vSOCIAL INVESTMENT: A NEW ROUTE TO FUNDING?Iona Joy, New Philanthropy Capital

London Funders, December 2012

AGENDA

1Roots of social investment market and where it is now 01

2Reaction from government, private investors and VCS 02

3Who is receiving or considering social investment funding? 03

4Risks, opportunities and challenges: what is appropriate for VCS? 04

5The Future 05

AGENDA

1Roots of social investment market and where it is now 01

2Reaction from government, private investors and VCS 02

3Who is receiving or considering social investment funding? 03

4Risks, opportunities and challenges: what is appropriate for VCS? 04

5The Future 05

4

AVAILABILITY OF FUNDS HAS GROWN OVER THE DECADE +

Social Investment Business £400m

Big Society Capital £400m+

2011/2012

5

2012: KEY MARKET DEVELOPMENTS

• £165m market size (BCG/Young Foundation)

• Piddly - macro stats promise £1bn potential

• Investment readiness inhibiting deals– £10m ICRF fund launched summer (for big deals)

– £10m Big Lottery IR fund (under tender – likely to be for smaller deals)

– Community Rights grants

– £10m Mutual Support programme

• BSC committed £37m to intermediaries – not just usual suspects!

• Government favouring payment-by-results mechanisms

• But Social Impact Bonds still a minority sport - complex

AGENDA

1Roots of social investment market and where it is now 01

2Reaction from government, private investors and VCS 02

3Who is receiving or considering social investment funding? 03

4Risks, opportunities and challenges: what is appropriate for VCS? 04

5The Future 05

7

REACTION FROM GOVERNMENT

• Keen, but not a lot of money from OCS:– ICRF fund £10m

– Social incubators fund £10m (odd beast)

• Local authorities and spending departments– Social Impact Bonds: Peterborough and now Essex

• Govt talks great commissioning talk but not on top of challenges – eg Commissioning Academy not about procurement

• Social Value Act pretty toothless

• Contracts – structure, timeframe, risk allocation not always investable

• With 70% market down to public services….. Commissioning key

8

REACTION FROM PRIVATE INVESTORS

• ‘Usual suspects’ supporting Social Impact Bonds, not gone much wider

• New investors came into Scope bond (first tranche closed oversubscribed)

• Trusts and foundations toe-dipping – handful eg, Esmee, Barrow Cadbury, Lankelly, Citybridge = most committed

• Fairbanking research: cautious interest, but private investors easily confused. Best to describe SI as new asset class to be treated separately

• NPC finding interest increasing, especially with ‘venture philanthropy’ types

• Private investors very variable – market needs segmenting so there is something for everyone

• FSA restrictions total headache – NPC and philanthropy advisers banned from specific advice

– Few investment managers interested in small deals

– Handful of IFAs getting interested

– Intermediaries (some!) regulated but not independent

9

REACTION FROM CHARITIES

• ClearlySo/NPC investment readiness survey for Big Lottery

• 1,255 responses: charities and social enterprises – BLF grantees/CS database

259

86

95

272

543

Organisations that have received repayable finance (21%)

Organisations that have been unsuccess-ful in securing repayable finance (7%)

Organisations that are currently looking for repayable finance (8%)

Organisations that are interested but not there yet (22%)

Organisations that are not interested (43%)

10

REACTION FROM CHARITIES

Main findings from survey/research:

• Some keen, some disheartened, some not sure

• Intermediaries/investors think charities not as investment ready as charities think they are

• Basic, secured financing easiest to procure (most of the purples)

• Longer term, higher risk financing trickier

• £10-100k most popular size of investment source (bit of a gap)

• External support doesn’t always match needs

Other things we hear:

• Commissioning uncertainty thwarts business planning

• Trustees often behind the curve and need ‘bringing along’

• Low conversion rates in pipeline/deal flow: are the right orgs applying?

AGENDA

1Roots of social investment market and where it is now 01

2Reaction from government, private investors and VCS 02

3Who is receiving or considering social investment funding? 03

4Risks, opportunities and challenges: what is appropriate for VCS? 04

5The Future 05

12

CHARITIES AND SOCIAL ENTERPRISES RECEIVING SOCIAL INVESTMENT

• Mainly organisations providing services/selling products – less likely to be campaigning

• Popular sectors where finance procured: palliative care, housing and homelessness, environment, employment, international

• Sectors where finance being sought: offender management/resettlement, science and research, but not always successful!

• NB work programme/CJS programmes focusing on PbR, likely to have strong demand for working capital

AGENDA

1Roots of social investment market and where it is now 01

2Reaction from government, private investors and VCS 02

3Who is receiving or considering social investment funding? 03

4Risks, opportunities and challenges: what is appropriate for VCS? 04

5The Future 05

14

2013: OPPORTUNITIES

• Increasing availability of capital

• Increasing public rhetoric on social value

• VCS strong position on social value

• Increasing demand for capital, eg working capital, asset transfers

• NHS reforms opening up marketplace

• Shift to PbR in CJS as well as DWP

• Austerity measures provoking new delivery mechanisms

• Charities getting savvy about forming collaborations

• Some support around to get there

15

2013: RISKS AND CHALLENGES

• Revenue to pay investments back: govt contracting uncertain

• Investment readiness – Business models

– Management/financial systems

– Governance

– Knowing where to go and what to do

• Lack of independent corporate finance advice for investees and investors - both sides need extra skills

• Intermediaries snowed under, can’t do all the corp fin

• Processing capacity in intermediaries? FSA regulation an inhibitor?

• Getting to critical mass so there’s more variety to offer investors

16

2013: PUBLIC SERVICES = MAIN DRIVER OF MARKET

• 70% of market = public services, shrinking but not gone away

• Massive need for working capital: billions! + expansion capital

• Commissioning = opportunity: VCS-friendly sentiments– Personalisation = opportunity - avoids procurement

– PbR = opportunity - but tough negotiating risks and outcomes

• Procurement = risk: procedures not VCS-friendly– Commissioning Academy not about procurement

• Collaboration vital: big contracts covering everything favoured over multiple little contracts

• Evidence of social value: rising importance for service payers; gaining importance with investors

17

2013: BUT OTHER 30% ALSO INTERESTING

• 30% of market = not public services – more fun?

• Please the customers and they buy– if they have the cash

• Asset transfers (to communities) need financing

• People very unsure how to go about being an enterprise

• Do we have enough entrepreneurs?

AGENDA

1Roots of social investment market and where it is now 01

2Reaction from government, private investors and VCS 02

3Who is receiving or considering social investment funding? 03

4Risks, opportunities and challenges: what is appropriate for VCS? 04

5The Future 05

19

THE FUTURE –POSSIBLE SCENARIO

• VCS will adapt – always has done – and acquire necessary skills

• Short term, VCS will lose out to commercial sector on govt contracts – ecosystem will suffer

• Medium term VSC will fight back with collaboration and reinvention

• SI market will grow but BSC will carry much of the burden

• Longer term we’ll have sufficient ‘critical mass’ to create funds to appeal to different investors according to: – Causes

– Financial reward/social return (this really varies!)

– Risk

– Attitudes/values

• Confidence in market will increase despite some public failures

v

London Funders November 2012