A recurring challenge we get from social entrepreneurs around social impact investment is on the cost of capital. More specifically, they tell us they want cheaper, more patient money that can and will take more risks.
In the second of four blogs responding to challenges raised by social enterprises, Big Society Capital’s Senior Director of Social Sector Engagement Melanie Mills gives some background into issues around the cost of capital. She also shares what we’re doing to build the market and enable more organisations to access investment.
It’s completely understandable that any social entrepreneur or charity leader wants to find the best value (and that might simply mean the cheapest) lending. Despite lots of new products, new lenders and efforts to develop the type of money available, we know the cost of capital can still be a challenge to them taking on investment and equally that not all geographies have the same access to all types of capital.
For example, if you live in the East of England you may still have less choice of lenders than if your organisation is based in Liverpool and this often affects the price you might be able to borrow at. So whilst we’ve made progress, there is clearly still more to do.
Balancing the cost of capital
The cost of capital is a balance between being able to attract investors; being affordable and sustainable for the social enterprise’s model; and the investor actually running the funds, which can cover the costs and risk of losses.
The funds we invest into are trying to get this balance right all the time. The returns that investors expect will depend on their perception of risk, what they are holding the capital for and how aligned the impact is to their goals. Good Finance has a blog explaining this in more detail.
Beyond the headline interest rate, there are other important factors in considering the ultimate value that social investment can bring for a social enterprise or charity. But we recognise that price still matters.
Matching supply with demand
SEUK’s research on the State of Social Enterprise shows a demand for smaller investments: 51% said their organisation wanted to raise between £10,000 and £100,000 and overall, the median amount sought was £80,000. However, for investors, making lots of small investments is a challenge because there is a cost to doing every deal.
Big Society Capital is not always going to be the best source of money to plug some of the gaps that exist. But we are working with partners in the widest sense across the market to help bring in new money that can match demand.
What we are doing
Building the social impact investing market:
A key focus for us is to increase the supply of patient and catalytic capital available that can take more risk and open up social investment to organisations that wouldn’t have accessed it otherwise.
This includes:
- Our partnership with Access and National Lottery Community Fund to provide blended finance like that available through the Growth Fund. Funds such as these provide small, flexible and unsecured loan/grant blends to social enterprises and charities.
- Working to promote and improve Social Investment Tax Relief, which eligible organisations can use to access capital that is patient and more affordable by offsetting the risk for investors. More importantly, it offers social enterprises and charities the chance to negotiate investment on their terms.
- Working with Donor Advised Funds on how philanthropists can utilise social investment as an additional tool for greater impact. As this money has already been gifted, it can take more risk with different expectations around financial return.
- Supporting the work of investors like SASC and frontline organisations like Preston Road Women’s Centre to use their learning to shape new products such as their new housing fund, which has risk sharing built into the fund to enable more charities to be comfortable to take on repayable finance.
Listening and Learning:
- Being honest enough to say when the solutions needed don’t work for our capital is one thing. If our money is too expensive then we shouldn’t be part of the mix.
- Convening partners and collaborating with key stakeholders like DCMS, Power to Change, National Community Lottery Fund and Esmée Fairbairn (who have been at this a lot longer than us for example) is key to making investment be more akin with demand.
- Putting users at the centre of what we do, listening and learning and seeking to find solutions is something we are committed to.
All of our team are passionate about change and creating impact. It’s as much part of our DNA as for the social enterprises and charities we aim to support.
Still more to do...
Is social investment the cheapest money?
Not always.
Does it do more than provide financial investment?
For the social enterprises and charities we’ve spoken to, yes it does.
Have we got more to do to make better value capital that can ‘afford’ to take more risk and be ‘patient’ in waiting for a return as well as making this equally accessible across the UK?
Yes. If this is the measure we want to use to judge whether social impact investing is a success, then we still have a long way to go. But we will work tirelessly both with our own funds as an investor and through collaboration as well as a market builder to work towards this goal.