In my previous post last month, I suggested that at least two blogs posts that would be needed to (even usefully begin to) answer the question post by the headline.
The first of these was a post: “Looking at developments in the market for small, unsecured loans for charities and social enterprises since 2012 to see whether there’s more of these deals happening and what basis they’re happening on (size of loan, interest rates etc.)”
The context for this is the potential disconnect between (a) the significant growth of the social investment market overall (both in terms of the value of total outstanding investments and in the value of investments per year) and (b) the offer to most charities and social enterprise from the social investment market.
Turning up the volume
The first half of my previous blog looked at possible growth in the specific part(s) of the market described as ‘risk’ investment and the different perspectives on what that means.
In this case, it’s useful to begin by zooming out and looking at the shift in the market as a whole over the past four years.
Big Society Capital (BSC)’s recently published impact report claims that the total value of deals in the social investment market in 2016 was £595 million*, up from £213 million in 2011/12. The 2011/12 figures are primarily based on the City of London-backed report, Growing the Social Investment Market, however BSC’s data team have made some adjustments to the figures to reflect some changes in how we understand the market since then.
Supporting a 179% increase in deal flow in less than five years doesn’t seem like bad going. On the other hand, social investment leaders expected far more. As the title suggests, the BSC-commissioned report The First Billion, published by Boston Consulting Group in 2012, predicted that deal flow would reach £1billion by 2016.
The figures for deal flow – the amount of money invested in a particular year – should not be confused with the figure for the overall value of investments in the market (which includes the value of outstanding loans and equity investments made in previous years). The total outstanding investment figure for 2016 on BSC’s market size dashboard is £1.64 billion (of an overall total of £1.98 billion) excluding ‘Profit with Purpose’ investments**.
So, the less charitable assessment of BSC’s achievement in terms of deal flow is that they had a target to increase the size of the market by £787 million between 2012 and 2016, and have only managed to increase it by £382 million.
The assessment, while legitimate, may reflect more on the over-optimism of 2012’s predictions than on BSC’s performance. This blog post, written by NPC’s Dan Corry at the time, makes clear that these the predictions were based on several questionable assumptions – particularly around growth in charity and social enterprise income from public service markets – and these subsequently proved to be incorrect.
The reality, as shown by NCVO’s Civil Society Almanac, is that (with minor fluctuations) charity and social income from government has remained essentially the same over the past five years. It peaked at £15.7 billion in 2009/10 and the latest available figures (2014/15) have it slightly lower at £15.3 billion.
Growing the volume of investment in the social investment market by 179% in this context represents a significant achievement (of something).
Deal or no deal
What’s less clear is the extent to which the increase in the volume of social investment has made it easier for most charities and social enterprises seeking investment to get the investment they need.
One way to look at this is to look at the number of deals taking place in the market. When we look at the number of (meaningfully comparable***) investment deals, this figure has grown from 765 in 2011/12 to 923 in 2016.
So, while the amount of money being invested into charities and social enterprises has increased by 189% since 2012, the number of charities and social enterprises taking on social investment has increased by just over 20%.
This doesn’t invalidate the big increase in investment but it hints at why (as discussed in the previous blog) some sector leaders are concerned that most charities and social enterprises have not benefitted.
There’s no way of getting a clear picture of how the average charity or social enterprise’s experiences of the social investment market have changed in recent years but one way to get a broad indication is by looking at Social Enterprise UK‘s bi-annual state of social enterprise surveys.
Unfortunately, the 2017 survey is not yet available but the figures below give a snapshot of what was happening in 2011, 2013 and 2015.
In the 2011 survey, Fightback Britain:
- 45% of social enterprises said ‘Lack of, poor access to, finance or funding’ was the major barrier to Starting Up
- 44% said said ‘Lack of, poor access to, finance or funding’ was the major barrier to Sustainability and Growth
- 25% of social enterprises sought loans
- 56% got some of all of the loan finance they applied for
- the median loan applied for was £250,000
- the median amount received was £200,000.
By 2013’s report The People’s Business:
- 40% of social enterprises said ‘Lack of, poor access to, finance or funding’ was the major barrier to Starting Up
- 39% said said ‘Lack of, poor access to, finance or funding’ was the major barrier to Sustainability and Growth
- 20% of social enterprises sought loans
- 60% got some of all of the loan finance they applied for
- the median loan applied for was £150,000
- the median amount received was £70,000.
In the 2015 survey, Leading the World in Social Enterprise:
- 58%**** of social enterprises said ‘Lack of, poor access to, finance or funding’ was the major barrier to Starting Up
- 39%**** said said ‘Lack of, poor access to, finance or funding’ was the major barrier to Sustainability and Growth
- 23% of social enterprises sought loans
- 74% got some of all of the loan finance they applied for
- the median loan applied for was £87,500
- the median amount received was £80,000.
