15 July 2011
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As interest grows in businesses which create financial and social returns by tackling society’s current and future needs, this report, prepared by ClearlySo, on behalf of the City of London Corporation, the City Bridge Trust, and the Big Lottery Fund, seeks to understand more fully the perspectives of different types of institutional investors towards financing social enterprises by asking what is the current level of interest, what is deterring investors, and what could improve and accelerate the take up?
Institutional investors are important to the social investment sector’s long term growth which has mainly relied on government and philanthropy. To date, despite interest, there appears to be little engagement from the City and institutional investors to provide the financial backing required. The social finance sector is self contained with the top ten providers of social finance being responsible for 96% of UK social investment in 2010. This report discusses practical ways to attract investors into the sector and to seize larger scale new investment opportunities.
The key findings from the research include:
- Investors are more likely to engage if social investment can offer an expectation of market or close to market returns, as well as some guarantee or mitigation of risk, and liquidity if possible to help mitigate risk;
- There is no supply of suitable products to attract institutional investors; most are illiquid, making it hard for investors to exit an investment which adds to the investor’s perception of risk. Encouragingly, there are signs that some of these products are being addressed in new product design;
- The Big Society Bank (BSB) could provide £600m of new capital for the social sector and can play a key role in developing the social investment marketplace. The BSB intends to develop new investment products, be an early adopter of social investment concepts, as well as acting as a champion to lever in additional finance.
To accelerate social investment, the report recommendations include:
- The support of intermediaries in building up the social investment market by helping to match investors’ requirements with investees’ needs;
- The development of infrastructure and products whether it is the BSB supporting platform development for example to allow access to a wide range of products for a wide range of investors, or the tailoring of products to suit particular target investors;
- Public policy changes will be an important driver whether it is lobbying for greater use of fiscal incentives to encourage investment for example, or a consultation on proposals to establish an appropriate finance regime for social and community finance;
- Hold investors’ forums to understand the level and type of detail they seek to make and maintain a social investment;
- Analyse the sector and champion its key successes whether it’s looking at the loan default rate, or the average length of time to reach sustainability.