Deals, not structures, will drive the social investment market
What will finally get the social investment industry going? Many seem to believe that the introduction of the social investment wholesale bank will help. In part, they argue that a large institution is necessary. Why this should be so eludes me – in the aftermath of the great financial meltdown, the arguments against scale are compelling.
I have a different view. Markets are made by deals, not structures, and transactions, not entities. This is especially true if those entities are heavily government-subsidised intermediaries. Fortunately, there are many new deals that will become benchmark transactions and lead by example to help increase social investment.
One deal that we at Catalyst have advised on is the expected £5m transaction for the transport social enterprise the HCT Group. This deal, in which Bridges Ventures is the initial investor, is made up of fixed-rate loans and ‘social loans’, where interest is tied to HCT’s turnover growth. The size of HCT in the social enterprise sector, and its long and successful track record, make this a deal other investors might want to follow in the footsteps of. Not long before this, an even larger deal for the sector was announced – the EUR102m (£92.5m) financing of Triodos Bank. At a time when many of the largest banks were relying on government money, this Dutch ethical bank was able to announce a transaction funded purely by investors, without the need for state subsidy, which is being used to fund its rapidly expanding loan book.
Soon, Social Finance will formally launch its widely heralded ‘social impact bond’ – the Treasury will pay to the investors some of its own savings from the reduction in prison reoffending rates expected to be caused by the programmes carried out within the scope of the bond. This is an important benchmark because it connects returns and social benefits – in this case, in the form of governmental cost savings.
Finally, later this year, the Ethical Property Company will raise several million pounds in its sixth financing from the markets. The fact that this firm has been able routinely to tap the market for capital over the past 10 years sets a standard that other firms issuing, or thinking of issuing, ethical shares might hope to aspire to.
Such deals are invaluable for the sector. Others considering similar issues might copy these formulae.
These four deals are not unique, but build on the work of others. What makes them important is their size and scope within the sector. That they have all occurred within a year of each other is a great sign of hope.