Social investment: great hype or great hope?
11 September 2014
‘Social enterprises say, where’s the money? Social investors say where are the deals? Is social investment a great hype or a great hope?’ asked Michael Green, executive director of the Social Progress Imperative, introducing the first event in STEP/Philanthropy Impact’s new Philanthropy Programme, held in London on 19 March – the same day that UK Chancellor of the Exchequer announced a new 30 per cent tax relief for social investment.
Philanthropy has tiny resources compared to government or business, said Green, quoting Bill Gates saying that his own foundation is tiny! Social investment is all about making the most out of limited resources and leveraging larger amounts of capitals.
The event took the form of a case study of Impact Ventures UK (IVUK), formed in December 2013 by Berenberg and LGT Venture Philanthropy and managed by LGTVP. The fund aims to support social enterprises to improve the quality of life of disadvantaged people in the UK – LGTVP is experienced in quality of life measures – and to cover its costs: it offers its investors a net annual return of 7 per cent. Speakers were Richard Brass of Berenberg; Nick Jenkins, philanthropist and founder of Moonpig.com, and one of four volunteer advisers for IVUK; Andrew Purvis, director of K10 (formerly Reds10), IVUK’s first investment, and Luke Fletcher of law firm Bates, Wells Braithwaite, an expert on social investment.
‘There is demand for social investment,’ said Brass, ‘we just need to get the money in.’ Berenberg and LGT are the current investors. They have approached 350 people and 7 have signed up – generally agreed to be a great achievement. A particular achievement is having the London Borough of Waltham Forest Pension Fund among its investors.
"There is demand for social investment, we just need to get the money in..."
K10 is a for-profit business with social purpose, said Purvis. The problem it exists to solve is the decline in the numbers of apprentices in construction. K10 now has 190 apprentices on its books; construction firms pay to have them for whatever time they want while K10 looks after the apprentices, arranges their college training, etc. They are now breaking even, and the money from IVUK will enable them to scale up the business. K10 has always been a business, he said; the social impact element has evolved, and they are now embedding it in everything.
What are the challenges of receiving this sort of funding? Purvis dwelt on the rigorous due diligence. But this wasn’t all negative: the relationship with the fund was stronger afterwards, he said.
The big challenge for the fund is clearly the difficulties of raising capital – the discussion kept coming back to this. IVUK is now £20.8 million, and it could reach £30 million to £40 million, said Brass. One big question is whether Waltham Forest is a one-off institutional investor or a beginning. The lack of established track records for social investment is an issue, he said: what will risk-adjusted returns look like? Deals are expensive to make and the values of deals is low, so costs need to be brought down. Another issue is that investees are not used to collecting the data investors want: how can investors enable this to happen? Fletcher talked about the legal environment for social investment, still a challenge for investors with fiduciary duties, with interpretations of the recent Charity Commission CC14 guidance still uncertain.
Jenkins talked of the need to move away from the two-lane approach to life – destroying the world from 9 to 5 and repairing it and doing some good from 6 to 6.30 – and hoped to see a more intelligent approach to investing. It was clear from hearing him talk that it will be much easier to get money direct from asset owners like him, who have the freedom to make their own decisions and take risks if they want, rather than advisers, who are naturally more cautious as they are looking after other people’s money. But wealth managers can start to move things by asking clients what they want to achieve with their money. Jenkins remembered asking advisers if there were any products like IVUK 5 years ago and the answer was no.
Wealth managers can start to move things by asking clients what they want to achieve with their money
Does he see social investment in terms of a trade-off, accepting the possibility of lower financial returns alongside the social impact? While this is a huge issue for institutional investors, including foundations and pension funders, it clearly isn’t a big issue for Jenkins. He would be happy to establish a fund for building boreholes in villages in Africa and to see less than 100% repayment, he said, or to support start-ups and not see his money back. He is happy with a whole spectrum of results – he can please himself!
Caroline Hartnell is editor of Alliance Magazine