This document summarizes a presentation on social finance in the UK. It introduces the presenter and provides context on the growth of social finance as a new mechanism to fund social sector organizations. It then covers reasons for the rise of social finance, including replacing public grants. The document outlines the target market and spectrum of social finance products on the supply side. It also analyzes challenges on the demand side for social sector organizations in accessing social finance. In conclusion, it discusses balancing social missions with business practices and the need for a blended approach of finance and support.

1. Social Finance in the UK
Presentation by:
Stephen Cox
Specialist in Economic Development & Regeneration
7th December 2011, Utrecht

2. Today‟s Presentation
• Introduction
• Why Social Finance and why now?
• Brief overview on supply-side
• Identifying demand-side issues
• Some initial conclusions

3. Introduction
• Stephen Cox
• Urban planning, regeneration, economic development
• Recent study of supply and demand issues around
social finance
• Work with many third sector organisations in
regeneration areas

4. Why Social Finance?
• A new financial mechanism to do familiar things
• An attempt to replace public-sector grant in the third
sector/ social enterprise sector
• The start of a new era?
• What is the target market?
• Smart organisations are shifting this way
• Finance sector is responding to market opportunity
• But... Still many issues to resolve, particularly at the
grassroots level

5. Why Social Finance?
• Social economy and social enterprise both hugely elastic
terms;
– The concept has shifted over the last decade;
– The context has changed dramatically again with the
social innovation movement (NESTA, Young
Foundation);
– But capacity has been installed and a broad view of
the sector is being operationalised
• There is optimism and lots of talking, but also a lot of
fear that social finance cannot replace public grant

6. Why Social Finance?
• Massive growth in social investment funds of all kinds
• Easily the most significant development in the last 6
years – growth of loan, equity funds following on from
the double and triple bottom-line funds of the mid-2000s;
• Government funds to kick-start a social finance market –
de-risking for those wary at the outset; - a “new „third
pillar‟ of finance for social ventures; a “new „asset class‟
to “connect social ventures with mainstream capital”;
• Big Society Bank and dormant bank accounts give scale;
• A variety of financial instruments designed to attract
investors (donor advised funds) as much as to seek out
a return now available;

7. Why Social Finance?
Source: Venturesome (2009
The Target Market

8. Social Enterprise in the UK?
• Pushed from 2002 - US non-profits informed – a business
in a market context that uses its abilities and surpluses to
serve its social objectives;
•55,000 in the UK accounting for 1% of GDP;
• Retail coops, mutual and RSLs have turnover of £42 bn;
• But the vast majority are very small and lacking in scale
and scope – the iceberg and Upas Tree effect (see later);
• Power to mobilise social investment, social and ethical
finance – door open to leverage investee funds;
• Strong record of success above the iceberg waterline;

9. Supply-side Product Spectrum
• Grants
• Commercial loans
- Secured loans with mainstream lenders and specialist
lenders (Triodos, Charity Bank)
• Soft loans
- Unsecured loans from sector-oriented lenders (may
involve public sector support and higher interest rate)
- CDFIs are big players regionally (as in USA‟s CDLFs)

10. Supply-side Product Spectrum
• Equity and Quasi Equity
- Share capital investment, very low deal flow but has
potential in bigger social enterprises; requires
distribution of profits and may look for a return of 10%
- Delivered via investment funds:
- Big Issue Invest (c£3m raised)
- Esmee Fairbairn (c£11m committed)
- Bridges Social Enterprise Fund (c£12m)
- CAF Venturesome

11. Supply-side Product Spectrum
• Social Impact Bonds
- A form of outcome based/ payment by results contract
with the government as underwriters
- Involves an investor, the government and the deliverer
- Investor holds contract and takes risk of outcome
payments
- Investor covers costs of delivery agent under separate
contract
- Peterborough ex-offenders/ reoffending contract is the
prominent one everybody is watching

12. Supply-side Product Spectrum
• Hybrid Philanthropy Capital
– Layering of different sources of investment
Source: New Philanthropy Capital (2010)

13. Relationship Between Risk and Return
Source: Venturesome (2009)

14. Brief Overview on Supply-side
• Complicated and growing range of products
• Increasingly return on investment oriented
Source: Venturesome (2009)

15. Identifying Demand-Side Issues
General
• Shift required from grant-dependency
• Change in attitude, culture, behaviour to realise the days
of grant support are over
• Move from „funding‟ to „finance‟
• Not just about commercialisation; not all demand-side
organisations can commercialise

16. The Upas Tree – courtesy of Prof. Peter Lloyd
Strong Public
Grant Aid
Legacy
Social Enterprise
Social Entrepreneurship

17. Identifying Demand-Side Issues
Organisational
• Governance and management issues around finance
• Cultural – attitudes towards and experience of finance
• Opportunity cost – time involved in seeking finance
• Ability to articulate the proposal and make the case
• Organisational restructuring to respond to opportunity
• Demand needs to be nurtured, channelled, developed
• Demand is latent in many organisations

18. Identifying Demand-Side Issues
Inevitably, demand
will be greatest for
soft capital.
The softer the
terms, the broader
the appeal will be.
So paradoxically,
the supply side will
need periodic
injections of grant
funding.

19. The high profile players
The root population of community-based organisations
The Social Economy Iceberg – courtesy of Prof Peter Lloyd
REVENUE CAPABILITY
STATE PART-SUBSIDY

20. Challenges
• There are 900,000 civil society organisations in the UK
(170,000 Charities);
• Of these, around 3,000 (2%) account for 70% of the
revenue, 83% of personal giving and 91% of legacy
income
• Sector to face £3.6 Billion cuts up to 2016;
• Social finance cannot fill this gap, but the cuts will drive
demand
• Funds often did not require many to think of themselves
as enterprises generating surpluses or building assets;
• Banks and other commercial funders appraising them for
loan and equity finance saw them as “poorly managed”;
• Readiness to invest is an issue of the day;

21. Support is important – Finance Plus ?

22. Some Concluding Thoughts
• The sector is particularly vulnerable to this phase of the economic
cycle
• Resilience is reduced by overdependence on grant funding
• Pressing need to redress the balance
Mitigation
• Increase the ability of the sector to access a broader range of funding
options
• Bringing in good business practice without compromising social
mission
• Achieved through a focus on attitudes, awareness and capacity (more
than supply)
• Identify and address cultural barriers
• There may be a mistrust of finance and a negative association with
capitalism and the financial crisis
• Change must be championed and led by the sector - done by, not
done to

23. A Big Issue (adapted from NESTA 2011)
“Is our role to help social enterprises and charities to access capital, in
order for them to be able to deliver greater social impact? Or is it to
invest for financial returns?”
If it is the former, the consequences of this role is that a significant
investment providing non-commercial capital will be needed.
If we do not allow for this and prioritise commercial returns, we will fail
to support those that we are here to support, and displace capital
investments that would otherwise have been provided by a commercial
investor.“
Can the worlds of social development and finance come together to
help us through the crisis...? Still too early to say

24. Group Discussion

25. Contact Details
• Stephen Cox
stephen.cox@uk.ecorys.com
regenomico@gmail.com
++44(0)7905 048 613