So finally we see the launch of Investment Readiness in the UK, the magnum opus from ClearlySo and NPC and commissioned by Big Lottery Fund, was released yesterday.
Social investment players constantly talk about how the low level of investment readiness of organisations is hampering the development of the market. The effort required to get potential investees up the readiness curve is slowing the pipeline.
This is important, because in 2010/2011 only £165m of deals were done, but by 2016, Adrian Brown at BCG thinks the market should be worth a billion pounds of deals per annum (see The First Billion). How to make that leap?
We had a very enjoyable few months working with ClearlySo to unpick the investment readiness conundrum. We were put in charge of a ginormous survey to back up the fascinating feedback from the interviews running concurrently. Nigh on 7,500 organisations on Big and ClearlySo’s databases were consulted, and people responded generously with their time—1,250 replies which was many more than expected and meant the findings were pretty robust. Thank you respondents! And watch this space for publication of the appendix containing all the data. Not pretty enough to publish just yet, but the data is there.
From our perspective, these were the key findings:
- Getting finance for low risk needs, such as asset acquisition or refurbishment (and especially if security available), is an effort but possible. A surprising number of organisations were being funded by banks—28% of those who have got funding.
- Getting finance for high risk needs, such as expansion, much harder a) organisations were less likely to get the funding, and b) those struggling to get funding frequently identified the various tasks as ‘difficult’ or ‘very difficult’.
People didn’t know what financial products to look for, where, or from whom.
Two major mismatches leapt out at us:
- The support, guidance, advice (in many different forms and to answer many questions) currently available nowhere near matched what organisations wanted. People were looking for step-by-step guides and good signposting in the early stages. More intensive business planning and finance support was wanted in the later stages.
- Perceptions of skills among organisations looking for finance (including those who had failed to get it) somewhat adrift from what we heard from intermediaries and investors. Intermediaries tell us that it would help if financial skills and business acumen improved, but potential investees didn’t identify this is a major issue. Investees who had received finance were more self-critical.
These problems aren’t impossible to fix. Good guides can be written, signposting improved. Hopefully the Big Lottery Fund will complement the existing Investment and Contract Readiness Fund (ICRF) administered by Social Investment Business by supporting those with more modest ambitions than the ICRF target group.
And NPC is doing its bit so support organisations wondering whether social investment is for them—our view being that answering this question early saves everyone time and hassle. Indeed, NPC’s own social investment taster training—a morning to explore at a very basic level what its all about—regularly weeds out charities puzzling as to whether social investment is for them. And we are happy to provide strategic advice to charities thinking about this on a one-to-one basis. Our guide, Best to borrow can help to start the thinking.
All this stuff is important. Investment readiness is a crucial piece of the jigsaw to convert an arena of potentially a billion quid’s worth of opportunities to financeable deals.
- More deal structuring capacity needed—I don’t think charities should have to hire inhouse corporate finance experts in order to get their bond programmes off the ground
- More early stage grant funding to get emergent business models onto a sure footing
- Greater certainty/better risk assessment and pricing in the commissioning market
- More independent advice for investors wanting to join the market
- More managed fund options for investors
- How long have you got?!
But for now lets just get the promising investees in the best shape they can.