Social investment: a new route to funding?

Social investment: a new route to funding? Iona Joy, New Philanthropy Capital London Funders, December 2012 NPC - title of the document (can be changed under view/header and footer. Add date here if needed.

AGENDA NPC - title of the document (can be changed under view/header and footer. Add date here if needed.

Availability of funds has grown over the decade + Social Investment Business £400m Big Society Capital £400m+ 2011/2012

2012: key market developments • £165m market size (BCG/Young Foundation) • Piddly - macro stats promise £1bn potential • Investment readiness inhibiting deals • £10m ICRF fund launched summer (for big deals) • £10m Big Lottery IR fund (under tender – likely to be for smaller deals) • Community Rights grants • £10m Mutual Support programme • BSC committed £37m to intermediaries – not just usual suspects! • Government favouring payment-by-results mechanisms • But Social Impact Bonds still a minority sport - complex

Reaction from government • Keen, but not a lot of money from OCS: • ICRF fund £10m • Social incubators fund £10m (odd beast) • Local authorities and spending departments • Social Impact Bonds: Peterborough and now Essex • Govt talks great commissioning talk but not on top of challenges – eg Commissioning Academy not about procurement • Social Value Act pretty toothless • Contracts – structure, timeframe, risk allocation not always investable • With 70% market down to public services….. Commissioning key

Reaction from private investors • ‘Usual suspects’ supporting Social Impact Bonds, not gone much wider • New investors came into Scope bond (first tranche closed oversubscribed) • Trusts and foundations toe-dipping – handful eg, Esmee, Barrow Cadbury, Lankelly, Citybridge = most committed • Fairbanking research: cautious interest, but private investors easily confused. Best to describe SI as new asset class to be treated separately • NPC finding interest increasing, especially with ‘venture philanthropy’ types • Private investors very variable – market needs segmenting so there is something for everyone • FSA restrictions total headache • NPC and philanthropy advisers banned from specific advice • Few investment managers interested in small deals • Handful of IFAs getting interested • Intermediaries (some!) regulated but not independent

Reaction from charities • ClearlySo/NPC investment readiness survey for Big Lottery • 1,255 responses: charities and social enterprises – BLF grantees/CS database

Reaction from charities Main findings from survey/research: • Some keen, some disheartened, some not sure • Intermediaries/investors think charities not as investment ready as charities think they are • Basic, secured financing easiest to procure (most of the purples) • Longer term, higher risk financing trickier • £10-100k most popular size of investment source (bit of a gap) • External support doesn’t always match needs Other things we hear: • Commissioning uncertainty thwarts business planning • Trustees often behind the curve and need ‘bringing along’ • Low conversion rates in pipeline/deal flow: are the right orgs applying?

Charities and social enterprises receiving social investment • Mainly organisations providing services/selling products – less likely to be campaigning • Popular sectors where finance procured: palliative care, housing and homelessness, environment, employment, international • Sectors where finance being sought: offender management/resettlement, science and research, but not always successful! • NB work programme/CJS programmes focusing on PbR, likely to have strong demand for working capital

2013: Opportunities • Increasing availability of capital • Increasing public rhetoric on social value • VCS strong position on social value • Increasing demand for capital, eg working capital, asset transfers • NHS reforms opening up marketplace • Shift to PbR in CJS as well as DWP • Austerity measures provoking new delivery mechanisms • Charities getting savvy about forming collaborations • Some support around to get there

2013: Risks and challenges • Revenue to pay investments back: govt contracting uncertain • Investment readiness • Business models • Management/financial systems • Governance • Knowing where to go and what to do • Lack of independent corporate finance advice for investees and investors - both sides need extra skills • Intermediaries snowed under, can’t do all the corp fin • Processing capacity in intermediaries? FSA regulation an inhibitor? • Getting to critical mass so there’s more variety to offer investors

2013: public services = main driver of market • 70% of market = public services, shrinking but not gone away • Massive need for working capital: billions! + expansion capital • Commissioning = opportunity: VCS-friendly sentiments • Personalisation = opportunity - avoids procurement • PbR = opportunity - but toughnegotiating risks and outcomes • Procurement = risk: procedures not VCS-friendly • Commissioning Academy not about procurement • Collaboration vital: big contracts covering everything favoured over multiple little contracts • Evidence of social value: rising importance for service payers; gaining importance with investors

2013: But other 30% also interesting • 30% of market = not public services – more fun? • Please the customers and they buy– if they have the cash • Asset transfers (to communities) need financing • People very unsure how to go about being an enterprise • Do we have enough entrepreneurs?

The future –possible scenario • VCS will adapt – always has done – and acquire necessary skills • Short term, VCS will lose out to commercial sector on govt contracts – ecosystem will suffer • Medium term VSC will fight back with collaboration and reinvention • SI market will grow but BSC will carry much of the burden • Longer term we’ll have sufficient ‘critical mass’ to create funds to appeal to different investors according to: • Causes • Financial reward/social return (this really varies!) • Risk • Attitudes/values • Confidence in market will increase despite some public failures

London Funders November 2012 NPC - title of the document (can be changed under view/header and footer. Add date here if needed.

Social investment: a new route to funding?