Matt's Investments Blog

Rather than feast or famine, we need a balanced diet

Joe Ludlow and Jo Casebourne - 05.11.2012

Is a £1billion forecast impact investment market in the UK a welcome feast for capital-starved social entrepreneurs? Isn't £1billion really just crumbs falling from the financial system's table? And feast or famine, is impact investment offering the right diet for the social venture market?

The UK impact investment market remains at an early stage, despite much progress in the last fifteen years. The size of the total impact investment market is very small compared to other sources of finance available to social ventures. In 2010/11 it was £165million[1] - if we compare this to voluntary organisations alone having an income of £35.5billion in 2007/08 on assets of nearly £100billion, we see that right now impact investing is far from being the mainstay of social venture financing.

And this new market is not equally serving the full spectrum of financial needs of social ventures. Asset-backed debt finance dominates with four social banks collectively responsible for around 70% of social investment activity in 2010, and four-fifths of investment being secured lending. As others have pointed out, this is a long way from the vision of impact investors taking risks to stimulate social innovation and growth of successful social ventures, with only 5% of the investments made in 2010 being categorised as equity or quasi-equity. This is the market failure in the supply of risk capital to social ventures that was recognised by the European Commission[2] in approving the creation of Big Society Capital.

So there is a convincing argument that right now social ventures are going hungry, and being fed an imbalanced capital diet. The forecast of rapid growth - reaching c£1billion by 2016 according to one source[3] - should therefore be welcome; but even at this rate of rapid development, it is unlikely to be at a significant scale relative to mainstream finance in ten years' time[4][5]^,.

However, anecdotally, we hear that demand for investment from 'investment-ready' social ventures is patchy; and Government[6] and the Big Lottery Fund are each taking steps to boost demand - for example funding investment readiness and social incubators.

Does this mean that the upturn in the supply of impact investment will go uninvested, that social entrepreneurs aren't as hungry as they appear? Certainly there are those who believe that the increased supply of money doesn't match with the taste of social ventures, in terms of price and risk profile[7].  But this is an emerging field, without established market norms and so perhaps such tensions are inevitable as customer and supplier adapt to one another, and indeed new entrants join-in on both sides.

And there are good reasons to believe the new capital being made available can be put to work. There is a highly favourable policy environment for social ventures in the UK at the moment - not just directly supporting the supply of capital, but also through opening up public service provision[8], devolving expenditure to local commissioners and service users, and disrupting the established market structures in health and education.  This is creating space for social innovations, and new markets for social ventures to serve - and that in turn we believe is driving a growing demand for capital with impact as well as financial objectives.

There's no doubt the supply of impact investment has thus far been limited, starving many social innovations of capital or feeding them with an imbalanced debt based diet. There's no doubt that in comparison with even a five years ago, the number and value of funds available has radically increased. With policy stimulus on both the demand and supply side of the social venture sector, there's reason to be confident that the new impact investment funds entering the market will be readily consumed by hungry social entrepreneurs whose appetite for this new menu is growing.

See the full impact investment blog series:

• Impact investing - a very old idea
• Rather than feast or famine, we need a balanced diet
• Who wants impact investment? part A
• Who wants impact investment? part B
• Focusing on impact
• The path of future market development: from social investment to impact investment?

[1] Brown, A and Norman, W (2011) Lighting the touchpaper: Growing the market for social investment in England. The Boston Consulting Group and the Young Foundation. http://www.youngfoundation.org/files/images/owing_the_market_for_social_investment_FINAL.pdf

[2] European Commission (2011) State Aid n° SA.33683 (2011/N) - United Kingdom Big Society Capital http://ec.europa.eu/eu_law/state_aids/comp-2011/sa33683-2011n.pdf

[3] Brown, A and Swersky, A (2012) The First Billion: A forecast of social investment demand. The Boston Consulting Group and Big Society Capital.

[4] As 5

[5] Ludlow, J and Jenkins, J (2011) Twenty catalytic investments to grow the social investment market. Nesta http://www.nesta.org.uk/library/documents/BSFF20CatalyticInvestprint.pdf

[6] Cabinet Office (2011) Growing the Social Investment Market: a vision and strategy. http://www.cabinetoffice.gov.uk/sites/default/files/resources/404970_SocialInvestmentMarket_acc.pdf

[7] Big Lottery Fund Research (2012) Growing the social investment market: Investment Readiness in the UK.

[8] See openpublicservices.cabinetoffice.gov.uk