Rodney Schwartz: It is essential to attract mainstream investors

Large mainstream pools of capital are deemed essential for solving social problems or offsetting rapidly shrinking expenditure, says our columnist

Rodney Schwartz
Rodney Schwartz

Although it was not intentional, I notice that my previous two articles for Third Sector have been about sector-leading, high-impact enterprises. Two months ago, I wrote about the Ethical Property Company, which had announced that it would be undertaking a ninth equity share issue; and last month I discussed a different ClearlySo client, JustGiving, and how our firm was founded on the pledge to create 100 firms just like it - high-impact, with good returns.

This month I am tempting fate a bit because, at the time of writing, this deal has not yet been finalised. But by the beginning of December the community transport social enterprise HCT will have closed a financing of about £10m with a range of social investors including Big Issue Invest, Triodos Bank, the FSE Group, Social and Sustainable Capital, the City Bridge Trust, the Esmee Fairbairn Foundation, the Phone Co-op and HSBC. ClearlySo was HCT's financial adviser. Notably, the traditional impact investors and foundations have been joined by a commercial bank and a coop. We believe it is the largest growth capital investment in UK impact investment yet.

HCT is a giant in the impact investment sector. A bus operator founded in 1982 when the east London borough of Hackney's local authority bus company was failing, the firm has grown rapidly and now has about 1,000 employees, more than 500 vehicles and a turnover of £45m a year. It has continued to grow at between 10 per cent and 20 per cent a year, even in a slowing UK bus company market, and has emerged as a leader outside the "big six" behemoths of the bus sector.

We began working with HCT in 2008. At that time it was keen to reduce its dependence on mainstream bank lenders - a shrewd move - and we helped it to raise more than £4m in 2010. There were four investors in the 2010 transaction and - of vital importance to the sector - they were able to exit the deal successfully with strong returns. The impact investment sector will not grow if the capital does not find its way back to investors - possibly to be reused in other impact deals. But the 2015 deal is larger and even more complex.

Coordinating the efforts of about a dozen players is not without its challenges. Each impact investor has its own passionate view on what is absolutely essential, and blending these into a single deal is not easy. We in the impact space are learning as we go. Mistakes are being made and new concepts developed, live in the laboratory of the market. This can be frustrating, but it is a necessary part of the market-building process.

The success of companies such as HCT, the Ethical Property Company and JustGiving is essential. We cannot solve social problems or offset rapidly shrinking expenditure on public services unless we access large mainstream pools of capital. These pools have polite interest at best in early-stage ventures; for impact investing to thrive we absolutely must scale up those with potential and attract large financial services firms as substantial investors. They will invest only in significant, established companies.

There is no higher priority than this for the impact space or for addressing the public services deficit.

Rodney Schwartz is chief executive of ClearlySo, which helps bring impact to investment

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