Template for Mapping Impact Investment Eco-systems:The UK Eco-system

Social Impact Investment Task-force established by G8Update for country representatives

Stephen Brien, 10th January 2014

22

Overview of impact investment Eco-systemEach financial transaction has its own ‘signature’ across the many parties

Social needProcurement / Commissioning InvestorsChannels

of capital

Addressing social need Supply of investment finance

Delivery Regulation / Infrastructure / Support Finance Regulation / Infrastructure

Ageing

Housing

Education

Children and Families

Healthy Living

Employment

Criminal Justice

Disability

…..

Finance Non-profit Delivery

Organisation

Government investment

High Net Worth Individuals

Local Funds

Traditional Institutions

Mass Retail

Trusts and Charitable

Foundations

Corporates

Secured Loans

Charity Bonds

Social Impact Bonds

Equity

Quasi Equity

Unsecured Loans

Development Trust

Non-profit service providers

Cooperative

Mutual / Public Service Spin-

out

Leisure Trust

Charitable Service Providers

Non-profit (maximising) trading

companies

Government Funded Service

Delivery

Government procurement of

non-profit delivery

Foundation / Charity procurement of

social value

Trading activities of social organisations

Grant-making / giving

Government procurement of for-profit delivery

e.g. Essex Children in Care Social Impact Bond with Bridges and Social Finance

Social Banks

CDFIs

Fund Managers

Tax Advantaged funds

Social Investment Intermediaries

Social Investment Wholesaler

Crowdfunding Platforms

33

Overview of impact investment Eco-systemEach financial transaction has its own ‘signature’ across the many parties

Social needProcurement / Commissioning InvestorsChannels

of capital

Addressing social need Supply of investment finance

Delivery Regulation / Infrastructure / Support Finance Regulation / Infrastructure

Ageing

Housing

Education

Children and Families

Healthy Living

Employment

Criminal Justice

Disability

…..

Finance Non-profit Delivery

Organisation

Government investment

High Net Worth Individuals

Local Funds

Traditional Institutions

Mass Retail

Trusts and Charitable

Foundations

Corporates

Secured Loans

Charity Bonds

Social Impact Bonds

Equity

Quasi Equity

Unsecured Loans

Development Trust

Non-profit service providers

Cooperative

Mutual / Public Service Spin-

out

Leisure Trust

Charitable Service Providers

Non-profit (maximising) trading

companies

Government Funded Service

Delivery

Government procurement of

non-profit delivery

Foundation / Charity procurement of

social value

Trading activities of social organisations

Grant-making / giving

Government procurement of for-profit delivery

e.g. Real Lettings Property Fund with Resonance

Social Banks

CDFIs

Fund Managers

Tax Advantaged funds

Social Investment Intermediaries

Social Investment Wholesaler

Crowdfunding Platforms

44

Procurement / CommissioningWith £250bn of social service delivery funded by government, £150bn could be accessible for impact investment . . .

2003 Non-profit Govt Contracting 2012 Non-profit Govt contracting 2012 All Govt Social Contracting Accessible Market of govt Social Contracting

£0bn

£20bn

£40bn

£60bn

£80bn

£100bn

£120bn

£140bn

£160bn

£180bn

£200bn

4.5 13 13 13

48 48

89.0

Series4

Government delivery

For-profit delivery

Non-profit delivery

For Profit

‘Accessible’Government

Delivery

(£150bn out of Social Operational expendi-

ture of £250bn)(Total Govt procurement across all sectors £89bn)

25 30

UK Govt market for Social Impact (current and potential)

13% CAGR

Other charitable service provision

Other Government

Social Delivery100

Other charitable service provision

. . . Foundations and Charities could also increase impact procurement

Note 1: Sources NCVO cited in Barclays Charity Review 2012, The First Billion - BCGNote 2: Social Enterprise annual turnover is £163bn – so assume non Value-sponsorship revenue is primarily trading (need to remove grant revenue)

55

Total UK Government expenditure

UK Government OpEx0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

346

100

298

50

50

32

720912

47

61

(By Department)

UK Government expenditure 2011-12(£Bn)

20% of Policing Opex

Prisons & Probation Opex

Further Education expenditure

Service Provision(Not payment admin)

Local Authority expenditure (£20bn)Neighbourhoods (£6bn) Localism (£3bn)

75% of General HospitalsGP, community health, mental illness, learning difficulties

60% of State Schools & academiesLearning & skills, Early years, Sure start, Children & Families expenditure

Assumptions

Health

Education

Communities

Work & PensionsBusinessJusticeHome Office

Scotland, Wales, NI(Devolved expenditure)

Other – non-social(e.g. Defense)

Accessible market for UK Impact Investment(Incl Scotland, Wales, N Ireland)

