Social Impact Investing – Whose Market is This Anyway?

Investors can ensure the Australian social investment market gets off to a better start by understanding and including social purpose organisations from the beginning, writes social impact investor and analyst, Emma Tomkinson.

Tuesday saw the launch of Impact Investment: The Invisible Heart of Markets, the report of the Social Impact Investment Taskforce set up by the G8 and Delivering on Impact, the Australian companion report by Impact Investing Australia.

The event marked the beginning of a strategy to grow the Australian Social Impact Investment Market, with one a flagship initiative being the establishment of a Social Investment Fund for Australia that will grow to over $350m by year 5.

Investors attending and speaking at the event displayed impressive enthusiasm for investing with impact. But one could be forgiven for thinking that the purpose of this market is to make investors a lot of money and allow them feel good at the same time.

Paula Benson from NAB announced $1m to support capacity building for social purpose organisations to help them “step up and deliver” investment opportunities, saying they’ve now realised “only businesses can solve social problems”.

Gary Brader from QBE announced that they’ve allocated $100m to invest in social impact bonds. He said “you have to make this look and feel like an investable sector” so that investors can participate “without sacrificing financial return”.

It would be nice to think that the purpose of the social impact investment market is to solve the financing issues of our social purpose organisations. On September 3rd, at the Social Capital Markets conference (SOCAP) in San Francisco, Sir Ronald Cohen said, “that’s what impact investment is about: enabling social entrepreneurs whether they’re working through Not for Profits or for-profits, to raise the capital they need in order to improve the lives of others, or the environment”.

So what capital do social purpose organisations need? We simply don’t know. It would seem obvious that in order to solve this problem, we need to understand it. And the best way to do that is to invite the organisations that we’re trying to serve to tell us.

The Difference Incubator is currently surveying social enterprises to find out their financing needs (complete the survey here), but as yet there is no similar research of Australian charities and Not for Profits (the ACNC 2013 Annual Information Statement dataset would be a good starting point). Estimates in the reports that the social impact investment market could grow to AU$32 billion in a decade in Australia, or US$1 trillion worldwide, are based on investor appetite, rather than any examination of whether there’s anything for them to invest in.

In Australia, we have the opportunity to learn from the experiences of the UK social investment market. David Floyd pointed out the gap between the size of investments needed and the size of investment offered made in his interview with Big Society Capital’s (BSC) CEO Nick O’Donohoe in February.

“According to the latest available market data, the average UK social investment is £264,000 and 82 per cent of the current estimated £202million market is made up of investments averaging £723,000.

The latest data from Social Enterprise UK shows the average turnover of a UK social enterprise is £187,000 and the average investment sought by social enterprises looking for finance is £58,000.” O’Donohoe responded “If you’re talking about [investments of] less than £250,000, some part of the investment will always have to be grant.”

Big Society Capital has shifted from “not interested in grants” to entertaining the idea of grants as essential for social investment “at the beginning perhaps being focused a bit more on the fact that we can’t do [grants], we’ve changed our emphasis a bit to focus more on ‘there is clearly a need’ and we have a role to play in terms of trying to help.”

He concedes that the research on what social purpose organisations needed was perhaps insufficient.  “Was there enough work done on demand before we started? Maybe there wasn’t but you learn so much every day here by looking at and trying to evaluate individual and specific transactions.”

We can ensure the Australian market gets off to a better start by understanding and including our social purpose organisations from the start. Understanding the problem – the size and type of finance needed by social purpose organisations – is a fundamental initial step to developing a market as the solution.

About the author: Emma Tomkinson is a social impact analyst living and working in Sydney, Australia. She is particularly interested in the role of impact measurement in evidence-based policy, including policy related to social investment. She created the Social Impact Bond Knowledge Box for the Centre for Social Impact Bonds at the UK Cabinet Office and also developed the social impact bond concept for application in New South Wales, Australia. She currently works with a range of social purpose organisations.