Published by New Philanthropy Capital (NPC) this month, Best to Invest is a detailed analysis of the Social Finance market, illustrating how investor readiness, sector awareness, governance frameworks and emerging opportunity in the sector have a conditioning effect on present delivery and outcome.

The detailed contents offer insights for both funders and investees when looking at the Social Finance sector. NPC describe the market as being…

…structured around three main players: investors, which include government, trusts and foundations, individuals and corporates; intermediaries, for example Big Issue Invest, Social Finance and Charity Bank; and investees—mainly charities and social enterprises. Investors supply capital to investees either directly or via intermediaries. The investment may take a different form depending on the needs of the investee, the preferences of the investor and the products on offer by the intermediaries.

You can download a full copy of this report, Best to Invest, in pdf format here…

Best to Invest offers the following four barriers to making social investments in the present market context…

• The social investment market is not yet mature – opportunity costs to entry can be high, with opportunities to invest only now beginning to widely emerge.

• Good financial returns on endowments need to continue – organisations created in perpetuity need to maintain their levels of income to sustain grant giving as a continued and effective model. Divergence entails risk.

• Social investments are often complex instruments – governance is often created in different forms for each investment, whilst organisations may lack core skills and advice professionals in tangential sectors are not yet fully up to speed with sector delivery. (Complexity is well illustrated in our recent journal entry Social Impact Bonds – impactful or not…read more here).

• Regulatory and legal context for investment is also changing – which can be a deterrent to trustees and others, who may perceive a lack of investment advice relevant to the project being considered.

NPC tell us there are two kinds of social investors, those who invest for financial return and those who invest for social return.

In the first case there appears to be evidence that the finance first investor is the one who is looking to diversify their portfolio, to include a social element to their market approach. They will, however, still be looking for a near market rate return on their capital.

The second category of investors, those most interested in social impact, NPC tells us, are often willing to sacrifice their return in order to receive stronger social aims delivery, or to make this sacrifice so that the investment basket which may include more mainstream investors, thereby making  a more viable social return.

Perhaps this is the future of Social Finance, where the pool of capital is drawn from a mixed swathe of well-motivated investors, each with their own expectation on return? (Although, clearly, this would not diminish any of the complexity arguments in the NPC analysis).

On balance the NPC report makes a strong case for an energised Social Finance market. One which is growing, but which contains elements of delivery, governance and risk that are not for everyone.

Social investment is an attractive proposition for funders. Alongside grants, it can help them achieve their mission by enabling charities and social enterprises to scale up their work, develop new activities, and become more sustainable by developing a reliable income stream.

It can also help funders to maximise their social impact by aligning their investment values with their grant-making values. Social investment makes funders’ money work harder: funders can recycle their repaid funds into new investments, meaning that the same money can create social impact several times over.

If you are interested in the Social Finance sector, or developing a taste for investment in the market, then Best to Invest could be the sector primer you have been waiting for.

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