An expansion of European funds should stir the sector

Competition for European funding is set to increase, says Rodney Schwartz of ClearlySo

Rodney Schwartz
Rodney Schwartz

A series of recent announcements in the European social investment sector gives even the most diehard cynic confidence that momentum is most definitely building.

Deutsche Bank and the European Investment Bank have announced important contributions of capital that will come into the sector. While the EUR50m EIB fund, operating in a fashion similar to Big Society Capital, will back funds and intermediaries, the EUR10m Deutsche fund sounds like it will have greater latitude, and is available now for investment, while the EIB fund, to be operated by the European Investment Fund, is only promised for next year. A EUR90m fund with similar objects, this one funded by the European Commission, will appear in 2014.

One announcement that has gone relatively unremarked is that of LGT Venture Philanthropy, which announced its Impact Global Ventures fund - this may be the most important of the four.

The significance of the LGT fund is that it is its second fund in this area. LGT, in our opinion, has some of the smartest people in the impact investment sector, and its ability to identify, back and support social enterprises on a global basis is possibly unparalleled. Critically, the fact that this is the second fund means that it has successfully, through its first fund, garnered the support of its clients. As their scale grows, the LGT funds have the prospect to be a considerable source of capital for social impact investments.

Deutsche's decision is also significant. Here the critical point is that it has chosen to call it Impact Investment Fund 1, making it clear there are more to come. The chief executive in London, Colin Grassie, has been firmly behind this project for at least three years. The fact that he has brought it to reality, in the midst of the global bank liquidity crisis, is no mean feat. We hope that the Deutsche fund fares as well as LGT 1.

Nothing will move the sector forward like a bank and its clients getting interested in this area and feeling safe about their investments. As Katie Hill pointed out in research we recently published, this does not mean returns need to be high - just that people feel comfortable with the manager and the level of risk.

The announcement of two European funds is third in our priority list. First, doing what BSC seeks to do is hard, and the BSC is managed by some uniquely experienced individuals. It remains to be seen if the EU funds can match this combination.

Second, my own experience is that such funds can find their priorities shifting because of ever-changing political demands, making them a less reliable source of capital.

Finally, the key ingredient of developing client or bank interest is missing. I am a big fan of institutions being motivated by self-interest. That Deutsche or LGT clients will invest in these funds in growing numbers, and that the fund managers will thereby earn fees for doing so, helps ensure that resources flow into this area in a sustainable way. The funds are too small and there is no reason to think more will follow. Bear in mind the BSC will have £600m, at least, just for the UK. Moreover, the growing crisis in Euroland suggests there will be many competing demands on European funds for some time to come.

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