Untapped pools of potential investment capital exist
Our research, 'New Specialist Sources of Capital for the Social Investment Market', commissioned by the Social Investment Research Council, examined the potential for raising new finance for the UK social investment market from institutional investors. It focused on eight investor ‘groups’ which have been under-researched to date: pension funds, insurers, housing associations, charitable organisations, faith-based organisations, university endowments, corporations and family offices.
But hurdles to engagement remain
We found that these institutional investors do have an interest in social investment. However, challenges remain which prevent them from engaging more fully with the market. These include:
- a lack of performance track record for many social funds and organisations;
- lack of awareness of suitable investment opportunities among investors;
- and a need for credible investment advice.
In addition, we found that many of the investors interviewed tended to associate the ‘social investment’ market primarily with its more innovative products. When asked for their impressions of market performance, investors frequently cited social impact bonds as their point of reference – rather than, say, a sustainable forestry fund. Thinking of social investment only in terms of its more innovative elements linked to the market as a whole being perceived as ‘high risk’ in the minds of investors – despite this not necessarily being the case.
A spectrum of opportunities could encourage new investors
To engage greater support from institutional investors, we identified a need to consider the full range of opportunities the market can offer. It can be helpful to think of the social investment market as a spectrum, with two key sets of investment opportunities at either end.
One opportunity is the need for risk finance investments - estimated at £500m - required to support social sector organisations in coming years. This might also include more innovative products such as social investment bonds.
The alternative, at the other ‘end’ of the market, is a multi-billion pound opportunity to invest in more established social industries, such as social housing, microfinance and clean tech.
Matching opportunities to investors
In considering the needs of institutional investors, our research suggested that investments at the established end of the market are most likely to appeal to institutions that would like to make social investments but are currently put off by what they see as a market dominated by small, risk-equity type deals, rather than the infrastructure projects and bonds that large investors such as pension funds are used to considering.
By contrast, risk finance deals are most likely to appeal to institutions that are more able to take a values-based approach to investing, either through philanthropy portfolios (family offices, charitable endowment funds, corporate CSR funds) or as a means of service delivery (housing associations).
Any attempt to engage institutional investors with social investment needs to reflect the different motivations and limitations of each group, and by extension what types of opportunity are most relevant. Such an appropriately-targeted approach is likely to be more successful than a ‘one size fits all’ approach to engaging new investors.
The research report ‘New Specialist Sources of Capital for the Social Investment Market’ is available to download from the City of London’s research webpage.