The social investment sector makes lots of big claims about providing much-needed capital for social enterprises to increase their impact on people and communities. But is the finance that they’re offering really best serving the needs of social enterprises, and how can social investors create more flexible financial products that address the very real financial challenges for businesses trying to do social good?
B minus. Could do better. A fairly standard appraisal in the social enterprise sector of the kinds of repayable finance – loans and equity investments – out there for them. The arguments behind this have been made many times before, but for those new to the discussion, I’ll restate the key points here:
From a traditional investment perspective, attempting to solve for all of these needs is a bit like squaring the circle. The sector’s basically asking investors to take more risk, expect less return, do it over the longer term and with little or no security. But given that social impact investors are an innovative bunch - or at least seem to be interested in creative solutions to complex problems - this should be a welcome challenge.
Earlier this year I attended The Gathering – essentially Burning Man for the UK social investment community – where I co-hosted a session with Dirk Bischof from Hatch Enterprise and Scott Greenhalgh from Bridges Evergreen Holdings to meet that challenge head on. While Dirk threw down the gauntlet from the entrepreneurs’ perspective, Scott and I provided a couple of examples of what’s being done already to address these capital issues.
Bridges’ Evergreen fund provides long-term (10+ year) risk finance of £2 million - £10 million, in the form of either debt or equity and without the need for security – or an exit. The fund is looking to recoup its investments by means of dividends and interest payments and, as such, looks for opportunities in proven business models with strong growth projections. Bridges’ successful track record in the UK social investment market has helped it to get this structure off the ground and persuade its own investors.
Meanwhile, at Nesta Arts and Culture Finance, the Cultural Impact Development Fund takes the idea of trading off financial returns in favour of social returns quite literally. Borrowers have the opportunity to reduce the interest rate payable on their debt if they can provide evidence for agreed annual social impact targets. The fund offers unsecured loans of between £25,000 - £150,000 and is supported by Access – The Foundation for Social Investment, with capital from the National Lottery Community Fund and Big Society Capital. Over a five-year repayment period, a maximum discount of 1.8 per cent is possible – a fairly significant haircut to an average interest rate of 7 per cent.
Following these examples, we asked the audience, comprised of other investment intermediaries, investors, advisors and entrepreneurs, in an attempt to elicit ideas about how we might make finance more long-term, risk-tolerant, affordable and flexible in nature.
This was a far-ranging conversation involving around 30 people – and I don’t have nearly enough space here to do it justice! But here are the main takeaways for me:
Having had time to reflect since The Gathering, three other ideas come to mind that would help us create more useful investment products for the social sector: