Social Investment For Dummies What social finance can (& can t) do for your social enterprise or charity Workshop session by Helen Heap, Social Investment Analyst Quid Pro Quo The Third Sector Finance Conference September 2013
What is social investment? Social investment is the provision and use of capital to generate social as well as financial returns. Social investors weigh the social and financial returns they expect from an investment in different ways. They will often accept lower financial returns in order to generate greater social impact. Some interpretations of social investment include the provision of capital without any expectation of financial return. When we refer to social investment, however, we mean investment mainly to generate social impact, but with the expectation of some financial return. Source: Big Society Capital website
Social Investment Market Overview Total market size estimated at 165mn in 2010/2011 84% of that was secured lending 11% unsecured lending 5% quasi-equity or equity Big Society Capital (BSC) launched April 2012 funded by 400mn from dormant accounts and 200mn from UK high street banks BSC only invests in social investment finance intermediaries; BSC does not fund delivery organisations directly Social investment market forecast by BSC to reach 1bn by 2016
Different types of finance, different jobs Different types of financier do Different jobs Lender - secured Purchase of fixed assets - buildings or equipment Lender - unsecured Provision of working capital - funding day-to-day trading Investor - equity or quasi-equity Fund development of business; build reserves / rainy day funds Philanthropist - grants Fund delivery of services; maybe some capacity building
How do financiers decide whether to fund something? Grants Grant funders do not require any return of original investment or other financial returns They expect to lose 100% of the money they provide in return for delivery of pre-specified social outcomes Evidence of delivery will be required via output or impact measures These will often be highly specific to individual funders Decisions to invest will be based on track record of the delivery organisation and the specific objectives of the funder
How do financiers decide whether to fund something? Non-grant funders Rule of thumb rate of return on capital invested must be greater than the cost of capital Translation what you get back must be more than you put in Cost of capital to any financier is determined by: i. the amount of money provided ii. how long it is used for iii. the risk of losing some or all of it Whatever type of finance you take, the amount you have to pay for it will depend on how certain the financier is that they will get all of their capital back at the end of the agreement
Main Social Finance Providers Loans Investor Type of Funding Size Buzzbnk Unsecured Loans 1k to 30k Community Generation Fund Secured Loans 20k to 20mn SIB Adventure Capital Fund - Main Investment Fund (currently closed) Grant & Secured Loans 50k to 750k Charity Bank Unsecured & Secured Loans 50k to 1mn Social Investment Business Loan Fund (from Autumn 2013) Unsecured Loans TBC
Main Social Finance Providers Non- Debt Investor Type of Funding Size CAF Venturesome Triodos Bank SIB / UnLtd Big Venture Challenge (reopening 2014) Big Issue Invest Social Enterprise Investment Fund Unsecured Loans, Underwriting, Quasi-Equity Secured Loans, Social Impact Bonds 25k to 250k 25k to 15mn Loans or Equity 50k to 250k Loans, Quasi-Equity & Equity 50k to 1mn Nesta Impact Investments Loans, Quasi-Equity & Equity 150k to 1mn Social Venture Fund Loans, Quasi-Equity & Equity 250k + Esmee Fairbairn Finance Fund Loans, Quasi-Equity & Equity up to 500k Impetus-PEF Grant & Social Impact Bonds 500k - 1mn Impact Ventures UK Fund (LGT& Berenberg) Loans, Equity 500k to 5mn Social Finance Social Impact Bonds 1mn to 10mn Bridges Ventures Social Entrepreneurs Fund Quasi-equity Up to 1.5mn Bridges Ventures Social Impact Bond Fund Social Impact Bonds Up to 3mn SIB Adventure Capital Fund - Community Builders (currently closed) Grants, Secured Loans, Quasi- Equity, Guarantees 200k +
Secured loan key features Contract for return of original money + regular payments of interest within agreed time period Risk of loss is mostly determined by the quality of the collateral (asset e.g. building or machine) backing the loan Due diligence by the lender will focus mostly on the collateral Interest rates charged typically between 2.5% and 7% depend on the term of the loan
Unsecured loan key features Contract for return of original money + regular payments of interest within agreed time period Risk of loss is mostly determined by the quality of the borrower Due diligence by the lender will focus on the credit rating, trading history and existing assets/liabilities of the enterprise & management Interest rates charged typically between 9% and 20% depending on the type of loan and term
Quasi-equity key features Legal agreement between investor and enterprise; investor buys from the enterprise a right to a share of revenues over a defined period Investment is entirely at risk; if expected financial performance is not achieved a lower, possibly zero, financial return will result Due diligence by the investor will focus on the viability of the business model, the track record of management team, credibility of forecasts Expected rates of return (IRR) in a range of 10% to 25%
Quasi-equity - example CAF Venturesome Revenue Participation Agreement with Charity Technology Trust 50,000 investment Share of annual revenue paid to investor 2% Target IRR 10% First year revenue assumed 600k; 15% per annum growth in revenues forecast over 5 years Average monthly payment to investor from revenues over 5 years 1150 Total payment to investor after repayment of original capital 18,800 Note: this example does not include arrangement fees
Equity key features Investors will expect to own a significant share of the business and have board representation No contractual requirement for return of capital but in practice investors will be expecting to exit the investment within 5 10 years in order to realise capital gain Investment is entirely at risk; success ratios are usually well below 50% Due diligence by the investor will focus on the viability of the business model, the track record of management team, credibility of forecasts and growth potential of the business Any financial payments are made to shareholders in the form of dividends out of financial surplus Required rates of return often 20% + (IRR)
Equity - example Bridges Ventures and the TheGym 9mn invested in 2007; further 7mn invested 2010 Majority stake sold to a private equity company in June 2013; 3.7x multiple to investors (i.e. after fees and profit share to Bridges Ventures) Reported IRR of 50% Bridges Ventures retain a 25% stake in the company and a seat on the board.
