Joe Ludlow and Jo Casebourne - 19.11.2012
The UK's comparative advantage in developing the impact investment market, together with the relatively small size of supply relative to present and future demand, provides an opportunity for the UK to lead the world in investing in public and social innovation, and in developing innovations in ways of financing for impact. The Impact Investment industry could be a great British success story.
But it is becoming clear there are competing views on how the market should develop.
We think these competing viewpoints are broadly clustered into three main visions of the role of impact investment:
1. 'access to affordable capital for the social sector' - this view focuses on the demand for finance from social sector organisations and holds that the social sector needs 'affordable' finance because there is a market failure in both the price paid for the social sector's outputs reducing profitability, and a market failure in the provision of capital by mainstream financial institutions to the social sector. Together this puts social sector organisations at a comparative disadvantage compared to private sector organisations e.g. social sector organisations struggled to compete with the private sector for contracts from the DWP's Work Programme, and struggled to access working capital to deliver on those contracts that were won.
Whilst, there is no doubt that the social sector needs access to finance, this traditional sector-based view of demand can see finance as being an end in itself, or at least the only barrier to greater impact.
2. 'the lack of finance is a problem of perceived not actual risk' - this view considers that it is possible to make attractive financial returns from impact investments, but that the mainstream market does not yet understand the risks and returns of impact investments and so does not provide finance. It is hoped that by demonstrating impact investments further new mainstream investors will be attracted into the market to supply finance. This view assumes that investors are primarily motivated by financial return and see impact as a differentiator between assets.
3. 'creating a different type of investment market' - this view:
Nesta's work on impact investment is built upon the last of these market viewpoints. This is not to say our view is right and others are wrong. However, we find this view most consistent with
In this series of blogs we've sought to discuss some of the dynamics of the impact investment market in the UK as we see them. We hope you've enjoyed them and welcome your comments and own experiences.
Much of this thinking is reflected in the approach of the Nesta Impact Investments, the new early stage social venture investment fund managed by Nesta Investment Management.
See the full impact investment blog series:
 Nesta (2011) Investing for the good of society: why and how wealthy individuals respond. Nesta http://www.nesta.org.uk/library/documents/BSFFGoodofSocietyprint.pdf
 Worthstone (2012) Financial planners as catalysts for social investment. Nesta http://www.nesta.org.uk/library/documents/Financialplanners2.pdf
Download the entire Impact Investment blog series from Joe Ludlow and Jo Casebourne