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Template for Mapping Impact Investment Eco-systems:The UK Eco-system
Social Impact Investment Task-force established by G8Update for country representatives
Stephen Brien, 10th January 2014
22
Overview of impact investment Eco-systemEach financial transaction has its own ‘signature’ across the many parties
Social needProcurement / Commissioning InvestorsChannels
of capital
Addressing social need Supply of investment finance
Delivery Regulation / Infrastructure / Support Finance Regulation / Infrastructure
Ageing
Housing
Education
Children and Families
Healthy Living
Employment
Criminal Justice
Disability
…..
Finance Non-profit Delivery
Organisation
Government investment
High Net Worth Individuals
Local Funds
Traditional Institutions
Mass Retail
Trusts and Charitable
Foundations
Corporates
Secured Loans
Charity Bonds
Social Impact Bonds
Equity
Quasi Equity
Unsecured Loans
Development Trust
Non-profit service providers
Cooperative
Mutual / Public Service Spin-
out
Leisure Trust
Charitable Service Providers
Non-profit (maximising) trading
companies
Government Funded Service
Delivery
Government procurement of
non-profit delivery
Foundation / Charity procurement of
social value
Trading activities of social organisations
Grant-making / giving
Government procurement of for-profit delivery
e.g. Essex Children in Care Social Impact Bond with Bridges and Social Finance
Social Banks
CDFIs
Fund Managers
Tax Advantaged funds
Social Investment Intermediaries
Social Investment Wholesaler
Crowdfunding Platforms
33
Overview of impact investment Eco-systemEach financial transaction has its own ‘signature’ across the many parties
Social needProcurement / Commissioning InvestorsChannels
of capital
Addressing social need Supply of investment finance
Delivery Regulation / Infrastructure / Support Finance Regulation / Infrastructure
Ageing
Housing
Education
Children and Families
Healthy Living
Employment
Criminal Justice
Disability
…..
Finance Non-profit Delivery
Organisation
Government investment
High Net Worth Individuals
Local Funds
Traditional Institutions
Mass Retail
Trusts and Charitable
Foundations
Corporates
Secured Loans
Charity Bonds
Social Impact Bonds
Equity
Quasi Equity
Unsecured Loans
Development Trust
Non-profit service providers
Cooperative
Mutual / Public Service Spin-
out
Leisure Trust
Charitable Service Providers
Non-profit (maximising) trading
companies
Government Funded Service
Delivery
Government procurement of
non-profit delivery
Foundation / Charity procurement of
social value
Trading activities of social organisations
Grant-making / giving
Government procurement of for-profit delivery
e.g. Real Lettings Property Fund with Resonance
Social Banks
CDFIs
Fund Managers
Tax Advantaged funds
Social Investment Intermediaries
Social Investment Wholesaler
Crowdfunding Platforms
44
Procurement / CommissioningWith £250bn of social service delivery funded by government, £150bn could be accessible for impact investment . . .
2003 Non-profit Govt Contracting 2012 Non-profit Govt contracting 2012 All Govt Social Contracting Accessible Market of govt Social Contracting
£0bn
£20bn
£40bn
£60bn
£80bn
£100bn
£120bn
£140bn
£160bn
£180bn
£200bn
4.5 13 13 13
48 48
89.0
Series4
Government delivery
For-profit delivery
Non-profit delivery
For Profit
‘Accessible’Government
Delivery
(£150bn out of Social Operational expendi-
ture of £250bn)(Total Govt procurement across all sectors £89bn)
25 30
UK Govt market for Social Impact (current and potential)
13% CAGR
Other charitable service provision
Other Government
Social Delivery100
Other charitable service provision
. . . Foundations and Charities could also increase impact procurement
Note 1: Sources NCVO cited in Barclays Charity Review 2012, The First Billion - BCGNote 2: Social Enterprise annual turnover is £163bn – so assume non Value-sponsorship revenue is primarily trading (need to remove grant revenue)
55
Total UK Government expenditure
UK Government OpEx0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
346
100
298
50
50
32
720912
47
61
(By Department)
UK Government expenditure 2011-12(£Bn)
20% of Policing Opex
Prisons & Probation Opex
Further Education expenditure
Service Provision(Not payment admin)
Local Authority expenditure (£20bn)Neighbourhoods (£6bn) Localism (£3bn)
