Investment readiness in the UK

Report by Dan Gregory, Katie Hill, Iona Joy, and Sarah Keen, ClearlySo/ New Philanthropy Capital: London, July 2013

It is important that social impact investment remains focused around the needs of social purpose organisations, and an effective social marketplace must actively seek their voices. This report provides some of this perspective from the UK, by exploring the issue of investment-readiness among both potential and current investees of social impact investment.

Despite covering only the UK market, this report is helpful in the Australian context for two reasons. Firstly, as the UK market is considerably more developed than Australia, it provides a corpus of perspectives from social purpose organisations that have already received social investment, and reflects on their experience through the process. Secondly, while much of the literature tends to emphasise one component of the marketplace – demand (investees), supply (investors) or intermediaries – this report focuses on the intersection and tensions between them.

This is presented as a series of ‘mismatches’ between investees and other actors in the market. The results are only indicative, so care should be taken with interpretation, but some interesting findings include: 

Mismatch 1: Perceptions of skills and attributes required for investment readiness vary between investees and investors

Potential investees were relatively confident of their organisation’s ability to build revenue, but investors are more likely to identify revenue models as developmental or untested. Investors identified shortages in the level of financial skills in the majority of propositions viewed; investees were more confident in their financial and business abilities. Investees tended to overestimate the emphasis placed by their investors in their ability to create social impact; instead investors were relatively undemanding” about how social impact is generated. Finally, investees show an overall preference for small to medium amounts of risk capital at sub-commercial terms; investors tend to offer larger, asset-backed capital on near-commercial terms.

Mismatch 2: The availability of support with what is required

A lack of diagnostic tools and clear referrals for applications for social impact investment leads to high levels of applications ‘too early’ that are subsequently rejected. Investees believe available information on investment to be fragments, and investors agree that many applicants have little real understanding of the social impact investment options available to them. Moreover, there is a lack of supply-facing support specific to social enterprises leading to them bearing an unsustainable burden of risk assessment, due diligence and structuring.

Mismatch 3: Access to support with organisations’ ability to draw on it

A variety of investment readiness services are available in the UK, but this may not meet the budding interest in social impact investment. Potential demand for support is hidden, rather than small. This is complicated by social impact investment being more geographically ‘sticky’ than its mainstream counterpart.

These are only a small selection of the many issues explored in detail through this excellent report. However they do show that the effectiveness of a social marketplace hinges on its ability to identify and respond to mismatches and different expectations between various market actors. As we build a marketplace in Australia, we must be cognisant of the experience and challenges of investment readiness in the UK.

SA

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