Last month our new investment analyst Emma Steele attended the Good Deals Social Finance Fair in Birmingham – here were some of her takeaways about social investment.
As a relative newbie to social investment and having joined EP only in September, it was with great curiosity that I attended the two-day Good Deals fair held in Birmingham this year. For anyone seeking involvement with social investment – whether you are a funder, an advisor, or a frontline charity exploring it as an option for the very first time – I found Good Deals to be a good way of getting familiar with the players in the sector and getting a flavour of what the main issues and challenges are.
I found that there is a divide in views on the financing needs of the sector. On the one hand, some of the funders and advisors have a traditional, quasi-commercial bank mindset and are looking to fund – they are geared towards funding traditional asset- or cashflow-based organisations. On the other there were quite a few social enterprises and organisations looking to push for more innovative solutions to the sector’s funding challenges, given the unique circumstances social enterprises face.
Comfort and Due Diligence
One question that arose was how to best support early stage social enterprises that need very flexible terms and patient capital. The director of the women’s employment social enterprise Miss Macaroon argued that her organisation needed to have easy access to information online around fees and costs, and quick turnarounds.
The CEO of Stockwood CBS, an ethical rural business park and farm, discussed how they managed to fund the acquisition of a second site, part-funded by a community share issue and partly through a loan from CAF Venturesome. He emphasised that the flexible structure of the equity/loan was crucial to making the arrangement work, but that the two phrases funders swear by need to be understood by social enterprises – “due diligence” and “comfort”. Enterprises must dedicate resource to preparing due diligence, and give funders enough comfort to accept risks
Is social value valued?
What remained less clear is how funders assess social value in their risk/return consideration, and ultimately their pricing. Some lower their pricing when impact is great enough, but other funders seem to consider impact more as a one-off screening criteria for lending, rather than a core part of the return calculation of the loan itself.
This brings us to the cost of funds, a major challenge to the social investment wholesaler Big Society Capital – BSC ultimately constrains the funding costs of many social investors in the market. BSC in turn indicate that they are constrained themselves by their own overheads, and by the cost of funding market development initiatives. It seems to me that whether BSC-funded social investors start internalising social value or provide more competitive lending rates will hinge on how BSC itself balances its long-term return strategy.
Patience is key
Perhaps even more pivotal than the cost of funding is flexibility around repayments. Many anecdotes I heard stressed that delaying repayments or setting repayment holidays from the start was key to the success of the investments, as dealing with uncertainty and upfront costs are major challenges for early stage social enterprises.
Another key topic was the need for more people-led investment, to ensure its scalability through vehicles such as Social Investment Tax Relief (SITR) and Crowdfunding. SITR was discussed widely and Resonance shared their findings on their first SITR Bristol fund, which they are now looking to replicate in Birmingham. The Bristol SITR fund allows investors to lend money to a social enterprise at a rate of 6%, with a 3-year mandatory interest-only period to allow for more patient capital at a reasonable cost. In return, the investors get 30% knocked off their income tax bill.
I saw a sector holding some productive discussions about the challenges it needs to face up to, and the fair is a great setting for organisations to make new contacts and start to access expertise they need. But the crucial question is how do we keep the impetus alive in the sector, and ensure the bright ideas discussed in Birmingham come to pass?