75% of General HospitalsGP, community health, mental illness, learning difficulties
60% of State Schools & academiesLearning & skills, Early years, Sure start, Children & Families expenditure
Assumptions
Health
Education
Communities
Work & PensionsBusinessJusticeHome Office
Scotland, Wales, NI(Devolved expenditure)
Other – non-social(e.g. Defense)
Accessible market for UK Impact Investment(Incl Scotland, Wales, N Ireland)
“AME”(e.g. welfare, tax credit, debt interest)
Capital investment
Note 1: Resource DEL in Government AccountsSources Government Budget Tables for 2011/12 (April 2013) and Guardian Public Spending Chart for 2011/12
Procurement / CommissioningHealth, Education and Communities dominate the accessible market
Home Office
Justice
Business
Work & Pensions
Communities
Education
Health
0 10 20 30 40 50 60
1
4
5
5
29
49
57
Total = £346bn
Total = £693bn
Total = £150bn
OperationalExpenditure1
66
Procurement / CommissioningApproach to defining accessible market – a set of broad assumptions
1. Identify total Government Spending = £694bn in 2011/12
2. Focus on spend that corresponds to operating expenditure (mostly salaries and procurement) = £346bn
3. Select spend in departments with Social purpose (including Scotland, Wales, N. Ireland) = £285bn
4. For each department, identify potential for impact = £150bn– Health: Mostly already categorised in govt accounts as a form of procurement (from Trusts)
- 75% of General Hospitals (salary and non-capital equipment/supplies) – care and support staff are major cost. - GP, community health, mental illness, learning difficulties
– Education: Given some schools are already run by charities, no technical barrier to vast majority being commissioned - 60% of Schools & academies- Learning & skills- Early years, Sure start, Children & Families
– Communities: Much of its services are about social impact- Local Authority expenditure (£20bn)- Neighbourhoods (£6bn) - Localism (£3bn)
– Department of Work and Pensions: expenditure on service provision, but not benefit administration– Department of Business Innovation and Skills: focus on further education budget (vocational training) - clarify– Ministry of Justice: Probation and Prison opex, which are already partly outsourced– Home Office: Assume that 20% of the policing budget could be shaped as social impact
• For the purpose of this template, we have taken broad assumptions that appear reasonable• Clearly important to do it accurately - as impact investment matures this picture will
become clearer
77
Procurement / CommissioningGovernment funding dominates the sector
Government Funded Service Delivery
Government procurement of
non-profit delivery
Foundation / Charity procurement of
social value
Trading activities of non-profit (maximising)
organisations
Grant-making / giving
Government procurement of
for-profit delivery
• Central and Local Govt dominate Sector - ~£250bn p.a. social expenditure (DEL)- E,g, Health, Education & Training, Policing, Prison & Probation, Welfare to work, Communities
• Upper estimate ~£150bn p.a. accessible to impact contracting
• Small Scale yet growing share of public spending– was £4.3bn1 in 2000, £13bn in 2012 – expected to be £25bn by 2016.Govt procurement doubling its share of non-profit sector income (15% -> 30%)
• More payment by results? – e.g. Troubled Families• Social outcomes fund - £20m + BLF £40m to top-up outcome payments for SIBs
• Currently very small – foundations mostly grant funds, charities mostly self-deliver impact• Opportunity for charities with large incomes to engage more with impact (e.g. City Bridge Trust, CIF, G
Weston, Save the Children, NSPCC, RNIB, Comic Relief)
• Social Enterprise Sales (equivalent social impact procurement a small % of this)• Purchase of products / services because of social value of delivery (employment, social inclusion, etc.)• E.g. Pluss founded by group of Local Authorities (£20m sales– employing people with disabilities and
supporting others into paid work)• E.g AgeUK offering domiciliary care services to consumers
• Individuals (£13bn) / Foundations (£3.6bn) / Corporates(£300m)• Of 70k social enterprises, 90% applied for some form of Grant funding in 2012• Government, trusts and foundations are targets of 60% of all funding applications, the rest go to high-
street banks and specialists
