If you are new to the world of social investment, it’s easy to misunderstand the motivations of the social investors who are trying to lend you money.
At an event hosted by a local infrastructure organisation in east London last year, one of my colleagues, who was describing opportunities to take on social investment, was loudly heckled by an audience member and accused of being a snake-oil salesman. I am often met with a degree of scepticism and cynicism about who social investors are, what they want with our sector and how they profit from it.
This is all understandable. The financial crisis has not done anything to improve the reputation of financial institutions and the products they offer. And that’s before you start to discuss the extent to which much of the sector’s work seeks to pick up the pieces of a broken and unequal system.
However, specialist social investors are not part of that system. They are not big financial institutions. One helpful way to seek to understand their motivations – and to increase the levels of trust between social investors and the sector they exist to serve – is to better understand the kinds of organisations they are and nature of their business models.
First, the majority of specialist social investors are themselves not-for-profit organisations driven by their missions. For example, Key Fund is a company limited by guarantee. It was set up in South Yorkshire in 1999 as a vehicle to help regenerate communities after the collapse of the coal and steel industries. Big Issue Invest is part of the Big Issue Group, dedicated to dismantling poverty, along with well-known social enterprises supporting homeless people. Social Investment Business is wholly-owned by a foundation and registered charity, with a mission to help impact-led organisations improve people's lives.
A number of other social investment funds that sit within sector organisations feel even more familiar. For example, Somerset Community Foundation offers loans alongside grants. In Greater Manchester, GM Social Investment is run by the Greater Manchester Centre for Voluntary Organisation, the sector infrastructure body for the city region.
Second, specialist social investors are not large organisations. The largest employ a few dozen people while looking after tens of millions of pounds. Funds that are run within organisations and have a broader support role might be not much larger than £1m, and are run by one or two people making and managing loans.
Third, people working for social investors are not making money from commission or bonuses when they get charities to take out loans. It is not in their interests to make loans to organisations that are not well placed to repay, so this would not create the right incentives. Furthermore, the social investors themselves do not have limitless pockets when it comes to their own operating costs, which is my fourth point.
Social investors typically make the money they need to run from the interest charged on the loans they make. That interest also covers the costs of the money they themselves might be borrowing, and it might also need to cover the costs of loans that default. For smaller funds, and funds that offer small-scale unsecured loans to the sector, this equation won’t stack up without some additional grant subsidy in the mix, both to help with the costs of running the fund and paying for defaults. Larger social investors will run a number of funds, each generating their own operating income and, much like a charity balancing a number of restricted grant-funded projects, they need to ensure core costs for the organisation are covered through this income. To give a sense of scale, depending on the size of the fund, operating income for the social investor might be in the region of 3 to 5 per cent a year of the total size of the fund. The organisations that provide the capital to social investment funds for them to lend scrutinise operating costs to ensure that they are getting value for money.
So most social investors are relatively small, mission-led organisations that, like all other social enterprises, run on tight margins. They are of the sector and are on your side. They are not trying to trick you into taking a loan that is not right for you. Feedback from charities that have borrowed often focuses on the positive long-term relationship formed with their investor, based on shared values.
Seb Elsworth is the chief executive of Access, a foundation that helps to widen access to social investment for charities and social enterprises