Social Investment Deal of the Year?


Magazine article

On Monday 9 December 2013 LGT Venture Philanthropy and Berenberg announced a first close of their social impact fund, Impact Ventures UK (IVUK), raising just over £20 million. What marks out this deal is that it is the first social investment fund, to our knowledge, that has secured a local authority pension fund (London Borough of Waltham Forest Pension Fund) among its investors. Furthermore IVUK has assembled an investment committee two thirds of which are independent and drawn from a variety of backgrounds relevant to helping social enterprises scale.

IVUK was created to offer investors the opportunity to engage in and learn from the social investment sector as well as give the entrepreneurs behind the social enterprises access to strategic and mentoring support. IVUK focuses on identifying businesses with specific and measurable positive social impact and a sustainable financial model. The investors will benefit from an investment education programme and have exclusive co-investment opportunities.

In the two articles below Richard Brass and Nick Jenkins tell the story from the founder’s and investor’s perspective.

The Founders: Richard Brass, Berenberg

The thinking behind IVUK was to create a source of capital that could be helpful to all stakeholders; the investors, the entrepreneurs and the beneficiaries. The needs and wishes of each are different but critically their interests are aligned; to create sustainable and scaleable positive social impact. It is this alignment that draws IVUK’s various parties together. A collaboration amongst different individuals and partners to work together.

Social investment is at an early stage but we are seeing the emergence of business models with potential investable returns. This is a source of funding that can sit alongside charitable grants and donations.

It is not a new concept but perhaps the events over the last few years have brought social investment into sharper focus. Our collaborative approach is designed to encourage more investors into the market. We recognise that shared values and shared information can lead to a better informed community which should help with the building of a stable foundation from which social enterprises can scale and, most importantly, beneficiaries are empowered with the relevant skills and support to have greater independence.

The Investor: Nick Jenkins

Earlier this year I was asked to join the investment committee, of Impact Ventures UK (IVUK), the new social impact investment fund launched this December by LGT Venture Philanthropy and Berenberg.

I agreed to join the investment committee, which is a voluntary role, because I was intrigued by the growing social investment sector and sitting on the committee would give me a great view of the types of social enterprise looking for investment. In return my view as an entrepreneur and serial investor should offer a useful perspective.

There has been plenty of hype about social investment as the new way forward but we shouldn’t get too carried away with it. Social finance is not “charity 2.0” or whatever the current buzzword is. It is merely one additional form of funding that suits a narrow band of social activity. This is not going to replace tin rattling, sponsored bike rides or grants, but it might bring about a significant change in the way we develop innovative ways to solve social issues.

There is no agreed definition of social enterprise at present, but for me the critical issue is whether or not the founders are driven by social mission or profit. The purest form is when the founding shareholders design the constitution to reinvest profits in the mission rather than allowing the distribution of profits to shareholders. This doesn’t preclude external investors from making a financial return for providing the funds any more than the suppliers of their office furniture will make a profit from supplying them, but there is no ambiguity about the motivation of the people driving the business.

We spend £400 billion on health, education and welfare in this country. Large chunks of this expenditure is outsourced through purely commercial entities such as Serco and Capita and some is channelled through charities and social enterprises who are driven by an interest in the outcome itself.

If you want to commission an air-conditioning system the private sector is very good at competing but when you are working on the management of care for vulnerable children would we not rather commission an organisation driven by the best outcome for the child rather than merely satisfying the pre-agreed measurement criteria in order to maximise profits? Are we not concerned that there is too much temptation to massage the figures a little or economise on the aspects that are not measured?

Part of the problem with the current system is that many social enterprises don’t have the scale to compete with the big balance sheets of large corporates. Social investment can bridge that gap and provide the funding to build their capacity. For many years social enterprises complained that the commissioning systems tended to favour large corporates over social enterprises. There are steps being taken to redress that balance. We have plenty of bright practitioners who have creative ideas of how better to solve the social issues we face in this country, I hope that the availability of sympathetic funding and a more level playing field of state procurement will result in the creation of some really effective and dynamic and nimble social enterprises.

Although a significant volume of social enterprise will be paid for by the state there are other social enterprises who reply on consumers for their funding. Jamie Oliver’s Fifteen is a great example of a business that takes revenue from diners to train young people in the catering trade who might otherwise struggle to find employment. The Clink is another great example, giving prisoners in Highdown the opportunity to learn a new trade in the restaurant.

You might notice the same examples being referred to again and again. There aren’t very many of them. However, from my own experience as an entrepreneur I know that there are plenty of entrepreneurs who have sold one business and would like a new challenge the second time around. The availability of funding for this type of enterprise ought to help spur on some of our entrepreneurial brains to create more businesses with a mission.

Some people struggle to get their heads around the idea of making a financial return on social investment. Making this work in a social enterprise context requires some creative thinking. In a normal Venture capital investment, the successful investments will be sold for a multiple of profits. The successful investments might yield many times the original investment which covers the money lost on the ones that collapsed without trace and on average it results in a reasonable return.

Social enterprises are not normally created with a view to an exit which means that financial returns need to be extracted from a share of any surpluses generated. It requires a change of mindset for people who come from a grant funded background but it is quite possible to a find a sensible balance.

Some people are curious about the motives of social investors. Social investment is likely to give a lower yield than a normal commercial investment fund of the same class. A Venture Capital fund might aim to offer a 14% annual return for a long term investment. IVUK aims for a 7% return over the same period. The investors have already traded some expected financial return for the social return. A typical investor might be a family foundation with an endowment. They would rather invest it where it can generate social benefit as opposed to simply investing it in the stockmarket until it is needed.

Rest assured that social investment funds don’t attract cigar munching fat cats, eager to gouge profit from the good works of others!

Richard Brass is Head of UK Clients at Berenberg Private Banking and founder of Impact Ventures UK

Nick Jenkins is founder of greetings card business, enterprise fellow of the Prince’s Trust and global board member of ARK (Absolute Return for Kids) 

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  • Philanthropy Advice
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