The social investment market offers a promising range of alternative sources of capital to social enterprises and charities.
At a recent workshop Eastside Primetimers co-hosted, we met with non-profit leaders who wanted to know more about social investment. Some were actively looking for finance, while others came along to learn more about this fast-changing field.
Why social investment?
Social investment is about repayable finance, as opposed to reliance on traditional sources such as grants. I’ve heard many smart people trying to define it, but no one’s done it better than someone at a recent conference who said simply it is “putting money towards doing good things”.
Specifically it involves money that needs repaying, rather than grants, and so there are of course financial implications. But it can enable organisations with a long-term vision and a good idea of how they want to increase their social impact to get access to capital. It is money that has fewer strings attached than grants and gives greater freedom for organisational development.
Social investment is particularly relevant for ambitious social organisations that want to scale up and have the willingness to take a financial risk to get there.
What different types of social investment are there?
Social investment is at a fairly early stage of development and is skewed heavily at the moment towards asset-backed financing deals. About 80% of all investments are for organisations that have property and want to borrow against it.
For example, we recently helped Bournemouth Community Housing Association arrange finance to develop a social enterprise hub. They received four offers which tended to combine a commercial mortgage (up to 70% of the deal) with an unsecured social investment (for the remaining 30%). This combination of commercial lending and social lending is quite typical.
Other types of social investment include cash flow lending, bonds and community share issues. Cash flow lending, sometimes referred to as ‘unsecured’ or ‘quasi-equity’ finance, is provided by the likes of Big Issue Invest, Charity Bank and CAF Venturesome, who have long track-records and are able to offer straightforward loans on terms tailored for the non-profit sector.
Bonds are traded debt instruments which give opportunities for small investors to participate in social development projects. According to Big Society Capital, 19 social bond issues have now been made, with the most recent being the Golden Lane Housing/Allia bond, which raised £11m. It’s an exciting area but at the moment it will only be relevant for a small number of organisations with strong balance sheets.
Community share issues, particularly for energy projects, are also on the rise. An energy cooperative, Energy4All, has used share issues to crowd-fund new member-owned projects. Take for example a solar cooperative in Solent, for whom Energy4All raised £2.4m in six weeks.
These examples illustrate the variety of investment possibilities that are emerging. I would expect – certainly hope – that this dynamism in the market continues and that we see more finance geared to local specialist charities, since this is where the biggest gap remains. Venturesome and Social Investment Business’s Local Impact Funds are particularly aimed at bucking this trend.
What do I need to do to get ready for social investment?
While there may be various types of social investment, in my experience, there are usually three basic things you need to do to get ready for social investment.
1. The first step is to embrace the principle of ‘risk versus reward’. Many charities are enterprising, but Trustees will also need to understand and embrace this approach of taking a financial risk to grow if social investment is to be a credible option
2. Then you will need to have a clear and well-evidenced value proposition that social investors can buy into. Many people will tell themselves they have a clear plan, but clarity isn’t when you are clear in your mind – it’s when others are clear about your proposition, especially the links between the social and financial returns, and how they as investors will benefit from supporting you.
3. Thirdly, you need to have the financial capability to repay the investment in the end. This means being able to show quantified, risk assessed income streams and a proven operating model.
Follow these steps and you will be well on your way to convincing investors to back you.
The only thing I can safely predict about social investment is that it will continue to be unpredictable. Many social investors have plans to bring new funds and products to the market, so do keep an eye on these developments and continue to assess if your organisation can take advantage of these new ways of funding social activities.
Richard Litchfield is Chief Executive at Eastside Primetimers – originally posted as a guest blog for the Foundation for Social Improvement on February 17th 2015.