Social investment is any investment activity which has an expectation of both a social outcome and a financial return, which would usually be below market rate.
For voluntary organisations it represents a form of repayable finance that can be used for capital investment, revenue funding development, capacity building, or other ways of improving their sustainability.
Social investment can take the form of:
- a loan, usually a secured loan
- equity (only if the organisation is constituted with a share-holding structure)
- quasi-equity where the lender takes their returns as a proportion of the organisation’s future revenue
- overdraft facilities
- social impact bonds where investors put forward the capital required to run a project, and are repaid by the commissioner (usually government) based on the results – or social impact – of the delivery organisation (often a charity).
Why social investment emerged
The voluntary sector has recently experienced dramatic changes in the way it is funded, from a significant reduction in grant funding to a dominance of contracts. To adapt to this new environment, charities may need to make significant changes, such as testing a new service model or scaling up an organisation to be able to meet a new need.
Charity trustees may be wary of taking commercial loans for these purposes because grants and contracts secured in the future cannot cover the cost of debt repayment (whereas a company would borrow on the basis of being able to repay a loan through future profits).
Who gives loans?
Loans are made by social investment finance intermediaries (SIFIs), who typically borrow capital from wholesale lenders like Big Society Capital and turn this into financial products for voluntary organisations.
What social investment can be used for
Big Society Capital has published a series of case studies that provide examples of where social investment has been used to enable or grow projects, including housing stock purchase and development, reducing reoffending and developing employment skills.
How much can be borrowed and what it will cost
Intermediaries usually arrange loans on a bespoke basis with borrowers. This makes it difficult for charities thinking about social investment to work out how much they could borrow and what it would cost. However, these case studies provide some useful examples. Generally, however, the same logic as in commercial lending applies: higher risk is reflected in higher interest rates, and secured debt is considered less risky by investors.
It is often uneconomical for intermediaries to provide loans of less than £250,000, so charities have experienced difficulties seeking to borrow lower amounts.
The Access Foundation Growth Fund combines grants with loans to enable intermediaries to offer a greater range of products, particularly loans under £150,000. Voluntary organisations can only borrow from the fund via an intermediary.
How social investors ensure impact
As part of the process of an investor negotiating an investment with a borrower, the borrower will be asked to measure the impact of the social investment, and to define how they will do this.
Investment impact measurement is often developed on a bespoke basis between intermediaries and borrowers. Where a model like a social impact bond is used, impact measurement will be built into the payment mechanism of the scheme.
Can a charity make a social investment?
The Charities (Protection and Social Investment) Act 2016 is making the process of charities themselves making social investments as the finance lender clearer. It's important for charity managers and trustees to be aware of their duties and responsibilities if considering this.