment wholesalers can best address social and environmental challenges and build vibrant markets for positive impact – a topic that I’m sure will be examined and rigorously debated at the the October summit. The experience of the pioneers shows not only the core value of the model as a key component of the supply of capital and the development of impact ecosystems, but also the long way we still have to go to achieve its full potential.
The GSG Impact Summit 2018 is taking place on 8-9 October in New Delhi, India. Register here