Risk capital fund 'could exclude the most needy'

The Government's £10m risk capital fund for growing social enterprises could neglect the organisations most in need of support, enterprise finance experts have warned.

The fund, which was announced last November as part of the Government's social enterprise action plan, may have to be restructured to comply with European state aid regulations, which say that the fund cannot influence markets or affect competition.

As a result the facility, which aims to attract an additional £10m of match funding from the private sector, cannot be a loan fund as planned and will have to offer equity investments.

Equity investments are permitted because they involve risk - unlike loans, which offer guaranteed returns and could be regarded as uncompetitive.

This system will be accessible only to organisations with legal structures that entitle them to take in equity investments, which will include enterprises registered as companies limited by shares or cooperatives.

This would in effect exclude enterprise charities or organisations listed as companies limited by guarantee, such as social care provider Turning Point and recycling enterprise London Remade. "We believe that fewer than 5 per cent of social enterprises that we know are able to take in equity capital," said Nigel Kershaw, chief executive of social financier Big Issue Invest. "My main concern is that it will not be used to scale up the social enterprises that need this support.

"The danger of the fund is that it's chasing the money and not the mission. If the mission is to grow social enterprises, we should start from there, rather than from where we think enterprises should be."

Kieran Larkin, policy officer at the Social Enterprise Coalition, admitted that the fund would not be the answer for all social enterprises. He said. "Although social enterprises will be able to offer competitive market returns, they will also be looking to provide blended financial and social returns," he said.

A Cabinet Office spokesman said: "The Government is aware that state aid issues could arise when dealing with financing organisations that could be competitive for business with enterprises that do not receive the same support."

Key points

  • The £10m fund may have to offer equity investments rather than loans
  • Experts believe that fewer than 5 per cent of social enterprises are able to take in equity capital
  • Enterprises that can accommodate equity include those listed as companies limited by shares or cooperatives
  • The Government's consultation on the fund ended on 2 November this year.

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