Capital, capacity, impact? A quick tour of the social investment market

Capital, capacity, impact?

A quick tour of the social investment market

Objectives of the session:

• To discuss a range of business models used for creating social impact– To differentiate between revenue and capital funding needs

within those models

• To explore ‘appropriate’ funding mechanisms, especially the role of social investment in financing capital requirements

• To discuss the role of the social investment market, and the UK’s social investment ‘boom’.

Objectives of the session:

• To discuss a range of business models used for creating social impact– To differentiate between revenue and capital funding needs

within those models

• To explore ‘appropriate’ funding mechanisms, especially the role of social investment in financing capital requirements

• To discuss the role of the social investment market, and the UK’s social investment ‘boom’.

11.20 – 11.40

Achieving social impact: a familiar model....

Expenditure on activitiesRevenue Outputs Outcomes

Which in business jargon we could call ‘value’

Thinking about this as a business model

Expenditure on services and products

Revenue

Maybe:GrantsDonationsContractsSpot purchases

Outputs Outcomes

Social value

Capacity / capability

CapitalForm maybe:GrantsDonationsLoansEquity

“Surpluses” (Profits), Financial value

Need maybe:Fixed assetsWorking capitalGrowth & developmentReserves and insurance

This chart ignores externalities created by the organisation – positive and negative

Build capacity through:Fixed assets and systemsCash and investment assetsHuman resourcesConsultancy

Jargon check....• revenue– covers the costs of expenditure of on-going work (service

provision, projects etc)– suppliers of income = purchasers of the organisations work– minimise the risk of not achieving intended outcomes /

value

• capital– money and other resources that build the capacity and

capability needed to deliver your service / project / work– capital funders = investors in the organisation– accept and manage the risk of not creating value

Is this the only model?

• 3 models?– Social enterprise

– Fundraising

– Social firm

Fundraising business model

Costs of meeting donors requirements

RevenueOutputs

Investment in fundraising

“Surpluses” (Profits)

Costs of delivering services to

beneficiaries

Capacity to deliver

services

Outcomes

Capital

Social firm

Expenditure on services and products

Revenue

Outputs for Customers

Outcomes

Capacity / capability

Capital

“Surpluses” (Profits)

“Externalities”

Business models, social and financial value

• Think about the organisations you have worked with and for:– How do they generate revenue?– What business models do they use?– How do they create value and for who?

And what about?

• Microsoft

• Charity shops

• Serco

• A charitable foundation

Objectives of the session:

• To discuss a range of business models used for creating social impact– To differentiate between revenue and capital funding needs

within those models

• To explore ‘appropriate’ funding mechanisms, especially the role of social investment in financing capital requirements

• To discuss the role of the social investment market, and the UK’s social investment ‘boom’.

11.45 – 12.20

Thinking about the role of capital in a business model

Expenditure on services and products

Revenue

Maybe:GrantsDonationsContractsSpot purchases

Outputs Outcomes

Social value

Capacity / capability

CapitalForm maybe:GrantsDonationsLoansEquity

“Surpluses” (Profits), Financial value

This chart ignores externalities created by the organisation – positive and negative

Thinking about why organisations need capital

• What things does your organisation use, build or buy that are not part of on-going service delivery?

physical equipment

bridging finance

growth / development

reserves / insurance

Capital needs of organisations

Build and maintain capacity through:•Fixed assets and systems•Cash and investment assets•Human resources•Consultancy

• What is the financial risk of these needs?– financial risk = “chances of

getting back the initial money spent”

pre-fundingrevenue

Capital needs (your balance sheet)

relatively low financial risk

relatively high financial risk

• match the risk of your need with a financial instrument that balances this risk

financial need

financial instrument

physical equipment

bridging finance development “rainy days”pre-funding

fundraising

Types of finance available to youInstrument Financial risk to recipient Example suppliers

Own reserves None (other than opportunity cost) n/a

Grant None – no repayment Grant makers, venture philanthropists

Equity / Quasi-equity (royalties) Lower – if activity fails, nothing to repay Specialist investors such as Venturesome, Bridges

Social Entrepreneurs Fund

Patient capital e.g. Preference shares, unsecured bonds

Lower – can take the form of unsecured debt/equity-like investment, but over a longer period and typically on ‘softer’ terms