• Significant scale - £48bn p.a. (80% of all Value Sponsorship)• Mostly Fee for Service, some Payment by results – e.g. Work Programme, Elder-care providers• New statutory requirements for commissioners to consider social value when awarding contracts
Potential mutualisation outsourcing to private and social providers
Opportunity for social enterprises to gain share
Donors beginning to drive achievement of impact
Note 1: Sources NCVO cited in Barclays Charity Review 2012, The First Billion - BCG
Backup
Opportunity for foundations to increase impact focus
88
Procurement / CommissioningImpact investment has started in the smaller procurement areas addressed by Non-profits
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%
5%
10%
15%
20%
25%
30%
35%
40%
Ageing
Children and Families
Community
Criminal Justice
Disability
Education
Employment
2000%
Healthy Living
Housing
Government Delivery
Non-profits activity in Government social procurement = £13bn
Existing non-profit share of Government procurement
Expe
cted
CA
GR
(201
2-20
16)
Source: The First Billion – BCG 2012
Early Adoption of Impact Investment in Crim Justice, Children & Families and Employment
99
Social Need – government contracting with non-profitsGrowth coming equally from growth of non-profit share and overall contracting growth
Other areas include: Climate Change, Social participation, Culture, carer’s services, school development, support services for crime victims
Themes
2012Non-profit contracting
Non-profit % of govt contracting
Expected CAGR 2012-16
Ageing Personal Care – residential and domiciliary £4.35bn 20% 13pts
Disability Personal Care – for working age and children with disabilities £2.67bn 40% 16pts
Education • Special Educational needs, Special Schools• School Service, Further Education and skills
£2.66bn 30% 12pts
Healthy Living Community Health, Adult mental health, Drug and alcohol treatment £1.43bn 12% 22pts
Housing Niche housing & Homelessness £760m 50% 27pts
Community • Enterprises run with ex-public sector assets• Transport - HCT provides 12 million passenger trips in the social
enterprise bus company every year
£760m 60% 27pts(right to bid)
Children and Families
• Early Year childcare for disadvantaged families, Surestart• Looked after children, Troubled families, Supporting young people
£630bn 10% 22pts
Employment Employment services for long-term unemployed and young people £188m 20% 19pts
Criminal Justice Reducing reoffending – services in prison and in community £76m 6% 35pts
Financial Inclusion
CDFI-type lenders £20m 10% 10pts
Backup
1010
Non-profit Delivery OrganisationsUK Charities and Social enterprises have a wide range of legal and organisational structures, with different abilities to absorb risk capital
Organisation type of Social Enterprises
Charities32%
Non-profit Service Providers31%
Cooperatives11%
Development Trusts1%
Mutual/Public Service Spin-outs
5%
Leisure Trusts6%
Other14%
Source – Growing the Social Investment Market – GHK 2013
Legal structure of Social Enterprises
Companies Limited by Guarantee
66%
Community Interest Company
15%
Industrial and Prov-ident Society
7%
Company Limited by Shares
6%
Sole Proprietorship6%
1111
Non-profit Delivery OrganisationsUK Charities and Social enterprises have a wide range of corporate structures, with different abilities to absorb risk capital
Development Trust
Non-profit service providers
Cooperative
Mutuals: Public Service Spin-out
Leisure Trust
Charitable Service Providers
• 1% - engaged in social development/regeneration• A mixture of legal structures – but do not take equity
• 31% - often a limited company• Can take unsecured debt and equity-like capital
• 11% - Often a limited company• Can take unsecured debt and equity-like capital
• 5% -Often Community Interest Company – (in some circumstances can take equity)
• Public Service Mutuals Growing: 71 established since 2010, Turnover now £1.1bn1
• Half in Health, 33% in Social Care, rest Community and Education - E.g. Plymouth Community Care
• 6% - often Industrial and Provident Society – can take Equity• E.g. GLL (Community Leisure)
• 32% of Social Delivery - Employment in Charity Sector is 765k• Many Large players – e.g. Mencap (£193m turnover), AgeUK (£156m), CRI (£81m)• Development of impact model creates a challenge to typical delivery structure –
many developing social enterprise arm (e.g. Age UK) – to take finance
• 90% have turnover <£1m p.a.
