What’s the reality of social investing? What are its limitations, and how can we overcome them? Does the system work, and how might we change it?
Three experts in social investment, from different sides of the fence, discussed the evolving landscape of the sector, and the challenges currently facing both investors and entrepreneurs. Nick Jenkins is a social investor and entrepreneur (and one of the ‘dragons’ on BBC2’s Dragon’s Den) who founded Moonpig.com before becoming CEO of educational charity ARK and starting his own charitable foundation; Amy Clarke is co-founder of Tribe Impact Capital, a wealth management team aligning financial investment with the UN’s Sustainable Development Goals; and Susan Aktemel is the founder of Homes for Good, a social enterprise letting agency for which she has raised nearly £10 million in social investment.
Bringing together their respective experience in offering, managing and raising social investment, they identified three key challenges that are limiting the efficacy of today’s social impact investment.
- A spectrum of ‘success’
Having operated extensively in both the for-profit and not-for-profit space, Nick is keenly aware that definitions of ‘success’ sit across a broad spectrum. While ‘success’ for traditional commercial investors is a return of 14% (with little or no positive impact), social impact investors might expect to see a lower return (e.g. 7%) plus demonstrable social impact – or even social impact alone. Investors need to define their place on this spectrum, to prevent a problematic “mismatch”.
- Expectations of returns
While social investors may not expect the sorts of lofty 12-14% returns seen in the commercial sector, there is a widespread expectation of returns as high as 7%. Nick outlines the problem: “you need a certain critical mass to create a fund; and the difficulty is trying to get a homogenous group of investors who have that wider spectrum definition of success”. The tone is set by these investors, and with it the rules that determine expectations of returns. What is more, this doesn’t take into account the differences between sectors. Susan points out that in the social housing sector, even 6% is a significant stretch. There are possibilities here for a new normal – and Amy highlights that she has seen signs that wealth holders are requiring lower returns – but the system may take some shifting.
- Investor education
Often, social businesses operate in disruptive or complex ways to solve challenging problems. This means that, while investors are interested in the concept, they may not have a deep understanding of the business model and ecosystem – which in turn creates a huge amount of work for social entrepreneurs who need, as Susan describes, “to go back to the drawing board with every single investor and explain the ins and outs”. This puts huge pressure on time- and resource-limited entrepreneurs who are trying to both run the business and raise extra capital.
It seems that, for the most part, the challenges faced by social investment arise from its differences from traditional business investment. What if these differences were embraced and designed for? Our panelists suggest ways in which a shift in thinking can move things forward.
- Specialist, rather than generalist, investment
Moving towards more specialised investment funds could tackle the problems of investor understanding, and help investors make better decisions while saving entrepreneurs unnecessary hard yards. “It’s very difficult when you’re a generalist fund to really get to grips with different types of businesses,” Nick says. “Over time, I’d like to see funds that are more focused”. And, as Susan adds, “if you’ve got specialised funds with specialised people, that cuts through [the learning curve] very quickly”. Not only that, but this specialist understanding could help with establishing realistic and sector-appropriate expectations on returns.
- Adding colour to the numbers
While any investment is, naturally, a numbers game, it was clear to all the panelists that stories have a critical part to play in communicating with existing and potential social investors. “Don’t underestimate the power of being able to give an investor a story they can take to the dinner table – these are the things that make their wealth real,” Amy says. And as Nick explains: “Storytelling is a way of giving an investor visibility of all the different strands that they can compute to work out if it’s worthwhile.” In finance, storytelling is something of a lost art – and it’s time to rediscover it. And it’s not just the success stories that need telling – stories of failure are as important to our collective learning as those of success.
- Managing portfolios for finance and impact
Amy’s work in wealth management has highlighted a need to understand private investment clients from both a finance and impact point of view – opening up the possibility of including social investments with a 2-3% return in portfolios that can tolerate them.
While the challenges faced by social investment remain evident, this is a space that is fast-evolving. It seems that with time – and a bit of bold thinking – we can expect to see these hurdles overcome by new approaches, new models, and more creative, impact-focused solutions.