Social investment — the use of money for both a social and a financial return — is maturing into an increasingly useful tool in a philanthropist’s toolkit. Family offices are particularly well-placed to use social investment, leveraging both their expertise and money, to provide long-term, purposeful support for social organisations.
In practice, social investment (or impact investment as it is often also termed) means lending money to charities and social enterprises. It’s an approach to philanthropy which is growing in the UK. The main reason for this, in my view, is a growth in demand – more charities and social enterprises are aware that they can borrow money, and straitened economic times means that more are having to explore new ways of financing their activities. However, this increase in demand is – finally – beginning to be matched by the availability of affordable, appropriate capital.
This is only possible because an increasing number of funders are using social investment as part of their philanthropic toolkit. These pace-setting philanthropists understand that charities may need larger pots of repayable finance alongside traditional grants – for example, to invest in opening a charity shop which will then generate enough income from trading to pay back the loan, and continue to generate income to support the charity’s core activities.
Social economy
But crucially, these philanthropists understand that this repayable finance is difficult for charities to get hold of from a bank. Charities and social enterprises may not have sufficient assets to take on a secured loan, and a bank may (often understandably) be loathe to make an unsecured loan to a social organisation with perennially uncertain income streams (such as local government contracts, grants, donations or trading income).
This is where social investment – in particular, genuinely affordable and flexible social investment – has a hugely important role to play in the social economy. Two examples illustrate its breadth of scope. The philanthropists who support CAF Venturesome’s social investment funds have enabled international development charity InterHealth to expand into Africa – just in time to help aid workers battling the Ebola crisis – and enabled vibrant south London charity Midi Music Company to weather a tricky cashflow period successfully.
Social investment is a way for philanthropists to make their charitable capital work harder for causes they believe in.
For instance, CAF Venturesome recycles capital at least twice in a six-year period, before aiming to return the capital to our funders’ charitable trusts.
Deploying capital
Our average loan to a charity is £100,000 – this means that over six years, £1 million social investment can be used to support at least 20 different organisations.
We work with nearly 100 philanthropists and their families – and we know that their motivations may vary widely.
Some funders see social investment as a way of efficiently deploying their charitable capital, and are willing to accept zero financial return – this is particularly the case in the current low-interest environment, where the opportunity cost of diverting capital to social investment is not that high.
An increasing number of funders see social investment as a way of exploring philanthropy – for example, you may want to support charities working with children and young adults, and your social investment in CAF Venturesome would reflect this.
Regular updates
We may then use this money, for example, in a three-year £85,000 loan to a charity in the south of England working with teenagers struggling in school – providing advice on financial management, governance, and social impact reporting alongside the loan.
Over those three years, you would receive regular updates on how the charity is performing – updates written from a social investor-angle, which tend to be harder-hitting than a fundraising update that a charity would send.
This means by the time the loan has (hopefully) been repaid – as 95% of our loans are – you would have a thorough understanding of that charity – the good, the bad and the ugly.
Armed with this insight, you may choose to further support the charity with grants or volunteering.
In this way, your social investment has led to a deeper philanthropic engagement with a cause you are passionate about.
This opportunity for deeper engagement resonates with family offices — and they are superbly well-placed to use social investment as a tool to combine their expertise, network and strategies with their money, ultimately amplifying their social impact. Holly Piper is Head of CAF Venturesome, the innovative social investment arm of Charities Aid Foundation. Since 2002, we have supported 450 charities and social enterprises with over £36 million of social investment.
