A post by Gemma Rocyn-Jones
Last week saw the UK government bring leading investors and architects of the social investment movement together from across Europe as part of the G8’s Task Force exploring where next for the market. Social investment has been one of the hottest topics in recent years, as an area where the supply of funds is increasing rather than decreasing, unusual in a time of austerity.
Closer to home, in May, Social Investment Scotland launched a £16 million loan fund for social sector organisations.
To support Better By Design organisations understand what these developments mean for them, The Young Foundation ran a webinar de-mystifying the world of social investment.
What is social investment?
Simply put, social investment is the provision of finance to produce both social and financial returns. It typically represents capital investment to support an organisation’s growth and infrastructure, an area long underserved by traditional grants. Social investment aligns the interests of the investor with the organisation, so both are committed and motivated by maximising their impact in a financially sustainable way. An added bonus for many social investees is the access to non-financial support that investors often bring, whether through their presence on the board or through access to their networks.
Who are these social investors?
Social investors themselves are a more familiar group than organisations may first imagine. As Social Investment Scotland’s entry to the market illustrates, they span the spectrum from traditional grantmakers like Esmee Fairbairn and Lankelly Chase, who operate their own investment funds, and venture philanthropists such as Impetus – The Private Equity Foundation, through to impact funds such as CAF Venturesome, Big Issue Invest and Nesta Impact Investment Fund and traditional financial providers such as the Charity Bank and Triodos. Alongside these dedicated investors can sit individual social investors who act as ‘angels’ supporting the development of the organisation through the temporary provision of finance.
What form does social investment take?
The type of funding an organisation needs will depend on how the funding will be used and how, or indeed if, it will be repaid. Social investment spans a range of products, from secured and unsecured loans (similar to what an individual might use to buy a house or car) through to equity and equity like (quasi equity) forms of patient capital. There are two important numbers to keep in mind though: of the £202 million invested socially, only five per cent represents equity and quasi-equity investments, which are most closely associated with financing development or growth costs. The majority remains invested via secured loans.
How to decide whether social investment is for me
There are essentially four key questions to consider when exploring financing options:
- Legally, what and how can you borrow? Your legal structure will determine what form of loan finance (if any) you can take on.
- What do you need the funding for? Is it for a fixed asset, working capital or development costs? Is there security you could put forward to the funder? The greater the uncertainty over the value the funding will bring to the organisation, the greater the risk to the investor.
- What level of repayments can your business model sustain? How much cash surplus will your model generate and over what time frame? If it will take several years to generate a surplus then patient capital may be the most appropriate.
- When do you need the funding? How urgently the financing is needed is an important factor. The higher the complexity or risk associated with the investment, the more time you need to allow to go through due diligence.
Once you know these answers you can put yourself into the shoes of the appropriate investor, think through what information they would need to be comfortable with an investment and then use your Organisational Health Scorecard to assess how closely you are likely to meet their expectations.
The slides from thewebinar can be found here.
We shared with organisations this reading on A New Approach to Funding Social Enterprises by the Harvard Business Review prior to the webinar.
The Young Foundation previously produced an animation of an Introduction to Social Investment for the Voluntary Youth Sector Organisations. Please visit the Young Foundation’s website to see the animation.