Who wants impact investment? Part B

Joe Ludlow and Jo Casebourne - 13.11.2012

In our last blog post we looked at how the shift to outcomes based purchasing in the public sector is changing the nature of demand for impact investment, and how investors are responding to that.

In this post we continue to look at some of the trends we see changing demand for impact investment.

From central procurement to local and individualised purchasing

While the terms of trade with the public sector are changing towards payment on outcomes, so is the scale and the nature of the entities purchasing public goods. Central government policy increasingly encourages decentralisation, localism and competition among service providers, for example: the abolishment of Primary Care Trusts in the NHS in favour of GP Commissioning Consortia; or the conversion of local authority managed schools to independent academies alongside additional competition from free schools.

These significant changes in management structures and disaggregation of demand for services is creating opportunity for social ventures to compete for business, and for a range of product and service innovations to be purchased when individual commissioners adopt different specifications for services.

Alongside government purchasing, public expenditure is increasingly being put in the hands of service users making public service markets increasingly consumer markets. For example, funding for adult social care, for care of children with disabilities is paid to service users to select a package of care from a range of providers.

And indirectly, government policy is stimulating demand for social ventures in the energy efficiency and renewable energy markets, e.g. the Feed-in-tariff has created a consumer market for renewable energy products; the Green Deal will create a consumer market for retro-fitting of energy efficiency measures in low-income households in poor housing stock. New social ventures are starting up with consumer product and service innovations and sales skills e.g. Cool2Care (backed by the Innovation in Giving Fund, managed by Nesta), helps match families with disabled children with appropriate personal assistants, paid for with family income and personal budgets.

These changing public markets, and the social ventures operating within them need investment capital to start-up, develop their products and grow sales. We have already seen specialist funds in the UK market attuned to the needs of social ventures operating in this environment: the Department of Health / Social Investment Business Social Enterprise Investment Fund invests in social enterprises providing healthcare; the FSE Community Generation Fund is providing capital to communities installing renewable energy products.

These are impact investing funds established to specialise in particular public service markets, and we think there will be more of them.

New social ventures often with technology at their core

The final trend we want to highlight is the increasing application of technology by social ventures to enable product and service innovations that have impact on social outcomes, at a price and cost that creates profits.

This is the application of technology, far more than it is the development of new technology - applications that speed up services through automation, enable better access, and creating more sustainable business models.

For example: telehealth solutions help medics to have easier communication with, and monitoring of, older people in the patient's home, improving their quality of life and reducing the NHS' costs; adaptive learning technologies use artificial intelligence to bring the benefits of really high quality personal tutoring at very low cost and so within reach of families on middle and low incomes.

Again, the impact investment market is responding to this trend. Omidyar Network, now with a UK office, has a specialism in consumer internet and mobile technology investments for social impact. Bethnal Green Ventures is an accelerator programme focused on startups applying digital technology for social impact, and our own fund - Nesta Impact Investments has a particular interest in technology.

We think that demand for impact investment is growing - but in different ways now in comparison with a decade ago when so much focus was on the traditional charity sector. These are social ventures who are innovating both in the design of their products and services, and in their business model, to serve very different public service markets.