• Capital Requirements expected to grow from £18bn in 2012 to £35bn in 2016
• Annual (commercial and social) Investment demand growing from £3.8bn to £7.6bn
• Shift towards PBR will increase social vs. commercial investment
• 56% of VCSEs expressing significant interest in social investment
Non-profit (maximising) trading companies
• Represent a large employment and service base – but social impact is derivative of trading rather than procurement by third party. Can take equity
• E.g Café direct
Note 1: Source – Soft Finance, Hard Choices - BCG
I
Increasing ability to absorb risk capital
Backup
1212
Outcome Commissioning StructuresThe Commissioning structure also varies significantly
Commissioningtrigger
Market shift from commercial to social enterprise
Outsourcing of existing activities
Commissioning of new outcomes (early intervention)
Shift from contracting for inputs to outcomes
Contracting Structure
Commercial Prime
SPV (SIB)
Direct Contracting by delivery body
Social Prime
1313
Delivery Market Regulation and CapabilityInfrastructure required to support service delivery is emerging in six areas
Regulation Innovation SupportDelivery-Capability Building
Accelerators / IncubatorsImpact Measurement Best-practice Sharing
• Community Interest Company (CIC) introduced in 2005
• Right to run/provide • New statutory requirements for
commissioners to consider social value when awarding contracts
• Open Data – some development, but much more possible to facilitate market building
• Advising on commissioning- Social Finance
• Leadership accelerators• Ashoka, Clore Social Leadership
Programme• Social Entrepreneur Schools
• Innovation Challenge funds- NESTA Big Green Challenge, Age
UnLimited• Social Innovation venture labs - Shaftsbury Partnership, Participle
• Innovation platforms- Social Innovation Camp
• Platforms - SROI Network, GIIN network,
SustainAbility
• Consultancies- NEF, NPC, Charities evaluation
services
Standardising impact measurement would help to give investors confidence
• Cooperatives UK, DTA – supporting social enterprises scale up delivery models
• Social Venture Networks - Ogunte
• The HUB, CAN Mezzanine, Wayra, Social Accelerator
1414
Finance£200m+ of Social Investment made in 2012 in 765 deals – mostly for small (£10k-£250k) loans – up from £165m in 2011
Secured Loans
Charity Bonds1
Social Impact Bonds
Capacity-building grants
Equity / Quasi Equity
Unsecured Loans
• Social Investment demand expected to grow 38% per year – to £1bn in 2016(increasing share of finance)
• 75% of social capital will need to be risk-taking (vs 10% today) - 15% Equity-esque- 60% Unsecured
lending
Direct Grants / Investment
Financial Lending
Charity Banks
Large SIFIs
Small SIFIs Typical
Gross returns
£600m+~80% of £3.5bn
Pool of debt£165.5 £15.6m £1.3m 6%-8%
£0.3 £8.8 £1.4m 7%-10%
£41m (often direct, with Charity banks, large SIFIs arranging)
2%-6%
£22m
(2012 a stand-out year - 11 SIBs)
7%-13%
£5m £5.7m£2.3m(+ £2m
Incubators)
Big Lottery Fund £30m
Cabinet Office £10m
Note 1: 2013 Data for Charity BondsSource – Growing the Social Investment Market – 2012 – in many cases, net returns significantly lower than gross, due to high initial transaction costs
Social Investment 2012
In addition, £150m of Big Society Capital Commitments – of which £15m drawn down
1515
FinanceUK Impact-first enterprises reluctant to raise capital if required return over 10% - A challenge, given the associated risks
Source – Bridges Ventures
1616
UK SIBs to date# Location Policy area Commissioner Contracting body Investment
sizeDelivery Body
1 Nationwide Adoption Voluntary Adoption Agencies & Baker Tilly (Consortium)
£3m Action for Children, Adoption Matters Northwest, After Adoption, Caritas Care Limited, Family Futures CIC, PACT
2 London Homelessness DCLG Greater London Authority
£5m St. Mungo's and Thames Reach
3 Wales - Cardiff and Newport
NEETs DWP 3SC £500k Dyslexia Action and CfBT Education Trust
4 West Midlands - Birmingham
NEETs DWP APM UK Ltd £800k
5 Thames Valley, NW England
NEET DWP Social Finance £900k Adviza
6 Perthshire and Kinross
NEETs DWP Indigo Project Solutions
£300k
7 Nottingham NEETs DWP Nottingham City Council
£2.7m
8 West London NEETs DWP Prevista
9 Shoreditch, London
NEETs DWP Impetus-Private Equity Foundation
£900k Tomorrow’s People
10 East London - Newham / Waltham Fst
NEETs DWP Stratford Development Partnership
11 Gtr Manchester NEETS DWP Social Finance £800k Teens and Toddlers
12 Gtr Merseyside NEETs DWP Triodos Bank £1.5m Greater Merseyside Connexions Partnership
13 Essex Child Protection Essex CC Social Finance £3.1m Children Support Service14 Peterborough Re-offending MOJ Social Finance £5m St Giles & Ormiston Trusts
Backup
1818
Channels of capital – directed at social impactA diverse landscape with many unprofitable small SIFIs
• Of 25 SIFIs, 9 had investments >£1m p.a.
• 16 SIFIs had investments <£1m p.a.
