The government has recently published its Social Investment Strategy 2016 . This provides a useful recap of how the government has bolstered the supply of social investment in recent years . Away from Whitehall and the City, however, there remains a sense among large numbers of social enterprises that social investment is not working for them.

A common complaint is the rates social investors offer are too expensive. Social enterprises understand they have to pay interest and fees when borrowing from social investors, but they expect these fees to be less than those sought by purely commercial lenders. Not only has this not always been the case, there have been occasions where the commercial lenders have actually been offering better terms than the social investors.

Another objection is that the due diligence process takes too long. We have heard this complaint in different contexts. Social enterprises looking to bid for large public sector contracts have found that, in seeking additional capital to support their bid prospects, it has not been possible to obtain a commitment in timeframes aligned to the competitive process.

Social enterprises operating in the commercial space have voiced similar complaints, such as one food growing operation who said by the time their loan had been approved they had missed the planting season and had effectively lost a year’s trading as a result.

Inevitably, there is a tension between the social focus of social enterprises and the financial rigour of the investors and a balance has to be struck. The sense is that the investors are expecting the enterprises to move far more towards them, rather than meeting in the middle.

To some extent this may be a classic case of inflated expectations as a result of the insistent (and, to some extent, welcome) cheerleading for social investment of recent years. However, different messages have been directed at different audiences. The wider the net is cast among the investor community, the more investors have been told, ‘you can get a warm feeling from knowing there will be social outcomes and you still get your financial return’.

Meanwhile, social enterprises are led to expect better financial terms because they are also delivering those social returns. They have also been attracted by terms like ‘patient capital’ which they have then looked far and wide for in vain. They are told social investors are aligned with them in their desire to make a difference in the world. Well, “Up to a point, Lord Copper”.

From the perspective of the social enterprise, for social investment to be meaningful it has to offer something different, and be better, than what is currently available in the commercial market. Many have found to date that is not the case. The theory, in the early days of social investment, was that investors were primarily interested in the social impact, but wished to see their capital returned so that it could be reinvested and achieve social impact on multiple occasions. Any additional financial return was very much a secondary concern.

As efforts have been made to introduce more funding into the social investment space, the emphasis seems to have shifted more to meeting the demands of the investor (which inevitably are more aligned to traditional motives) such that the distinctiveness of social investment has been eroded and, sometimes, lost. So whilst the stats the government shouts about in its strategy document are impressive in one sense, there is certainly scope to reach out to hitherto neglected swathes of the social enterprise sector, if the will is still there in the social investment space.

It will be interesting to see if the impact of the Access Foundation, when its funds finally reach social enterprises address these concerns. If not, the scepticism in parts of the sector towards social investment is unlikely to abate.

This item first appeared in Pioneer's Post Quarterly, November 2016.


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David Hunter

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Posted on 25/11/2016 in BWB In The Media

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