“AME”(e.g. welfare, tax credit, debt interest)

Capital investment

Note 1: Resource DEL in Government AccountsSources Government Budget Tables for 2011/12 (April 2013) and Guardian Public Spending Chart for 2011/12

Procurement / CommissioningHealth, Education and Communities dominate the accessible market

Home Office

Justice

Business

Work & Pensions

Communities

Education

Health

0 10 20 30 40 50 60

1

4

5

5

29

49

57

Total = £346bn

Total = £693bn

Total = £150bn

OperationalExpenditure1

66

Procurement / CommissioningApproach to defining accessible market – a set of broad assumptions

1. Identify total Government Spending = £694bn in 2011/12

2. Focus on spend that corresponds to operating expenditure (mostly salaries and procurement) = £346bn

3. Select spend in departments with Social purpose (including Scotland, Wales, N. Ireland) = £285bn

4. For each department, identify potential for impact = £150bn– Health: Mostly already categorised in govt accounts as a form of procurement (from Trusts)

- 75% of General Hospitals (salary and non-capital equipment/supplies) – care and support staff are major cost. - GP, community health, mental illness, learning difficulties

– Education: Given some schools are already run by charities, no technical barrier to vast majority being commissioned - 60% of Schools & academies- Learning & skills- Early years, Sure start, Children & Families

– Communities: Much of its services are about social impact- Local Authority expenditure (£20bn)- Neighbourhoods (£6bn) - Localism (£3bn)

– Department of Work and Pensions: expenditure on service provision, but not benefit administration– Department of Business Innovation and Skills: focus on further education budget (vocational training) - clarify– Ministry of Justice: Probation and Prison opex, which are already partly outsourced– Home Office: Assume that 20% of the policing budget could be shaped as social impact

• For the purpose of this template, we have taken broad assumptions that appear reasonable• Clearly important to do it accurately - as impact investment matures this picture will

become clearer

77

Procurement / CommissioningGovernment funding dominates the sector

Government Funded Service Delivery

Government procurement of

non-profit delivery

Foundation / Charity procurement of

social value

Trading activities of non-profit (maximising)

organisations

Grant-making / giving

Government procurement of

for-profit delivery

• Central and Local Govt dominate Sector - ~£250bn p.a. social expenditure (DEL)- E,g, Health, Education & Training, Policing, Prison & Probation, Welfare to work, Communities

• Upper estimate ~£150bn p.a. accessible to impact contracting

• Small Scale yet growing share of public spending– was £4.3bn1 in 2000, £13bn in 2012 – expected to be £25bn by 2016.Govt procurement doubling its share of non-profit sector income (15% -> 30%)

• More payment by results? – e.g. Troubled Families• Social outcomes fund - £20m + BLF £40m to top-up outcome payments for SIBs

• Currently very small – foundations mostly grant funds, charities mostly self-deliver impact• Opportunity for charities with large incomes to engage more with impact (e.g. City Bridge Trust, CIF, G

Weston, Save the Children, NSPCC, RNIB, Comic Relief)

• Social Enterprise Sales (equivalent social impact procurement a small % of this)• Purchase of products / services because of social value of delivery (employment, social inclusion, etc.)• E.g. Pluss founded by group of Local Authorities (£20m sales– employing people with disabilities and

supporting others into paid work)• E.g AgeUK offering domiciliary care services to consumers

• Individuals (£13bn) / Foundations (£3.6bn) / Corporates(£300m)• Of 70k social enterprises, 90% applied for some form of Grant funding in 2012• Government, trusts and foundations are targets of 60% of all funding applications, the rest go to high-

street banks and specialists

• Significant scale - £48bn p.a. (80% of all Value Sponsorship)• Mostly Fee for Service, some Payment by results – e.g. Work Programme, Elder-care providers• New statutory requirements for commissioners to consider social value when awarding contracts

Potential mutualisation outsourcing to private and social providers

Opportunity for social enterprises to gain share

Donors beginning to drive achievement of impact

Note 1: Sources NCVO cited in Barclays Charity Review 2012, The First Billion - BCG

Backup

Opportunity for foundations to increase impact focus

88

Procurement / CommissioningImpact investment has started in the smaller procurement areas addressed by Non-profits

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0%

5%

10%

15%

20%

25%

30%

35%

40%

Ageing

Children and Families

Community

Criminal Justice

Disability

Education

Employment

2000%

Healthy Living

Housing

Government Delivery

Non-profits activity in Government social procurement = £13bn

Existing non-profit share of Government procurement

Expe

cted

CA

GR

(201

2-20

16)

Source: The First Billion – BCG 2012

Early Adoption of Impact Investment in Crim Justice, Children & Families and Employment

