Missing from the manifestos?

I reckon CICs limited-by-shares are a good idea that potentially offer exciting opportunities for social enterprises to generate finance by selling equity. As far as I know, so far, not many of them are being set-up (as opposed to quite a lot of CICs limited-by-guarantee) and not many of those are managing to sell many shares.

My suggestion is the lobby should be asking the government to come up with some way of encouraging ordinary people – as opposed to very rich people or people running investment funds – to put cash into social enterprises.

My thought is that, given that the government guarantees your £50K worth of deposits in a bank, it might be also able to guarantee your first £10k or £20K worth of investment in a social enterprise (providing that enterprise met a series of conditions that prevent the state subsidising rank incompetence or scammery).

I don’t claim to be an expert in this sort of thing so I completely accept that a government guarantee might not necessarily be a practical idea but I’m sure there are possibilities for coming up with something that fulfils a similar function – allowing people to choose to invest some of their savings in a social enterprise, while somehow reducing the risk taken in doing so.

I wonder if anyone who does know what they’re talking about has thoughts on this?

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10 responses to “Missing from the manifestos?

  1. Like you…I really don;t know what I’m talking about either, but I really appreciate where you are coming from on this, David. How do you/we/us incentivize investment from regular folks. I love all the dialogue around dividends, access to capital and other mechanisms for spurring growth and investment in Social E. GOOD idea.

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  2. Marianne Whitfield

    Having recently taken over a struggling community centre with a view to turning it into a business centre I have been discussing this very issue with a number of people. I am not interested in making money myself from the venture, but unfortunately, the minute you mention the words ‘commercially sustainable’ or ‘investment’ people immediately seem to mistrust your objectives. I would love to be able to offer people the oportunity to invest in my plans, but I think it will need a cultural shift in perceptions of ‘enterprise’, in whatever form the enterprise takes.

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  3. The closest I know of, David, are the local bonds organised by CityLife. And I know BakerBrown are doing work on community shares. Beyond that, not much to add…

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  4. beanbagsandbullsh1t

    Thanks Nick. I want to read up more on both these things – I’m keen to do a post on Community Shares once I’m better informed – but from what I’ve seen so far I like to the look of them. And interested that the minimum investment in CityLife is £500, which is obviously not out of the league of ordinary people who might otherwise get an ISA or similar – so could choose a community benefit rather than a financial one.

    Both these are different – and benefiting difference kinds of organisations – from what I’m suggesting, though, which is fairly conventional equity investment in CIC CLSs but with some specific government support.

    Marianne, I don’t have any great suggestions beyond finding some people who do understand what you’re doing, getting on with it, then waiting for others to come round to your ideas once they see them working in practice.

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  5. I work for the charity UnLtd. Our work is focused on supporting social enterprises. My bit of the organisation works to to match social enterprises with finance to support their growth and development.

    Finance (as opposed to grant funding) for social enterprises is an emerging market and is certainly not well developed. There are people and organisations wanting to invest in social impact as well as financial return and many will trade social impact for a lower return. These are the social investors.

    Interestingly many prefer not to deal with CICs. Two main reasons; there is a cap on the profit distribution and there is no tax advantage. An investor would get both with a Company Limited by Shares (CLS or normal Ltd company).

    For some investors however, the CIC is a useful “mark” as it has a legal asset lock so that any funds put in cannot be taken out and used for purposes other than the social mission (i.e. retiring to the Bahamas).

    There are a number of ideas around for financing social impact, I am most interested in the new social bond idea. But old methods are already available. For example, straight forward loan finance. Put up a good case (both financial and social outputs/results) and there are social lenders (Tridos, Charity Bank, Venturesome etc.) who will listen. Equally, there are organisations that will provide interesting kinds of equity investment that do not require share purchases. Called “quasi-equity” these are basically long term loans where the principle is payed back to an agreed schedule and the interest varies with success.

    I am uncertain whether a government intervention would provide additional finance. It simply comes down to a good team having a great social change idea and producing the financial plans that show it will work. I know lots of people who would talk money to people like this.

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  6. beanbagsandbullsh1t

    Steven,

    Thanks. Really useful and interesting points.

    I understand the profit distribution issue but are you saying that there is a tax advantage you get for investing in a normal CLS that you don’t get if you invest in a CIC Limited by Shares? If that’s the case, that definitely needs questioning.

    Straight loan finance is a different issue. It’s definitely a sensible way to finance or grow social enterprises that can bring in large, stable, government contracts quite quickly but I don’t think it’s a good way to finance financially risky social enterprises with unpredictable income streams.

    The point about the sort of equity finance I’m arguing for is that it’s for situations where investors accept that the investment might not work – and unlike a conventional investment that might not work, they won’t get high returns if it does work.

    I think Community Investment Tax Relief (CITR): http://www.hmrc.gov.uk/manuals/citmanual/CITM9900.htm is probably in the right general area but that’s for CDFIs. I don’t know how successful CITR has been. I wonder if it would be possible to have a similar scheme for CICs – or, in fact, any companies with a Social Enterprise Mark who can take equity investment.

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  7. I was under the impression that the CIC Association intends to set up some kind of equity market?

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  8. CDFI’s offer the perfect intermediary through which everyday people to take equity stakes in social businesses whilst minimising risk.

    Surely the point of the CDFI system is that everyday people can invest in their chosen CDFI which in turn invests in just the sort of social enterprises which you are refering to.

    CDFI’s can take the sort of risks that larger funds can’t because they are closer to the ground, in the sense that they are usually localised and specialised. Both companies and indiviuals qualify who invest qualify for CITR – which can be equalivalent to a reasonable return. Also, CDFI’s usually publish lists of who they lend to so the ‘everyday’ investor knows where their money’s going.

    Moreover, theres no reason why CDFI’s should not buy equity stakes in social enterprises, CIC’s or even ltd companies under their CITR activities. As far as I know, no CDFI’s are currently doing it – London Rebuilding Society has considered it in the past, but as of yet, most of our borrowers have preferred a loan finance option.

    CDFI’s can do it, they perhaps need to fine tune the model, but how strong is the demand?

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  9. argg! after thought… both Bridges and Triodos take equity stakes. but the problem of a lack of any exit strategy and low demand still remains.

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  10. beanbagsandbullsh1t

    What, so you’re saying there’s CDFIs and banks wanting to buy equity stakes in social enterprises and the social enterprises are saying “no, we want a loan instead?”

    Why are they saying that? I’d much rather be paying a large percentage of profits – should I make any – to a CDFI than paying back a loan, irrespective of whether or not I was making a profit.

    Is it a control issue?

    All that said, the main initial thought I was putting forward was really about ways of social enterprises getting the kind of equity investments than people starting normal small businesses might get – from friends, family, people with an interest in the project and some ideas to contribute etc.

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