The messages from this data are unclear. Some themes that seem to emerging are:
- (With the exception of a big increase amongst ‘Start-ups’ in 2015 that may be explained by changed methodology), the % of social enterprises citing poor access to finance as a major barrier did not change significantly between 2011 and 2015
- the % of social enterprises applying for loan finance did not change significantly between 2011 and 2015
- the % of social enterprises successfully applying for loan finance increased steadily and notably between 2011 and 2015
- the average size of loans applied for (and received) dropped significantly between 2011 and 2013 before increasing slightly in 2015
There’s lots we don’t know. In particular, we don’t know how significant the social investment market was in these changes and non-changes. As discussed here, most investment taken on by charities and social enterprise is not social investment.
In terms of a tentative hypothesis, though, it seems plausible that the fact that the social investment market is growing may have contributed to the growing % of those social enterprises that are seeking finance actually managing to get it.
More or fewer
It’s much trickier to work out what has happened in terms of ‘risk capital’. As discussed in the previous blog, the ‘risk capital’ bucket includes any social motivated investment not made a bank.
My third blog will look at what some of the specific categories in this bucket – charity bonds, community shares, profit-with-purpose, SITR, social impact bonds and social property – do refer to but for now the point is that they are (with possibly a handful of exceptions) not small amounts of unsecured finance for charities and social enterprises provided by intermediary social investors (such as CAF Venturesome, Big Issue Invest or SASC).
In 2011/12, when ‘social investors’ where known as SIFIs, the combination of ‘Large SIFIs’ and ‘Small SIFIs’ made 536 investments with a total value of £35 million – an average investment size of £65,000. Not all deals included this figures were either small or unsecured but it’s the area of the market where that finance was primarily located.
The most directly comparable activities on BSC’s 2016 ‘Market Sizing Dashboard’ are ‘Non-bank Lending’ and ‘Equity-Like Products’*****. These categories combined in account for a significant increase in investment value (to £71.4 million) but a decrease in number of deals to 477, with the average investment size up to £150,000.
Without looking at the data in greater depth, it’s not possible to know exactly what this tells us. The wider re-categorisation of different parts of the social investment market mean that it’s not possible to be sure that the number of small, unsecured investments into charities and social enterprises has decreased since 2012 but it seems highly unlikely that it has increased.
But what does this all mean?
My working hypothesis is that:
- the current social investment market may be meeting the needs of ‘investment ready’ charities and social enterprises – those already inclined and in a position to take on investment – better now than it was in 2012
- that (while there some investors + Access attempting to tackle this) those who hoped that the launch of Big Society Capital in 2012 would prompt a significant increase in availability of small, unsecured investments from SIFIs/social investors are understandably disappointed
- that our understandings both of what’s happening in the newer sub-sections of the social investment market and of the interaction between social investment with the wider markets for finance remains significantly under-developed
I’ll aim to look at the pros and cons some of those new areas in the next post.
In terms of overall conclusions, the analysis in this blog doesn’t answer the big questions about the market for small amounts of unsecured finance for charities and social enterprises but it (hopefully) helps us to understand some of those questions better – while showing that an increase the volume of social investment does not necessarily mean that the social investment market is helping significantly more organisations.
Many charity and social enterprise leaders may be unhappy with this situation but they are not axiomatically correct – the goal of Big Society Capital and the social investment market should not necessarily be to increase the numbers of organisations taking on social investment.
It may be that significantly increasing the volume of investment into those organisations best placed to take it on is a better way of increasing social impact. That’s a debate worth having but not a decision that should be taken by default.
*The overall market size figure is bigger than this at £630 million but the £595 million figure is based on the sections of the market that are directly comparable with those captured in the 2011/12 data.
**This is not a reference to the validity (or otherwise) of investments into Profit with Purpose organisations as ‘social investment’ but a reflection of the fact that these investments are likely to have been taking place in 2011/12 but there is no way of capturing information about them.
***Of the total 1147 deals, 230 are investments into profit-with-purpose organisations which were not captured by the 2011/12 research. It is also likely as that the 765 deals in 2011/12 is an under-estimate as it does not include Community Shares and additional Equity-Like investment that is included in BSC’s revised volume calculation for 2011/12.
****Survey questions were amended in 2015 to make poor access grant funding and loan/equity finance separate barriers. My figures here include the combined totals which may be overstated compared to previous years if some organisations chose both options.
*****Social impact bonds may have been included in the ‘Large SIFI’/’Small SIFI’ figures but both volume and deal number were insignificant in both 2011/12 and 2016.