99

Social Need – government contracting with non-profitsGrowth coming equally from growth of non-profit share and overall contracting growth

Other areas include: Climate Change, Social participation, Culture, carer’s services, school development, support services for crime victims

Themes

2012Non-profit contracting

Non-profit % of govt contracting

Expected CAGR 2012-16

Ageing Personal Care – residential and domiciliary £4.35bn 20% 13pts

Disability Personal Care – for working age and children with disabilities £2.67bn 40% 16pts

Education • Special Educational needs, Special Schools• School Service, Further Education and skills

£2.66bn 30% 12pts

Healthy Living Community Health, Adult mental health, Drug and alcohol treatment £1.43bn 12% 22pts

Housing Niche housing & Homelessness £760m 50% 27pts

Community • Enterprises run with ex-public sector assets• Transport - HCT provides 12 million passenger trips in the social

enterprise bus company every year

£760m 60% 27pts(right to bid)

Children and Families

• Early Year childcare for disadvantaged families, Surestart• Looked after children, Troubled families, Supporting young people

£630bn 10% 22pts

Employment Employment services for long-term unemployed and young people £188m 20% 19pts

Criminal Justice Reducing reoffending – services in prison and in community £76m 6% 35pts

Financial Inclusion

CDFI-type lenders £20m 10% 10pts

Backup

1010

Non-profit Delivery OrganisationsUK Charities and Social enterprises have a wide range of legal and organisational structures, with different abilities to absorb risk capital

Organisation type of Social Enterprises

Charities32%

Non-profit Service Providers31%

Cooperatives11%

Development Trusts1%

Mutual/Public Service Spin-outs

5%

Leisure Trusts6%

Other14%

Source – Growing the Social Investment Market – GHK 2013

Legal structure of Social Enterprises

Companies Limited by Guarantee

66%

Community Interest Company

15%

Industrial and Prov-ident Society

7%

Company Limited by Shares

6%

Sole Proprietorship6%

1111

Non-profit Delivery OrganisationsUK Charities and Social enterprises have a wide range of corporate structures, with different abilities to absorb risk capital

Development Trust

Non-profit service providers

Cooperative

Mutuals: Public Service Spin-out

Leisure Trust

Charitable Service Providers

• 1% - engaged in social development/regeneration• A mixture of legal structures – but do not take equity

• 31% - often a limited company• Can take unsecured debt and equity-like capital

• 11% - Often a limited company• Can take unsecured debt and equity-like capital

• 5% -Often Community Interest Company – (in some circumstances can take equity)

• Public Service Mutuals Growing: 71 established since 2010, Turnover now £1.1bn1

• Half in Health, 33% in Social Care, rest Community and Education - E.g. Plymouth Community Care

• 6% - often Industrial and Provident Society – can take Equity• E.g. GLL (Community Leisure)

• 32% of Social Delivery - Employment in Charity Sector is 765k• Many Large players – e.g. Mencap (£193m turnover), AgeUK (£156m), CRI (£81m)• Development of impact model creates a challenge to typical delivery structure –

many developing social enterprise arm (e.g. Age UK) – to take finance

• 90% have turnover <£1m p.a.

• Capital Requirements expected to grow from £18bn in 2012 to £35bn in 2016

• Annual (commercial and social) Investment demand growing from £3.8bn to £7.6bn

• Shift towards PBR will increase social vs. commercial investment

• 56% of VCSEs expressing significant interest in social investment

Non-profit (maximising) trading companies

• Represent a large employment and service base – but social impact is derivative of trading rather than procurement by third party. Can take equity

• E.g Café direct

Note 1: Source – Soft Finance, Hard Choices - BCG

I

Increasing ability to absorb risk capital

Backup

1212

Outcome Commissioning StructuresThe Commissioning structure also varies significantly

Commissioningtrigger

Market shift from commercial to social enterprise

Outsourcing of existing activities

Commissioning of new outcomes (early intervention)

Shift from contracting for inputs to outcomes

Contracting Structure

Commercial Prime

SPV (SIB)

Direct Contracting by delivery body

Social Prime

1313

Delivery Market Regulation and CapabilityInfrastructure required to support service delivery is emerging in six areas

Regulation Innovation SupportDelivery-Capability Building

Accelerators / IncubatorsImpact Measurement Best-practice Sharing

• Community Interest Company (CIC) introduced in 2005

• Right to run/provide • New statutory requirements for

commissioners to consider social value when awarding contracts

• Open Data – some development, but much more possible to facilitate market building

