Developing a social equity capital market
New Economics Forum
The rise of social entrepreneurship has resulted in an increasing number of businesses seeking to maximise both social and financial returns. Like traditional businesses, these organisations need equity capital to grow and achieve their strategic objectives.
With an estimated 55,000 social enterprises in the UK, it is clear that many of these new businesses will require equity finance as they evolve.
Businesses set up for a social purpose operate across a range of sectors, but have a common objective: to generate a reasonable profit whilst providing goods or services creating social benefit.
Social purpose businesses may seek to expand operations. As they do so they are likely to require funds beyond bank borrowing or early stage investment. Issuing shares in the company through an equity listing is a route to raise significant capital. This builds the number of stakeholders, offers an exit for early stage investors and provides a basis for future investment.
Social purpose businesses have issued equity in various ways. The London Stock Exchange (LSE), Alternative Investment Market (AIM) or PLUS Markets represent established sources of available capital.
However, some have chosen to avoid the mainstream markets and opted for an unlisted or alternative equity offering instead.
The experience of equity listing raises questions about the barriers, challenges and opportunities that social purpose businesses face in this process.
What is the best way to direct equity capital to social purpose businesses? Are existing equity capital markets sufficient to meet the needs of social purpose businesses, and if not, does this suggest an alternative market mechanism is required?
These questions form the basis of research carried out by nef (the new economics foundation) in conjunction with the CAF (Charities Aid Foundation) to capture the views of key representatives from the UK social investment sector. The purpose of this report is to focus on the challenges that equity listing raises for social purpose businesses, and explore issues related to developing a social equity capital market.
Our research with social purpose businesses looking to raise funds
indicates that they have important requirements of the equity
listing process, including:
an ability to maintain ownership
desire to attract investors with a long term perspective
limitation of speculation in the capital market
control over social mission
investors with understanding of social as well as financial return
Likewise, investors seeking a social investment opportunity require:
regular reporting and disclosure
liquidity of shares
independent mechanism for valuation
clarity of financial and social return expectations
a market with FSA regulated status
As social purpose businesses continue to expand, it is clear that a market mechanism to raise and trade in equity capital would bring benefits for owners, entrepreneurs and investors alike. The success of unlisted equity offerings with individual investors demonstrates demand for social investment alternatives; whilst charitable foundations have only just begun to explore investment related to their social missions.
The solution could be a social equity capital market in the form of an index, designated classification or registered group that is part of an established exchange. Alternatively it may be possible to expand existing trading mechanisms such as Internet–based exchanges or matched bargain market.
The interviews carried out indicate that, in general, there is positive support for such a mechanism. Yet most are cautious about the practicalities that must be addressed. Social entrepreneurs were the most enthusiastic about the concept, whilst SRI fund managers the most sceptical. A range of practical requirements of a social equity capital market were identified:
regular reporting and transparency
minimisation of speculation
limitation on ownership and takeover
a critical mass of investment-ready social purpose businesses
investment intermediaries and advisers for the social sector
equity research coverage
social audit process
nominated advisers to support equity offers and carry out due diligence
enhanced investor awareness of social investment alternatives
Establish a common information point
Create an online forum to bring together the range of information and initiatives involved in providing equity capital to social purpose businesses. Objective – raise investor awareness of social investment opportunities and greater understanding of equity listing as an option for social purpose businesses.
Develop social equity capital market prototype
Develop a feasibility study and business plan for a market mechanism to raise and trade equity capital. Objective – establish a framework to begin resolving practical issues and enable solutions to structure, location, cost and accreditation to be found.
Explore partnerships and alternative market mechanisms
Discuss possible partnerships with mainstream markets such as AIM or PLUS Markets or internet-based ShareMark and Early Stage Investment Exchange. Objective – explore how a social capital equity market could be established by partnering with an existing exchange.
Build links with ethical investors
Individual investors often form the majority of shareholders in unlisted social purpose businesses. These investors are often drawn from the consumers, employees, suppliers or community members who actively support the social mission of a company.
Explore how to build links with and develop a formal network of these individuals. Objective – expand the awareness and interest in investing in social purpose businesses.
Support social purpose businesses to raise equity capital
Help prepare social purpose businesses for market by initiating programmes of technical assistance and investment support. Objective – increase the number of ‘investment-ready’ social purpose businesses equipped to enter the equity capital market.
Develop investment intermediaries
Identify specialist advisers who can play a key role in the social purpose business market by acting as intermediaries and assuming responsibility for due diligence and accreditation. Objective – ensure a robust market develops by providing access routes and appropriate advisers.
Develop new products to attract additional investors
Create new investment vehicles by providing a well defined pool of regulated equity shares. Objective – to attract additional sources of social investment capital from sources such as charitable foundations, private investors and SRI funds.
Expand awareness of social purpose businesses
Undertake an awareness campaign of social purpose business investment opportunities. Objective – to ensure charitable foundations, high net worth individuals and ethical investors realise there is a way to invest directly in businesses to bring about positive social change.
Establish investment priorities of charitable foundations
Determine the investment expectations and requirements of charitable foundations. Objective – to maximise the opportunity for charitable foundations to directly support social businesses aligned with their social objectives.
Build standard measures of social value
Devise a consistent, standard measure of the social return of a business. Objective – provide investors with a comparable indicator of the social ‘value’ of investing in such a business.
Develop fiscal incentives
Investigate and promote fiscal incentives such as enterprise investment schemes (EIS), venture capital trust (VCT) structures and inheritance tax relief, or new incentives along the lines of the community investment tax relief (CITR)
Objective – to encourage investors to channel funds into social purpose businesses by limiting risk and potential lower returns. It is clear that for a social capital market to become a reality it will need commitment from a number of individuals and institutions.
An active working group would establish a forum to review and build consensus on the above recommendations. The result being a dynamic and effective source of equity finance to promote positive social change.