• 89% of SIFIs expect to increase their investments in social ventures over next 2-3 years
Growth Constraints:• Transaction Costs• Variable Commissioning
Practices• Lack of attractive social
ventures to invest in• Grant-making
suppressing demand• No dedicated funds
channel for endowment PRI
• Triodos Bank, Charity Bank, Unity trust bank, Ecology Building Society
• 16 Small CDFIs – e.g. Social Investment Scotland, Key Fund• For CDFI – Pool of investments is £750m by 2011• # of CDFIs peaked in 2006, and now in decline
• Bridges / Big Issue / NESTA / SASC (part of SIB group) / Berenberg• Retail – Allia, CAF (Venturesome), Apposite Capital (Health Specialist)• Commercial bank with social fund – e.g. Deutsche Bank
• Not yet
• Social Finance, Triodos, FSE, Allia, ClearlySo
• Big Society Capital
Backup
Social Banks
CDFIs
Fund Managers
Tax Advantaged funds
Social Investment Intermediaries
Social Investment Wholesaler
Crowdfunding Platforms • Funding Circle
1919
Investment Market Regulation and InfrastructureThe infrastructure is emerging to support financing of impact investment
Investment Brokers / Advisers
Data Capture / Standard Setters
Research Houses / Product Reviewers Regulation
Providers of Standardised Approaches /
Documentation etc
Financial Product Developers
Capacity-buildingGrant giversMarket Builders
Angel Networks
2020
Investment Market Regulation and InfrastructureThe infrastructure emerging to support financing of impact investment
Investment Brokers / Advisers
Data Capture / Standard Setters
Research Houses / Product Reviewers
Regulation
Providers of Standardised Approaches /
Documentation etc
Financial Product Developers
• Limited brokerage – Investment and Contact Readiness Fund, ClearlySo • SIFIs – 16% offer brokerage, and 42% offer investment structuring• Almost no authorised capacity to give impact investing advice to investors
• EngagedX is emerging
• Research: ClearlySo, GHK, NPC, NCVO, SEUK, SE100, BCG• Financial Product Reviewers: Worthstone, Good Analyst
• Potential Tax Relief for social enterprise investment – but how broad will be the perimeter – beyond Charities / CICs?- Could take several years to mature
• Community Interest Tax Relief (CITR) for investment into CDFIs• Social investment duty on FCA/PRA to encourage sensitive regulation- Review of regulatory barriers to social investment (esp Advice and Distribution)- Crowdfunding consultation underway by FCA
• Centre for SIBs at the Cabinet Office
• Social Finance, ClearlySo, but in general intermediaries not yet operating at sufficient scale
Capacity-buildingGrant givers
• Big Lottery Fund’s Next Steps programme has invested several million• Esmee Fairbairn, Barrow Cadbury, Panahpur
Market Builders• Social Stock Exchange, Ethex, Abundance, MicroGenius, • Impact Base – international platform
Angel Networks • Toniic / Clearly So
Backup
2121
InvestorsWhere will impact investment come from?
Government investment (funding capital and capacity building)
High Net Worth Individuals
Local Funds
Traditional Institutions
Mass Retail
Trusts and Charitable Foundations
Corporates
2222
InvestorsWhere will impact investment come from?
Government investment (funding capital and capacity building)
High Net Worth Individuals
Local Funds
Traditional Institutions
Mass Retail
Trusts and Charitable Foundations
• Historically a strong source of capital, but likely to be squeezed – bootstrapping role diminishing• E.g. Future-Builders £200m - £80m outstanding
• High net worth individuals could provide £180m p.a. in the future (contingent on impact of Tax breaks)
• Vast majority want money to do social good as well as financial return – 15% have some investments with ethical. Community, or social benefits
• Regional Growth Funds, local authorities, housing associations• e.g. City of London Social Investment Fund - £20m
• Dominant Scale, but reticent investors often looking looking for opportunities that are not matched by market (i.e.. They want close to market returns, downside protection, liquidity, track record of success)1
• Exception - £250m Pledged from five local authority pension funds
• IFAs / IFPs• Substantial Interest in social investment – even with trade-off on financial return • Deposits at Charity Banks, Investment in Charity Bonds
• Existing foundations’ investment is limited – estimated £45m in 2011 (Esmee Fairbairn total pool £30m)
• Large Charitable foundations that hold significant reserves could help to rapidly extend and diversify the supply of capital (£100bn of assets)
• PRI potential – but no dedicated UK Channel
Corporates • Corporate Foundations emerging interest
Note 1: Source: ClearlySo
Growth highly contingent on tax relief
Backup