Venture capital firm Catalyst will manage the fund, which will invest in businesses that produce a "social return" in areas including education, health, and renewable energy. Charities which have trading subsidiaries are among the organisations to be targeted by the new fund.
Catalyst was approached with the idea by the Big Issue and Gordon Roddick, chief executive of the Body Shop. Both Roddick and Big Issue founder John Bird will sit on the fund's advisory board and the Big Issue will give Catalyst access to its network of "social sector" organisations. The magazine will also share in the profits.
Under the venture capital model, investors play an active role in the management of the business and gain a return on their investments when they withdraw.
"This is not charity, it is investment," said Catalyst's chief executive Rod Schwartz. "I believe that it will match or exceed the rate of return for other venture capital funds. It's a real opportunity for investment which our competitors are ignoring. The social sector is undervalued and ignored by venture capital firms. But the winds of change are blowing.
There has been a sea-change in the way these businesses are seen and judged by consumers."
Schwartz said that the "exit" for investors in social businesses could be a trade sale to a private sector company or recapitalisation, which is where the business pays off the equity investment and refinances itself.
Alternatively, the investment could be paid off gradually over time.
"We have talked to charities and, in some cases, they are willing to develop subsidiary businesses and sell to the private sector. The exit could give them funds to spend on their core activity," he said.
Catalyst plans to raise around £50 million for the fund and will seek investment from banks and financial institutions, pension funds, corporations and charitable foundations.
The firm's methodology involves looking closely at how management teams and boards work together. "We use psychometric testing so we can understand the issues that every single management board has to face," said Schwartz.
Alistair Grimes, chief executive of Community Enterprise Stathclyde, an advocate of equity investment for social enterprises, backed the fund but questioned whether the social sector could produce the same returns as private, for-profit firms. "I'm slightly sceptical that the fund can produce the same returns as conventional venture capital funds. There is not evidence that this has happened in the US," he said.