Charities have been borrowing money for centuries. However, around the turn of the millennium there was a wave of new initiatives supporting the sector’s access to capital. Bridges Ventures was set up in 2002. The government made a significant investment in providing capital for charities and social enterprises delivering public sector contracts with the creation of Futurebuilders in 2003. Big Issue Invest was established in 2005.
Momentum grew in the following decade as the proportion of the sector’s income generated through enterprise activity continued to grow and the need for capital grew in step. Initiatives included the creation of Big Society Capital to capitalise a wide range of investment funds, greater support for the sector to access finance through investment-readiness programmes, the development of the social impact bond market, the growth of blended finance models through my organisation, Access, to help smaller organisations access capital, and the launch of Good Finance to help it all make sense for charities and social enterprises.
As we begin the 2020s, then, it feels appropriate to consider what the third decade of social investment will look like and what we all need to do to maximise the opportunities for the sector by 2030.
Social investment makes sense only when there is a source of income in an organisation that the investment will help to grow and which will repay that investment. This might be based on property or on trading activity. Over the past two decades we have become much better at discussing and analysing some income models, especially public sector contracts and general fundraising.
But this level of understanding does not usually extend to trading and enterprise. Building a better understanding of the different sorts of enterprise models that work in different parts of the sector, how they fit together in an individual organisation’s business model and how they link to impact is key if the sector is to maximise its income. Crucially, this expertise should not sit in consultancies outside the sector, but rather in the sector’s own networks. The next 10 years need to see a transformation in the sector’s understanding of the role of enterprise.
Similarly, charities and social enterprises need a better understanding of their impact in their local economies. We can be sure that the next decade is going to see major investment in more deprived and so-called "left behind" places. For the sector to benefit from that, we need to be more articulate about our economic impact as well as social impact in those places.
In some areas, social enterprise is pretty much the only meaningful economic activity, and in many more there is great potential for it to grow. Yet it’s easy for policymakers and local enterprise partnerships to ignore the sector when compared with large infrastructure projects of major manufacturing investment. We can’t miss the opportunity to be part of building stronger local social economies.
Foundations and other funders should think more carefully about the role they want to play in supporting charities or social enterprises in order to make the best possible use of precious grants. Do they want to buy outcomes by providing revenue funding? Or do they want to invest directly in the organisation to make it stronger? If they are doing the former, are they providing revenue that can come only from grants or are they displacing income that could potentially be earned? If the latter, are they using grants to incentivise the right sort of enterprising behaviour, or risking funding organisational development that could be supported with repayable finance?
Investment products themselves need to continue to evolve to meet the needs of the sector. Good progress has been made over the past five years in increasing the supply of smaller-scale unsecured lending. But many organisations would benefit from more patient and longer-term finance that is repaid in a way that better recognises the long time it can take for organisations to develop reliable revenues.
But for this product development to happen there will need to be a more reliable and longer-term source of subsidy. If we have learned anything from the second decade it is that, although some social enterprises can raise large sums using capital on near commercial terms, for the majority of organisations seeking finance the capital has to be provided on terms that allow for greater risk or longer-term horizons than commercial capital on its own can tolerate. Blended finance models can provide this bridge between the needs of charities and social enterprises and the needs of capital.
Using public money as grant to subsidise investment activity in this way is entirely normal in mainstream business. The British Business Bank exists to do this for small and medium-sized enterprises. Further building the evidence base about, and strongly making the case for, the role of subsidy in order to attract more finance to the sector will be the measure of success over the next 10 years.
Seb Elsworth is chief executive of Access, a foundation that helps to widen access to social investment for charities and social enterprises