Social Investment: It’s not as bad as you think NCVO / EVOLVE 2015The New Funding Landscape

David Floyd Social Spider CIC

What I do and why I’m here

• MD of Social Spider CIC, a small social enterprise based in Walthamstow

• Writer and researcher on social investment for MoJ and Big Lottery Fund

• Project manager for Esmee Fairbairn-funded: Alternative Commission on Social Investment

What is social investment?

‘finance provided for VCSE* organisations, whichthe investors expect to both get back and tocreate social impact.’

*VCSE stands for: voluntary and community organisation orsocial enterpriseSource: Social Investment Explained (Big Lottery Fund)

Talk (a bit) like a social investor - some more handy acronyms + terminology:

SIFIs - Social Investment Finance Intermediaries - in most cases, organisations raise funds(primarily) from institutional investors and invest that money in charities and social enterprises.

SITR - Social Investment Tax Relief - a tax break for individuals making unsecured investmentsinto charities, social enterprises and social impact bonds

Institutional investors - people who invest other people’s money including our pensions

HNWI - High Net Work Individual - people who are really rich - >£1million (assets excludinghome)

The Mass Affluent - people who are quite rich - £100,000-£1million

Retail investors - any of us who have a bit of spare cash

1. Why everyone’s talking about social investment (about from the

people who aren’t)

Grants are hard(er) to come by

In 2003/04 grants peaked at£6 billion, over half of allincome from government.

In 2012/13 grants made upjust 17% of income fromgovernment (£2.2 billion).

There are more contracts available

In 2003/4 governmentcontracts were worth£5.6 billion

By 2010/11 they’d reached£12.3 billion

But by 2012/13 they’ddropped to £11.1 billion

(In theory) growing numbers of investors are seeking both financial and social returns

“If we can create instruments — likesocial impact bonds — that can delivera financial return of about 7%, a highsocial return and limited downsiderisk, then we can meet two needs. Wecan provide reasonable returns thatare uncorrelated with equity marketsand attract capital to entrepreneurswho can develop innovative andeffective ways of improving the fabricof our society.” - Sir Ronald Cohen andWilliam A. Sahlman, Harvard BusinessReview, 2013

The UK is home to ‘the world’s first ever social investment market builder’

“Big Society Capital is going toencourage charities and socialenterprises to prove their businessmodels – and then replicate them.Once they’ve proved that success inone area they’ll be able – just as abusiness can – to seek investment forexpansion into the wider region andinto the country.” - David Cameron, April 2012

Source: FT.Com

“The launch of Big Society Capital isvery welcome news to the socialenterprise sector. Access toappropriate finance remains thebiggest barrier for social enterpriseskeen to grow and have a greaterimpact. The UK social investmentmarket is exciting and set to attractcapital to the sector at a time whenother sources of finance areshrinking.” - Peter Holbrook, SocialEnterprise UK, April 2012

Source: Cabinet Office

The UK government has put shedloads of £ into building the UK’s ‘Social Investment Market’

Pre-2010:• Adventure Capital Fund - £25 million• Futurebuilders - £150 million • Social Enterprise Investment Fund - £110

million• Community Builders - £70 million Post 2010:

• £10 million Social Incubator Fund • £10 million Investment and Contract Readiness

Fund• £60 million Commissioning Better Outcomes

Fund (with Big Lottery) • (At least)£400 million of unclaimed assets put

into social investment wholesaler, Big Society Capital - with £200 million more from banks

• Social Investment Tax Relief

Figures from After The Gold Rush - the report of the Alternative Commission on Social Investment.

Big Lottery (since 2010):• £11.25 million to Social Finance to develop

Social Impact Bonds• £6 million Next Steps Fund • £8.5 million Unltd’s Big Venture Challenge • £10 million Big Potential

2. The 1st Billion? The gap between rhetoric and reality

Is it £1 Billion or £1 Trillion?

“Those of us with a stake in this markethave always believed that it has a hugepotential. From a base of just £165Mof deals in 2011, this report shows usthat demand could reach £750M in2015, and around £1B the followingyear, if current trends endure. This isencouraging news. Now we just needto make that demand real, and ensurethe supply of capital is there to meetit.” - Nick O’Donohoe, CEO, Big SocietyCapital - from The First Billion, BostonConsulting Group, September 2012

“We need to capitalise on the “first

trillion” of potential global investment

money identified by the Social Impact

Investment Taskforce, launched in 2013

under the UK’s presidency of the G8. £1

trillion – that’s what it cost to deliver our

health and education systems for the last

five years. Just think what that money

could mean on the ground: how many

lives it could transform.” - Iain Duncan

Smith Source: Daily Telegraph, March 2015

Social investment v Investment into social organisations

Total value of deals in ‘Social Investment Market’ 2011-12

£202 million

Average size: £264,000 / 90.2% secured

Total loans owed by VCS organisations - 2012/13

£3.5 billion“Across the sector as a whole the average loan size is under £50,000… The majority of loans outstanding across the sector as as whole are between £20,000 and £50,000.” / 75% secured - NCVO Civil Society Almanac 2015

