Do the risks of social investment outweigh the rewards for charities?

Seva Phillips, investment analyst, CAF Venturesome

Social investment is right for some, but not all, charities. There are several things a charity needs to consider before taking it on: what do we need the capital for? If we accessed a loan, how would we repay it, and over what timeframe? Are our financial systems robust enough to manage it? Are the trustees engaged in the plan? What type of investor are we looking for? And so on.

Where a charity isn’t able to comfortably answer those questions, the risks may be too high. However, in cases where the risks are properly identified and managed, the rewards can be great. Social investment can give charities the capital they need to develop and grow, transition to different ways of working, or get through a difficult patch. Ultimately, it can help them to better serve their beneficiaries, which surely outweighs the risks involved.

Iona Joy, head of charity effectiveness at NPC

We are seeing a growing interest in social investment from charities – great news, as the right type of social investment can help charities increase their impact and, in the process, become more sustainable. However, it is more complicated than merely raising extra funds for scaling up or delivering new services.

It sounds obvious, but social investment requires repayment – so a key piece of advice we give charities is to ensure you know where the money to repay investors will come from. In social investment it is the funder who recycles the funds, not the charity, and funders may be withdrawing money from your charity at an agreed, but inconvenient, time.

So how does the risk/reward stack up? Risks surround the need to repay, and any culture or organisational change that has to accompany this. Rewards for charities can come from increasing their impact, and becoming more efficient and ultimately more sustainable. But for every charity, the tipping point is different; you need to ignore the hype and think carefully before you dive in.

James Perry, chief executive, Panahpur

Social investment offers the promise of a potentially significant new source of funds for charities. However, it is a completely different game to receiving a grant. The charity needs to be clear about how social investment will be repaid, and confident that it will be able to deliver its plans to do so.

Plans need to be based on expectation rather than hope, and there can be severe consequences if repayment cannot be made.

Raising social investment can be complex and time-consuming. But the process can help to build management capacity, as well as impact measurement and financial disciplines that some charities need to develop.

So while it is a risk that needs managing – and is certainly not appropriate for all – it is also an opportunity. But only where there is a commercial case, management capacity, and a reliable commercial model that will enable repayment.

Ashley Horsey, chief executive, Commonweal Housing Ltd

At Commonweal, our stock-in-trade is houses, and social investment seems to work very well for us: it helps boost the capital we need to acquire more housing for more projects.

Our asset-backed model is, in essence, similar to taking a conventional mortgage, but we are doing so with enlightened organisations who are sharing risk with us, albeit a relatively low risk to investors. The yield is underwritten by Commonweal, with capital appreciation shared between all parties.

However, those considering this kind of investment should be aware of the risks involved. For social investment to work, it must not siphon funds away from grant-giving and philanthropy; rather, it can and should boost such funds when used as mission-related investment by endowed charities. It must neither blinker funders against traditional grant giving, nor get hijacked by commercial investors seeing it purely as another asset class. It should not force charities to develop unsustainable repayment models. And, most importantly, it must work for both parties.

Danielle Walker Palmour is director of Friends Provident Foundation

At the moment, social investments are long term (sometime 10 years), illiquid (there is no way to sell them), and innovative (never done before). Very risky, indeed.

Nonetheless, we’ve chosen to make direct investments of up to 5 per cent of our funds in social enterprises and charities, and have built up a range of social investments alongside our grant programmes. Although we will not see most of the funds invested back for years, I would cautiously say the non-financial rewards are already accruing. With the working capital we’re now able to offer, organisations can expand their services and reach more people. Funds stay in organisations for a long time; this helps to build robust relationships, engendering good communication and transparency. Furthermore, sharing the risk means we now have an organisational stake in the success of the social mission, just like the charities we invest in. Finally, social investors among trusts and foundations of all sizes and types are increasingly sharing knowledge and experiences, which improves our overall understanding and practice.

For my trustees, these rewards are powerful inducements that outweigh the known risks. Active governance is key to ensuring this continues to be the case.

This article first appeared in The Fundraiser magazine, Issue 34, October 2013