What I learned from Social Investors over Breakfast
I was delighted to have the chance to attend the Investor Breakfast at the ClearlySo SBC12 conference. After a career in the City, being around social entrepreneurs feels so"¦ nourishing. I love their energy and ideas. But I was curious about the investor experience: what are their concerns and aspirations, where are they satisfied and where is there still work to be done?
The breakfast panel was made up of some of the sector's most experienced social investors: Suzanne Biegel hosting from Clearly Social Angels, Paul Cheng from SharedImpact and previously of CAF Venturesome, and Nikolaus Hutter, Europe Director for the global impact investing network Toniic.
Both the opportunities and the challenges spring from the fact that social investing is still so new. But the sector is really gaining traction, with the UK playing a leadership role, helped by the commitment the government has shown to social enterprise, and by the Enterprise Investment Scheme (EIS) and the more recent Seed Enterprise Investment Scheme (SEIS) which provide significant tax benefits to British investors.
There is plenty of investor appetite, in fact there is appetite beyond what is currently investable, and many opportunities remain very early stage. While some angel investors are able to take on these early deals, institutional investors tend to look for more track record. In early stage deals, the amounts of capital required are typically small, which proves a challenge as transaction costs are high, particularly for funds which need diversification but also a minimum size to deals.
One of the most interesting points to me was how investors look for the "impact" in these deals. We all know of fairtrade and other companies that run a commercial business and then use that to fund a social goal or charity. There is a view, though, that investing in businesses where the impact is integrated into the primary business goals is more likely to be effective. When you invest into the first model, you have the risk that the business will fail financially, and so there will be no impact. In the second case, you may find that you are able to have a positive impact, even if the business does not succeed in becoming profitable. I had never thought of separating out the "impact risk" from the financial risk, and I found that argument interesting and persuasive.
There are a range of structures - some very innovative - in which to invest. In the UK, social enterprises can be set up as charities (which cannot issue equity but can take on debt), or as for-profit limited corporations. Investors took issue with the CIC (Community Interest Company) structure, which appears to be tailor-made for companies conducted "for community benefit" but in fact do not offer attractive tax benefits compared to other structures.
Investors who put their money in social enterprises are looking for a social "bottom line" as well as financial returns, so how do they monitor this? While each project is meant to achieve different goals and so performance targets are very specific to each enterprise's mandate, there is a move towards more standardisation. IRIS provides a lexicon, defining the measurement terms so that investors know that an apple is really an apple and an orange is truly an orange. Investors around the room chipped in that they typically asked their entrepreneurs to track just a few key KPI social measures, to allow them to stay focused on running their business.
So how do investors extract their capital and returns? Here, too, financial innovation is at the core of the sector. Some investments are debt with clear repayment schedules. Others become revenue sharing deals, so that investors make money as the entrepreneur does - with a number of different flavours to make sure that everyone's incentives are aligned. A specific example was a payout where 90% of profit went to investors until they were fully paid back, reverting to 50% thereafter, with the investors holding on to an equity stake should the company be sold. Investors are also able to monetise their investment through innovative factoring - with some providers offering to buy receivables at a relatively friendly discount to bring the cashflows forward. Other investors in the room pointed out that they liked to consider investing in the assets of the business rather than the business itself, and that sometimes that was very helpful to the entrepreneurs. Outright trade sales or public listings remain thin on the ground for now, and there's a lot of interest to see how the new Social Stock Exchange in London works out. SharedImpact is looking to build a secondary market for a variety of social investing instruments, to create liquidity opportunities for investors.
While road-tested investors are candid about the challenges in putting money to work in the sector, there was clear enthusiasm for the opportunities and the momentum of the sector, the progress in areas such as scale and measurement, and in the leadership role that the UK is playing in social investing.