Social investment v GrantsUnsecured finance provided by ‘Social Investment Market’ - 2011-12

£19.8 million

Source: Growing the Social Investment Market (GHK, 2013)

Grant income of VCS organisations - 2012-13

£5.2 billion

Source: NCVO Civil Society Almanac 2015

Mismatches between supply and demand

What we want “The median amount of finance sought by socialenterprise was £58,000 – below the minimum thresholdsof many specialist social investors and financiers. It can beargued that some specialist financing structures havefallen out of step with the actual needs of thesector.” - The People’s Business, SocialEnterprise UK (State of Social Enterprise Survey, 2013)

49% VCSEs looking for finance sought ‘mixed-fundingproduct’ / 7% able to get it - Investment Readiness in theUK - (Investment Readiness in the UK, Clearly So/NPC,2012)

What we get2011/12: Average investment size: £264,000 / 90.2%secured loans - Growing the Social InvestmentMarket (GHK/City of London, 2013)

“Small loans are expensive. They’re expensive tooriginate, they’re expensive to monitor. The default risk isalways going to be reasonably high and there’s a point atwhich the rate of interest is just inconsistent with thesocial mission of the enterprise” - Nick O’Donohoe, BigSociety Capital - Beanbags and Bullsh!t, 2013

Reasons why you definitely shouldn’t attempt to secure social investment

• As a direct replacement for contracts, grant-funding or donations

• To support activities that do not have a (potential) revenue stream

• Because it seems to be the only type of funding that’s available

Until recently you would have been unlikely to be offered social investment if...

• Your org is small: turnover < £5million

• You want a small investment: < £250k • You do not own a building

• The business activity you are seeking investment for has no track record

3. Just because you’re sceptical doesn’t mean you should

ignore it entirely

Grand claims for social investment are as yet unproven but there are several ways that

it’s already useful...

If you’re bankable - Social Banks: like banks but better

“We only lend to and invest in

organisations that benefit people and

environment. We connect savers and

investors who want to change the world

for the better with entrepreneurs and

sustainable companies doing just that.” -

Triodos

“We offer a fair rate of interest and are totally

transparent about how we use their money. In our

latest survey 99 per cent of our savers said they

would recommend us to a friend.

Our specialist knowledge and commitment to the

sector means that we have been able to provide

flexible loans to support more than 1,000 charities,

community organisations and social enterprises.” -

Charity Bank

Big Society Capital-backed funds / Investment readiness support

Big investments for big organisations

• Increase in availability of unsecured loans of > £250k - eg. SASC

• (Mostly) Equity investments in CLS social enterprises/social businesses from social venture funds - eg. Nesta Impact Investments

• New approaches to buying property for social good - eg. Real Lettings Fund

Investment readiness to start on route to investment

• Start-up support from Social Incubator Fund

• Big Potential - helping organisations to raise £50k-£500k

• ICRF - helping orgs to raise investment or win contracts of > £500k

Social Impact Bonds - for all the (many) drawbacks, an opportunity to get flexible funding to deliver services with clear, measurable outcomes

• Payment-by-results contracts where social investors put up the money for VCSEsto deliver services

• Commissioners pay investors based on outcomes achieved

• By August 2014 - 25 in the whole world, 15 in UK, 10 funded through a single DWP programme

• Pros: payment for delivery, measurement of outcomes

• Cons: high costs - SPVs, wide range of subsidies, VCSEs (usually) don’t benefit from upside

SITR - potential to raise relatively small scale finance from HNWIs, mass affluent and individual retail investors

• Unsecured loans and equity deals

• Investors get 30% of their investment off their tax bill

• No repayments for first three year

Freedom Bakery (right) raised £45,000in SITR deal they set themselves.

Community Shares + Crowdfunding

Are great but I’m not going to saymuch about them to avoid duplication

Access to the rescue - smaller, riskier finance likely to be available soon

Access: The Foundation For SocialInvestment set up to:(a) create a pipeline of investment opportunities

for social investors(b) placate sector leaders and organisations angry

about the irrelevance of most social investment to most charities and social enterprises

(delate according to audience)

Blends investment from Big SocietyCapitaland grant funding Big Lottery Fund toenable SIFIs to offer unsecured loans andequity/equity-like investments under£150,000

Stated aims of Access Growth Fund:

• Help more established organisations be able to

maintain and increase their social impact and their

sustainability

• Enable newer and early stage charities and social

enterprises deliver social outcomes, by providing them

with the finance they need to continue and grow

• Improve the delivery capacity of these organisations

so that they are able meet the needs of their target

group

• Share learning by being open, transparent and

collaborative around best practice to the benefit of

both users of the Growth Fund and of other funders

and bodies interested in supporting social impact.

Contact info:David FloydSocial Spider CICWebsites: www.socialspider.com / http://beanbagsandbullsh1t.com/ Email: david@socialspider.com Phone: 020 8521 7956 / 07789 778 085