By Karl H Richter, CEO and co-founder, EngagedX
Our seminal study, commissioned by the Social Investment Research Council, reveals for the first time historic performance of UK social investment activity.
The anonymised sample covers 426 closed investments relating to £42m of capital deployed. The dataset includes both debt and equity deals made from 2002 to 2014 by CAF Venturesome, Key Fund and Social Investment Business, and is the largest aggregate set of performance data that has been assembled on social investing. It was published by EngagedX and the Social Investment Research Council with the support of the RBS Group.
Total financial performance
Comparing all capital drawdowns with all capital, interest and fee payments, financial performance over the 12-year period was negative 9.2%. While at first glance this seems disappointing, it is in fact remarkably good given that pricing of capital was driven by affordability and not risk adjusted. Moreover, most of these investments were high risk deals, made after investees had been refused finance from mainstream finance institutions.
The market is maturing
Assessing the data for change over time suggests that total financial performance is indeed improving. Deals made within the last five years delivered a total return of negative 3.4% – three times better than the overall 12-year period and six times better than the period preceding 2009.This significant improvement is remarkable not only because it occurred in the wake of the financial crisis, but also because it relates to over half the sample by both number of deals and amount of capital deployed.
Put another way, in just over a decade of ambitious expectations and demanding conditions, the nascent social investment market is already achieving nearly full capital preservation with an improving trend. This historic performance indicates that deploying repayable finance to social purpose organisations is indeed a viable proposition – and that social investment to date has been successful in meeting its objectives.
Engaging social investors
Investors frequently struggle with appraising the risk profile of new social investment deals, which requires capturing more metadata of historic deals to better segment past performance. This study is a valuable first step to informing and engaging investors.
However, further work is required - the full spectrum of investor motivations, transaction costs and management overheads all need to be better assessed. This includes assessing past deals by product type, sector, legal form of investee, geography, turnover, number of staff, and stage of development, amongst other criteria.
Informing and developing the social investment market
As well as highlighting market development, this study points to the need for consistent data capture from the start, to avoid the complications and resultant high cost of retrospectively structuring data. Doing so will also enable cost effective comparable analysis within the market. We hope that this project encourages other social investors to be transparent with their data. There is potential for greater voluntary reporting and transparency to emerge as the hallmark that distinguishes social investing from mainstream markets.
Financial performance is only half of the social investment journey. Being able to evaluate social impact as a bona fide non-financial return on investment is equally important (if not more so, given the difficulties). However, without robust and comparable data, it is impossible to judge investment performance fairly and to understand the complex interrelationship between financial returns and presupposed social impact creation. This study and its accompanying dataset, goes some way to completing that first part of the social investment journey.
The dataset was released on the 5th June 2015 and is available via the Government's open data portal.
About the author
Karl H Richter is CEO of EngagedX. The mission of EngagedX is to unlock more socially motivated investment capital by developing market infrastructure for data driven services and products. For more information see: http://www.engagedinvestment.com/engagedx.html