Social investment: investor readiness?

Social investment is a hot topic. In the last few months, the prime minister hosted a conference on social investment as part of the G8, a new development impact bond was launched, and multiple reports and events entered the frame. The government’s vision of a thriving social investment market where social ventures can access the capital they need to grow, is beginning to gain momentum.

But despite the buzz, social investment among funders—ie, grant-making trusts and individual philanthropists—is still a minority sport. Only a small group of funders are currently involved:  Most of these are larger foundations with plenty of staff and resources or  individuals with backgrounds in commercial investment, and they’ve been really important in building the market. Smaller foundations and philanthropists have shown a great deal of interest in the area but, so far, most have stayed away.

This may be a good thing. Social investment isn’t right for everyone—and this applies to both charities and funders. It’s an alternative tool that offers funders the opportunity to increase the impact of their money. But it won’t be able to replace grants, and in many cases it won’t be an appropriate way to support the social change that funders want to make.

But, for funders that could use social investment effectively, what’s stopping them from taking the plunge?

Best to invest?, our new funders’ guide to social investment published today, explores a number of barriers. For foundations with a permanent endowment, or those that have strategically decided to exist in perpetuity, the need to retain the value of their endowment means that they cannot accept the sub-market financial returns that many social investments offer. The grey regulatory environment and the likely need for additional resources and specialist skills pose extra challenges. For some, the cumulative effect is that the social investment world seems vague, difficult and scary.

Of course, there are ways round these hurdles. ACF has suggested the funders may have more flexibility than they realise when it comes to managing their endowment. Collaboration with other investors can help share the risk and reduce the costs of social investment. Our Best to invest? guide provides advice on thinking through the benefits and risks, and how to get started, which we hope will also play a part in helping funders navigate the sector.

But the bigger question is, do potential new investors need more hands-on support? The government, in particular, has focused a great deal on helping charities and social enterprises to get ‘investment ready’. Less has been be done to support interested funders to become active players in the market. So, as I leave months of research behind, I’m left wondering, would a greater focus on ‘investor readiness’ plunge more funders into the market?