What exactly is social investment? An easy place to start you might think but it was immediately apparent that there was no agreed single definition even amongst the panellists! Many in the audience espoused models of investment for the greater good of society and investment where financial return is of secondary benefit or purpose. Whichever way the term is defined, it is clear that social investment features prominently on the agenda of philanthropists, charities, corporates and governmental policy advisors . This was obvious and reflected the diversity of our audience which included private equity practitioners, management and trustees of charities and foundations, professional services firms, banks, academics and students.
Why does ”Social Investment” resonate across the spectrum? In one word – size and then as an addendum; its potential.
- The ‘social sector’ or ‘third sector’ now employs over 40 million people globally
- Over 200 million people volunteer their services for the ‘social sector’
- More than 30 universities around the world run programmes on social entrepreneurship
- The European Venture Philanthropy Association now has 135 members from 20 countries
With the increasing gap between rich and poor and the withdrawal of government investment (I am not commenting on causality) the demand for social entrepreneurs can only increase. At the same time, investors/philanthropists are seeking to optimise returns for their donations given the ever increasing demands for such funding. These returns or KPIs are at the heart of social investment ethos. They are essential to create the “currency” whereby one investment can be compared to another, fundamental in the equation to determine the classic economic pay off structure.
Once considered the domain for governments, the boundaries between economic and social investment have blurred. In developing markets where government support is weak, social entrepreneurs have been instrumental in creating organisations providing healthcare, education and micro finance. In developed markets, privately financed organisations such as venture philanthropy firms (eg Impetus Trust), have been established, providing philanthropic support to social enterprises as well as management skills and specialist expertise. Many of these organisations were established by high net worth individuals looking at giving back to the community. These individuals have been instrumental in ‘professionalising’ charities, defining and focussing on KPIs, thereby transforming them into investable organisations.
It is wise to remember that whilst impact KPIs may be bespoke and critical, KPIs on financial health and operational issues must also be met to ensure sustainable deliverability. The establishment of market intermediaries and advisers have followed the professionalization of the industry.
Once some semblance of critical mass is evident, financial innovation is usually responsive and adept at developing markets to aid the flow of capital. Social Investment or “Impact” capital is not immune to these forces.
Social impact bonds have been mooted as the tool or mechanism for scaling this market. Social impact bonds are an outcomes based contract that align returns to a mission, to improve an aspect of society (eg reducing reoffending). The private investors are reimbursed by (so far) the government and achieve a financial return only if certain KPIs are exceeded (eg the reoffending rate). If these KPIs are not met, the investors lose their money. The creation of measurable KPIs is key to attract additional capital from investors rather than or solely from governments. However, governments tend to be departmental so that the costs and benefits may straddle departmental budgets and costs will be incurred years before the benefits are seen, making governments problematical as a coupon payer. Maybe it is best for them to have skin in the game through tax incentives in the hands of investors.
Intermediaries such as Social Finance will need to play a key role in educating and drawing together issuers and investors in order to see this market grow. Venture philanthropy firms to date have played a key role in instilling KPIs in their portfolio organisations.
Demographics, the internet and social media have played an important role in developing the market for impact capital. The creation of social enterprises has been embraced by the younger population and social media has made it easier for social entrepreneurs to spread the word about their causes at a low cost.
Government policies have also facilitated social enterprise. Examples are the Social Innovation Fund in the US and the Social Enterprise Investment Fund and the launch of Big Society Capital in the UK.
The above factors have all been contributors to driving social enterprise beyond just a niche place in the economic spectrum, between purely financially motivated businesses and public services to one that is clearly resonating through boardrooms and government committees and advisors.
Hans Holmen and Ann Iveson
We are interested in your views of the future of the social investment market.
- Why are you / your organisation interested in the sector?
- What could the private sector and government be doing differently / better to drive more investment?
- How are social returns most effectively measured?
- Where next for Social Impact bonds? What problems aside from reoffending could they help? Will it be charity driven or Foundation/investors driven? Could a group of charities sharing a mission, pool together or is it a piecemeal solution for the larger charities?
The best response will win a copy of International Private Equity authored by Professors Eli Talmor and Florin Vasvari of London Business School.
For more coverage of venture philanthropy, please see a Coller Institute of Private Equity/LBS research paper that showcased Impetus Trust, entitled Catalysing Systemic Change: The Role of Venture Philanthropy at http://www.collerinstitute.com/Research/Paper/142 and an interview with Daniela BaroneSoares to be featured in the next edition of the Business Strategy Review at http://www.collerinstitute.com/News/StudentNews/15.