What is Social Investment?
Social investment is the use of finance to achieve a social, as well as a financial return. Money is provided by investors who want to see it paid back and see that it has been spent on making society better.
Social investment provides finance to build an organisation’s long-term capacity to achieve its social mission. It is not an income source, but a financial tool that may create opportunities for VCSE organisations to consolidate and grow.
Social investors often offer better interest rates and more flexible terms than high street lenders as they are looking for social returns as well as financial. They are more likely to be willing to accept higher levels of risk and lower levels of financial return in exchange for social impact.
Social investment can help by providing working capital to even out cash flow (e.g. between contract payments or grants) or by enabling organisations to create new, extended or different ways of delivering goods and services, such as buying a building or investing in equipment or staff.
VONNE has been working with Big Society Capital to support their Let's Talk Good Finance events which aim to bring together charities, social enterprises and organisations with social investors and intermediary bodies to network, share information and discuss the latest issues relating to social finance.
Big Society Capital is also responsible for the Good Finance website, a comprehensive resource for anyone considering social investment.
Types of social investment
Most debt finance is secured or unsecured loans, usually repaid over a set period of time with interest. It can also take the form of overdrafts and standby facilities. Secured loans are set against ownership of a building or other asset which an investor will be able to sell if the loan is defaulted on; they are considered relatively low risk to investors. Unsecured loans are higher risks and so attract higher interest rates, to offset the risk.
With equity finance, an investor provides a sum of money in exchange for a stake in the organisation, normally in the form of shares or dividends on profits made. The organisation has no legal obligation to repay the amount invested or interest. This is only available to organisations that have legal structures allowing them to issue shares or to distribute profits (e.g. companies limited by shares, industrial and provident societies).
This is a hybrid of the previous two forms. It is similar to a conventional equity investment but does not require an organisation to issue shares. The financial return for the investor is based on the future financial performance of the organisation (usually a proportion of an organisation’s income in the case of VCSE). If financial performance is not achieved, the returns to the investor may be lower than expected, or nil. If financial performance is better than expected the returns may increase.
Social Impact Bonds
Social Impact Bonds (SIBs) are a form of large-scale investment around a particular social theme in a specific location. They may involve a number of VCSE organisations delivering a variety of interventions over several years. SIBs do not fit neatly into the definitions of social investment described above. VCSE organisations are paid by contract for their work by investors. Public sector commissioners (usually government) agree to repay investors if it can be shown that the work undertaken has resulted in significant improvements in social outcomes and that this has led to a reduction in public spending.
Is social investment right for my organisation?
Social investment is not for everyone. Some of the questions an organisation should be asking themselves when considering it as an option are:
- What do we need the investment for?
- Do we have an income stream that can be used to repay an investor?
- What social impact are we hoping to create? Can we provide transparent evidence of our social impact?
- Does the board understand - and have the appetite for - the risk relating to social investment, and are they prepared to take appropriate actions to mitigate that risk?
- Does our legal structure allow us to obtain a loan?
- Do we have the right skills and experience to plan and manage the finances and deliver against a robust business case?
Social investment advice for Boards
Has your Board considered whether social investment could help deliver your mission?
Practical support, guidance and information to help board members of charities and social enterprises understand the opportunities and risks of social investment are available on the Big Society Capial's Get informed pages.
Learning from the £10m Ways to Wellness social prescribing programme
In recent years the Government has encouraged the voluntary and community sector to consider social investment as part of its funding mix. In the health and wellbeing sector an eye-catching example is the £10m Ways to Wellness programme in the west of Newcastle upon Tyne that VONNE helped set up. Launched in April 2015, over six years it will help up to 8,500 patients with long term conditions to manage their health better and thus reduce costs to the health service.
Read more about the programme in the VONNE briefing 'Social investment for health and wellbeing'.
- When considering any income generation path, your Local Support Organisation (LSO) can advise you; see VONNE's directory of LSOs in the North East to find your nearest.
- VONNE has produced a Social Investment Jargon Buster to help you navigate your way around the terms and language of social investment. There are several others available online including one from social investor Esmee Fairbairn Foundation.
- Big Potential: offer support and investment readiness grant funding to VCSE organisations considering or working towards investment (local providers listed below). The website also has in-depth information on social investment including case studies, guides and a diagnostic tool. Read their guide to social investment. They also provide a quick "snapshot" guide.
- NCVO: offers a range of information and resources such as the KnowHow site, which includes a section on social investment within their Knowledge Bank. The NCVO blog also has several useful articles including one on social investment readiness and one discussing the pros and cons of loan finance.
This is a selection of key local and national investors and investment funds but is by no means exhaustive.
North East social investors
- Big Potential: offers support and investment readiness grant funding to VCSE organisations considering or working towards investment. North East approved providers are:
- North East Finance: various funds aimed at North East SMEs, including social enterprises.
- North East Investment Fund: North East LEP area (Durham, Northumberland and Tyne & Wear). Capital loan fund for projects that encourage economic growth and create jobs.
- North East Social Investment Fund: Managed by Northstar Ventures. £100,000 - £1m.
National social investors
- Big Issue Invest: £50,000 - £1.5m.
- Bridges Ventures: Offers Social Impact Bond Fund and Social Entrepreneurs Fund. £300,000 - £3m.
- Charities Aid Foundation: Charity banking services and loans of £25,000 - £5m.
- Charity Bank: £50,000 - £2.5m plus banking services.
- Co-operative and Community Finance: £10,000 - £150,000 for employee or community owned social enterprises.
- Esmee Fairbairn Foundation: Minimum £100,000. Also offers grants. Areas of interest include arts, children and young people, environment, social change.
- Impact Ventures Fund: Growth capital (equity, debt or quasi equity).
- Key Fund: Up to £300,000.
- RBS Social & Community Capital: £30,000 - £750,000 for sustainable, investment ready organisations.
- Social and Sustainable Capital: Partner of Social Investment Business £250,000-£3m. Includes Community Investment Fund and Third Sector Loan Fund.
- Social Impact Accelerator Fund: £200,000 - £1m
- Triodos Bank: Lending and banking services.
- Unity Trust: Lending (usually over £250,000) and banking services.