My inbox is overflowing with analysis of the recent Budget and its benefits for the impact investment sector – in particular, plans to create a social impact venture capital trust. George Osborne, the Chancellor of the Exchequer, was praised for these proposals, which are only the most recent of many that this government and its predecessor have implemented since the early noughties. The first was the community investment tax relief, originally proposed by the Social Investment Task Force, but the goodies have kept flowing. Social investment tax relief felt like it was proposed yesterday, but it was announced in early 2013 and implemented last summer.
It is great for the impact investment sector to be getting so much attention. But I warn against expectations that this will bring about a sudden boom: observers who wish the sector to grow faster – frankly, I think it is growing pretty fast already – or who think such funds will solve a meaningful portion of the problems facing British society today will be disappointed.
I have read many studies summarising the views of investors that tax credits would encourage them to invest in a particular way, but there is little evidence that they actually do. Tax credits lower the cost of investment for the wealthy with available liquid assets, but I argue that they rarely change the amounts invested.
Perhaps we should consider, for example, what the venture capital trusts have done for venture capital investing in the UK. VCTs were introduced in 1995 to encourage entrepreneurialism and were made more attractive in subsequent years. During this time, most venture funds have performed abysmally. In fact, they seem to have turned negative right after the launch of VCTs. One might not want to suggest causality, but one could argue that the new funds have only inflated prices, thereby depressing returns. During this period, venture leaders such as 3i and Apax Partners left and drifted into larger deals. VCTs have not transformed the venture capital industry - and will not do so for impact investing.
If tax credits are not the answer, what might be? Perhaps an analysis of the original recommendations of the Social Investment Task Force provides some guidance: CITR (a tax credit) has been disappointing; disclosure by banks and greater latitude for foundations have had little impact; and community development finance institutions are progressing patchily, but only with large subsidy. The sole big win was Bridges Ventures, benefiting from the recommendation to "set up community development venture funds" and now a thriving impact investment firm. The government invested £20m (half the fund) on a first-loss/capped-return basis. This meant the fund could lose half its value before investors suffered any loss, and was crucial in getting early support for this novel concept.
So enough of tax credits that are unlikely to draw in more capital. Money for first-loss guarantees will cost less and be more effective in galvanising the sector, because it deals with the key issue investors face – the perception of high risk because of the novelty of impact funds.
Rodney Schwartz is chief executive of ClearlySo, which helps social entrepreneurs raise capital