Few provide genuinely patient capital, Investing for Good

Overdraft / standby facility

Medium – short-term cashflow lending usually against expected revenue

Some banks provide overdrafts (may require security over assets/personally guaranteed) Venturesome provides (unsecured) standby facilities

Secured loan (mortgage)

High – asset used as security to guarantee repayment

Banks (Charity Bank, Triodos, Unity Trust Bank, and mainstream lenders)

LOW RISK HIGH RISK

HIGH CHANCE OF REPAYMENT

LOW CHANCE OF REPAYMENT

Secured loan

Standby Facility

Overdraft

Unsecured Loan

Patient Capital

Quasi-equity

Equity

Grant

Physical equipment

Bridging finance

Pre-funding of revenue

Reserveccapital

Growthcapital

Appropriate financing

Fixed Asset Acquisition

• for physical equipment to do the work e.g. office, desks, chairs, machinery– Sefton Carers Centre

• needs to buy the building it currently rents• it’s the only suitable building in the area (cost £1m)• earns revenues from contracts with local public sector

Working Capital• to manage timing differences between cash out and cash in

– Questscope: bridging finance• EU contract, paid in arrears• need to spend money up front doing the work and then claim it back

• to fund on-going costs ahead of revenue– B-Eat: reserve capital

• income patterns “lumpy”, expenditure pattern constant• have a track record of average income = expenditure• raises money from fundraising events, grant makers, some trading of

publications, training and conferences

Growth capital

• for exploration / development of new work that enables better delivery of mission– Charity Technology Trust: growth capital

• CTXchange supplies software at low cost to charities• need to invest up to £100,000 in infrastructure and marketing• increased sales should generate profits to repay the investment

Reserve capital / insurance

• for “rainy days” i.e. to protect the organisation’s work from unexpected shock– Interhealth:

• notification from landlord of early termination of lease• premises are specialist / new premises hard to find and costly /

new premises need to be secured immediately• earns revenue from

– Spot purchasing of medical appointments– Annual membership fees

Objectives of the session:

• To discuss a range of business models used for creating social impact– To differentiate between revenue and capital funding needs

within those models

• To explore ‘appropriate’ funding mechanisms, especially the role of social investment in financing capital requirements

• To discuss the role of the social investment market, and the UK’s social investment ‘boom’.

12.25 – 12.40

Social investment market, impact investment, social impact bonds, what?• Social or impact investment is strategic investment with the primary goal of

improving outcomes for individuals, communities, society• The secondary goal is to see a return on capital• c£180m invested in 2010, majority lending by social banks• Often understood to be about lending to the third sector, but it is broader than

that• Government has a strategy / policy:

– ‘Growing the social investment market’– Connects with public sector outsourcing and mutualisation policies too.

Grantmaking aka Philanthropy

Mainstream investingEthical / SRI investing

How does this relate to ‘normal’ investment, or grant making?

Positive outcomes for individuals, communities, society

Negative outcomes for individuals, communities, society

Maximum financial return

-100% return = grants

Neutral outcomes

Social investment aka impact investment aka investing for outcomes

0% return

Potted history of investing for outcomes

• Building societies – c18th: mutual benefit for the community• Netherlands e.g. Triodos – an idea in 1968, a bank in 1980

• Social Investment Taskforce 2000• Futurebuilders, Community Builders etc 2002+• Growing social investment strategy 2011• Big Society Capital 2011/12• Payment by outcomes & Social Impact Bonds 2011+?

• Plus long history of investment in developing economies

Investing for outcomes can’t happen in isolation

• Currently:– Majority of investment funds are for

general social purpose– Returns are too low for the risks

involved

• Graham Allen MP’s proposal for an ‘Early Intervention Foundation’ is one model of focusing on a set of outcomes and stimulating revenue, capital and measurement together

A market?Intermediaries linking demand and supply

Charities

Social enterprises

Social businesses

Financially excluded individuals??

Social investment intermediaries

Investors Social Ventures

Individuals

Charitable foundations

Financial institutions e.g. pension funds, investment trusts,

banks

Returning to the objectives:

• To discuss a range of business models used for creating social impact– To differentiate between revenue and capital funding needs

within those models

• To explore ‘appropriate’ funding mechanisms, especially the role of social investment in financing capital requirements

• To discuss the role of the social investment market, and the UK’s social investment ‘boom’.

Discussion....

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