A new investment market could help charities, social enterprises and voluntary organisations to gain funding and avoid the dependence on continual one-off grants
In his party conference speech this week the Prime Minister made it clear he remains personally committed to the idea of expanding civil society, empowering communities and encouraging social action. In general terms most people of all political stripes can get on board with such aspirations. More controversial is the extent to which civil society organisations can and should be involved in public service delivery. But the most intractable problem of all is around, as is so often the case, the money.
The simple fact is that the ‘social sector’ remains undercapitalised in many areas. And to scale up in the way that Cameron’s vision of the Big Society requires, charities, social enterprises and voluntary organisations need access to a diverse and reliable range of financial support.
The hamster wheel of annual grant funding rounds cannot be the solution. Charity chief executives are frustrated and constrained by the need to bend their plans to the needs (and some might say whims) of grant funders rather than being able to plan the strategic growth of their organisation in a way that best meets the needs of the people they serve.
Happily there is a political awakening to this finance problem too. Big Society Capital will open soon – a new wholesale bank that can potentially pump millions of pounds gleaned from high-street banks via Project Merlin into loan finance for civil society organisations. But even that is a drop in the ocean compared to the size the social investment market in the UK could grow to – if a greater and more diverse range of investors (and not just government backed investors) can be persuaded to enter the market – a new, growth and enterprise market.
There are just over a dozen social investors and fund managers in the UK whose investments to date can be measured in the hundreds of millions rather than billions – but all report that they had many more applications for funding support than they were able to meet. JP Morgan estimated last year that the global social investment market could be worth up to US$1trn over the next 10 years.
In our review of the social investment market, Making Good in Social Impact Investment, launched yesterday, our argument is we are genuinely at a watershed moment. Social investment is an emerging market but is starting to have the record to be a properly investible alternative market. The political winds are blowing in a favourable direction.
The demand for greater volumes of social investment is clear. And, above all, with the investment track record now established by pioneers like CAF Venturesome, Bridges Ventures, Triodos, Big Issue Invest, Social Finance, Esmée Fairbairn (and yes, The Social Investment Business) – and by their investees – an investment case and financial prospectus can now be set out for investment in the social sector.
This should give a basis of confidence for existing social investors to raise more funds, for new social investors to come in, and, over the medium term, to start attracting mainstream investors, further increasing the supply of capital available. Pension fund managers, investment banks and high net worth individuals should begin to feel it makes sense to look at and begin to understand this exciting alternative asset class which offers sustainable financial return, assessable risk and the potential for diversification.
And as an emerging market, the good news is both that other emerging markets have successfully emerged towards investibility over time (the housing association finance market being one example we describe in our review), plotting the path this market can take, and that there is a wealth of international examples in this global as well as domestic market.
So, to make this happen, existing social funders need to work together to help bring about a step change in the size of the social investment market by launching new funds and reaching out to mainstream investors – getting them to allocate perhaps just small parts of their portfolios initially. They need to collaborate as well as compete on carrying on building the investment track record and statistics for this emerging market and they need to build for scale.
Because growth, collaboration and partnership in this market is good not only for investors and civil society organisations – but also for the vulnerable people who will be increasingly relying on them for help and support as the public sector shrinks.
Dr Rupert Evenett is a non-executive director of The Social Investment Business and co-author of the report Making Good in Social Impact Investing
