Seb Elsworth: Six signs that social investment is working for charities

There are six reasons why charities and social enterprises will own the next chapter in the development of social investment, says our columnist

Seb Elsworth (Photograph: Claudia Leisinger)
Seb Elsworth (Photograph: Claudia Leisinger)

Social investment is all about connecting capital to social need and thereby improving the lives of people and communities. However, charities and social enterprises haven’t always felt that social investment is there to serve them, but more to serve the needs of investors, despite the upsides having been well rehearsed, with a good number of compelling examples to point to.

Investment can help charities and social enterprises to be more resilient through being able to generate more of their own income. Taking on investment can also help to build more efficient and commercially savvy organisations.

This scepticism on behalf of the sector is probably grounded in the fact that the forces of capital are not necessarily well aligned to the goals of the social sector: if they were, many of the issues that charities work so hard to address wouldn’t be there in the first place. Ensuring there is a return on capital runs the risk of social sector business models being pulled out of shape as organisations struggle to afford repayments. Reducing the risk of losses can mean that innovation is hard to back, and only safe, proven models can raise finance, which means the opportunity to tackle problems further upstream is missed. Investment-speak can be baffling to charities and social enterprises. Legal structures imported from mainstream finance are not fit for purpose.

If social investment is designed solely to meet the needs of the capital, it will always struggle to live up to its potential in supporting charities and social enterprises.

But I believe the tide is turning. Here are six developments I see happening in the world of social investment that suggest it is increasingly being designed and delivered to provide what charities and social enterprises need, rather than the traditional requirements of investors.

First, there is more understanding of the types of enterprise model that can benefit most from investment and can afford it, rather than assuming that social investment is going to save the day for the whole charity sector. See the work being done by a range of funders to better understand how they can support the development of enterprise models, and Big Society Capital's focus on specific areas such as housing.

Second, the rise of blended funds, which explicitly recognise that the requirements of some investors – to make a return and avoid losses – won’t match the realities of financing charities and social enterprises at the cutting edge of social change. Other investors, such as foundations, which can be more patient and take risks, help to mitigate the risks for others, in exchange for crowding in much more money. Examples include the Arts Impact Fund, and SASC’s Third Sector Loan Fund.

Third, there is increasing attention on the development of new investment products that might be better suited to the needs of charities and social enterprises, especially those starting new products and services. See the work of Flip Finance and the efforts of various foundations to develop more patient investment products that share risk.

The fourth development is more information being put in the hands of charities and social enterprises so they can make good decisions and compare offers. See initiatives such as Good Finance and the work of Big Society Capital to publish much more detail about the investments that have already been made.

The penultimate development is the reframing of support away from "investment-readiness" towards enterprise support for the social sector. This flows from the recognition that social investment is not the end of a development journey but just a tool to help grow income, and leads to more focus on tooling up charities and social enterprises to be viable enterprises in the long term. See the excellent work of foundations such as the Lloyds Bank Foundation.

Finally, many more charities and social enterprises are realising that most social investment funds are very keen to make deals. They need to get their money working in order to pay their way, so potential borrowers should be empowered to shop around to get the best deal.

These six developments, and many more besides, mean that the social sector need no longer feel that social investment is something happening to charities and social enterprises. Instead, the sector will shape its future.

Seb Elsworth is the chief executive of Access, a foundation that helps charities and social enterprises access social investment

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