Holly Piper

Head of CAF Venturesome

Charities Aid Foundation

What’s more important - more money, or more of the right money?

9 December 2019

A recent clutch of articles and initiatives around investing for impact have raised a number of interesting points about how getting more of the ‘right’ capital can at times conflict with ‘getting more’ capital into social investment.

As a passionately impact-first social investor, I strongly believe that social organisations need more affordable, patient and risk-bearing capital.  Affordable and patient investment is available when an organisation is judged to be lower-risk.  When a social organisation has an asset base (such as a building) or a strong trading track record, they can typically take on long-term secured debt from a commercial bank to meet their financing needs.  This type of lending can generate a modest financial return – which is why banks keep providing it!

But if you don’t have assets, decades of strong growth or a fairy godmother, as a social organisation seeking investment your options are more limited.  Despite the growth of the social investment sector in recent years, there is still significant unmet demand - as CAF Venturesome’s pipeline attests to. And philanthropic capital is well-suited - with a couple of key caveats - to providing this type of social investment.

However (first caveat!), the pool of philanthropic capital may be very big – likely £65bn and counting – but it is finite, and so needs to be used well.  For many social investors – trying to fit the square peg of risk-averse capital into the round hole of higher-risk demand – this means “blending” – using a small proportion of philanthropic capital to provide a first loss layer to subsidise other, more commercial, capital.  Is blending a good idea?  I’d argue yes when necessary – i.e. at a deal level.  For example, a grant-making trust committing a £0.5m grant to leverage £3m commercial capital in order to support a highly-scalable but untested social venture with a £3.5m investment need; because without the grant, the investment would not have been made. 

A pile of coins

But it is exactly because this resource of philanthropic capital is so finite – so precious – I’d argue that it should not be used so readily at a market level to de-risk “commercial” capital.  Attracting more “commercial” money (pension money, commercial banks, individual investors, institutions etc.)  into social investment is brilliant.  But, clearly, the higher the risk-adjusted return expectations of an investor, the more philanthropic capital is used as a subsidy (so the quicker this is used up); or the higher the price of the social investment (which is borne by the social organisation borrowing).  As Richard Litchfield has recently argued powerfully, social organisations are reluctant to borrow at the high interest rates prevalent in the sector.  And we know – from research and from our conversations with the dozens of social organisations we speak to each month – how important the perceived and actual affordability of social investment is.

I am keen to see lower prices in the social investment sector (including by CAF Venturesome) where possible.  But I do not think that this necessitates ‘using up’ more philanthropic capital in subsidies.  Instead, I believe that social investors should “pay more” for higher impact – this might mean taking a risk that they otherwise wouldn’t, or accepting a lower financial return.  Therefore to expand the pool of the “right” capital in the UK social investment market, I believe that investors should raise their impact expectations, and lower their financial return expectations.

This is clearly easier said than done.  But a few funders – including some of the recently-formed dormant-asset organisations such as Fair4All Finance – are beginning to act in this way.  And my hope is that recent initiatives – particularly the launch of the ambitious Impact Investing Institute, and the forthcoming SEUK commission on social investment – are a brilliant opportunity to reset the dial on the ‘right’ price for social investment.

Holly Piper, CAF Venturesome

As an aside: CAF Venturesome’s social investment funds are designed to provide social investments which are as affordable, risk-bearing and patient as possible.  Our unsecured loans usually have an interest rate of 6.5%, which contributes towards our operating costs; we use philanthropic capital to make our social investments and are super open that we expect a small negative return for funders in our main social investment fund; we still have some work to do on “patience” admittedly, but we’re working on it!

If you want to know more about a social investment from CAF Venturesome or want to use your philanthropic capital to support our fund, talk to our team on 03000 123 300 or email us at venturesome@cafonline.org and we’ll be happy to help.