Scope Social Bond 2mn bond listed on Euro MTF Stock Exchange Luxembourg 2% fixed annual interest payment, paid semi-annually 3 year term Unsecured Funds used to expand Scope s revenue streams additional retail shops & new supporter recruitment Annual reporting of social impact 2012 report by The Good Analyst
Social Impact Bonds key features Currently 15 SIBs outstanding including Peterborough (reduction of reoffending) and 2 rounds of DWP Innovation Fund (young people) Private investment provides up-front funding to delivery organisations for prevention and early intervention services High value outcomes-based contracts public sector pays if (and only if) the intervention is successful Transfer of risk from public sector to private investors Financial returns to investors via outcomes contract if outcomes don t improve then investors don t recover their investment
Social Impact Bond - example Think Forward Social Impact Ltd 3mn payment by results contract with DWP Innovation Fund to reduce the number of young people who are NEET in schools in Shoreditch, London Private Equity Foundation (PEF) is the financial intermediary, Tomorrow s People (TP) is the delivery organisation. Very close working relationship between them to ensure operations are delivering to maximum potential. Contract pays out if improvements are made for 7 different outcomes for 950 young people over 3 years TP receives funding to deliver service up-front; investors receive financial returns only once verifiable outcomes are achieved
UnLtd Big Venture Challenge - grant & debt/equity combination Experimental programme launched 2011 to provide high-risk capital in the 50k to 100k range for high growth social ventures Initial grant of 25K + opportunity to apply for additional grant of between 50k and 150k if matched by loan or equity co-investment of equal or greater amount After first year: 12 deals; 1.2mn of investment, using 570k of BVC match-funding; 67% of investment was equity finance; 66% of equity finance provided by angel investors new to social investment Further cohorts to follow in 2014 and 2015
Investment & Contract Readiness Fund 10mn from Cabinet Office, managed by Social Investment Business Grants of between 50k and 150k to enable social ventures to prepare for external investment of at least 500k Must use an approved provider to purchase tailored capacity-building support Currently in review period and fund is closed to new applications but expected to reopen soon Big Lottery Fund expected to launch similar 10mn fund, called Big Potential, aimed at VCSE organisations, soon
Social Investment or Social Finance? Social Investment Capital at risk Capital made available to generate social return only while business model is developed Financial returns available over longterm once financial sustainability achieved Building a social enterprise Social Finance Capital protection Capital made available to generate financial return from the outset Social returns generated as a result of funding service delivery Financing a social business
Social finance pros Around 30 social investment finance intermediaries (SIFIs) now exist to help social ventures secure funding 600mn of funding from Big Society Capital is there to help SIFIs provide finance for social ventures SIFIs should have a better understanding of social businesses than purely commercial funders, therefore more willing to provide finance
Social finance cons Social finance is not appropriate for all social organisations Social investors want their money back plus a financial return you must have the means to make regular financial payments Application processes can be long and arduous only apply if you are sure you meet the criteria Social investors will require you to report on your social impact in addition to meeting financial criteria make sure you have the resources to do this The greater the risk taken by the investor in providing you with finance, the more information they will expect from you operational and social impact
Can Social Finance Meet Social Need? Report June 2013 out the Authors len Heap isan independent social investment analyst. She was Social Investment Manager at morrow s People and priorto that Helen spent over 20 years in various financial roles with Abbey Life vestment Services, Goldman Sachs and Sloane Robinson. bbie Davisonis the Director at Can Cook CIC and a Board Member of both SocialEnterprise North est (SENW), Social Enterprise Network (SEN Merseyside) and OpenCulture. Robbie is a practitioner, th 24 years experience in developing and leading Social Enterprises. http://www.tomorrows-people.org.uk/files/blog/can-social-finance-meet-social-need-heap-and-davison-june- 20131.pdf
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Helen Heap Independent Social Investment Analyst