• Advising on commissioning- Social Finance

• Leadership accelerators• Ashoka, Clore Social Leadership

Programme• Social Entrepreneur Schools

• Innovation Challenge funds- NESTA Big Green Challenge, Age

UnLimited• Social Innovation venture labs - Shaftsbury Partnership, Participle

• Innovation platforms- Social Innovation Camp

• Platforms - SROI Network, GIIN network,

SustainAbility

• Consultancies- NEF, NPC, Charities evaluation

services

Standardising impact measurement would help to give investors confidence

• Cooperatives UK, DTA – supporting social enterprises scale up delivery models

• Social Venture Networks - Ogunte

• The HUB, CAN Mezzanine, Wayra, Social Accelerator

1414

Finance£200m+ of Social Investment made in 2012 in 765 deals – mostly for small (£10k-£250k) loans – up from £165m in 2011

Secured Loans

Charity Bonds1

Social Impact Bonds

Capacity-building grants

Equity / Quasi Equity

Unsecured Loans

• Social Investment demand expected to grow 38% per year – to £1bn in 2016(increasing share of finance)

• 75% of social capital will need to be risk-taking (vs 10% today) - 15% Equity-esque- 60% Unsecured

lending

Direct Grants / Investment

Financial Lending

Charity Banks

Large SIFIs

Small SIFIs Typical

Gross returns

£600m+~80% of £3.5bn

Pool of debt£165.5 £15.6m £1.3m 6%-8%

£0.3 £8.8 £1.4m 7%-10%

£41m (often direct, with Charity banks, large SIFIs arranging)

2%-6%

£22m

(2012 a stand-out year - 11 SIBs)

7%-13%

£5m £5.7m£2.3m(+ £2m

Incubators)

Big Lottery Fund £30m

Cabinet Office £10m

Note 1: 2013 Data for Charity BondsSource – Growing the Social Investment Market – 2012 – in many cases, net returns significantly lower than gross, due to high initial transaction costs

Social Investment 2012

In addition, £150m of Big Society Capital Commitments – of which £15m drawn down

1515

FinanceUK Impact-first enterprises reluctant to raise capital if required return over 10% - A challenge, given the associated risks

Source – Bridges Ventures

1616

UK SIBs to date# Location Policy area Commissioner Contracting body Investment

sizeDelivery Body

1 Nationwide Adoption   Voluntary Adoption Agencies & Baker Tilly (Consortium)

£3m Action for Children, Adoption Matters Northwest, After Adoption, Caritas Care Limited, Family Futures CIC, PACT

2 London Homelessness DCLG Greater London Authority

£5m St. Mungo's and Thames Reach

3 Wales - Cardiff and Newport

NEETs DWP 3SC £500k Dyslexia Action and CfBT Education Trust

4 West Midlands - Birmingham

NEETs DWP APM UK Ltd £800k  

5 Thames Valley, NW England

NEET DWP Social Finance £900k Adviza

6 Perthshire and Kinross

NEETs DWP Indigo Project Solutions

£300k  

7 Nottingham NEETs DWP Nottingham City Council

£2.7m  

8 West London NEETs DWP Prevista    

9 Shoreditch, London

NEETs DWP Impetus-Private Equity Foundation

£900k Tomorrow’s People

10 East London - Newham / Waltham Fst

NEETs DWP Stratford Development Partnership

   

11 Gtr Manchester  NEETS DWP Social Finance £800k Teens and Toddlers

12 Gtr Merseyside NEETs DWP Triodos Bank £1.5m Greater Merseyside Connexions Partnership

13 Essex Child Protection Essex CC Social Finance £3.1m Children Support Service14 Peterborough Re-offending MOJ Social Finance £5m  St Giles & Ormiston Trusts

Backup

1717

Variety of Channels of capital – directed at social impact

1818

Channels of capital – directed at social impactA diverse landscape with many unprofitable small SIFIs

• Of 25 SIFIs, 9 had investments >£1m p.a.

• 16 SIFIs had investments <£1m p.a.

• 89% of SIFIs expect to increase their investments in social ventures over next 2-3 years

Growth Constraints:• Transaction Costs• Variable Commissioning

Practices• Lack of attractive social

ventures to invest in• Grant-making

suppressing demand• No dedicated funds

channel for endowment PRI

• Triodos Bank, Charity Bank, Unity trust bank, Ecology Building Society

• 16 Small CDFIs – e.g. Social Investment Scotland, Key Fund• For CDFI – Pool of investments is £750m by 2011• # of CDFIs peaked in 2006, and now in decline

• Bridges / Big Issue / NESTA / SASC (part of SIB group) / Berenberg• Retail – Allia, CAF (Venturesome), Apposite Capital (Health Specialist)• Commercial bank with social fund – e.g. Deutsche Bank

• Not yet

• Social Finance, Triodos, FSE, Allia, ClearlySo

• Big Society Capital

Backup

Social Banks

CDFIs

Fund Managers

Tax Advantaged funds

Social Investment Intermediaries

Social Investment Wholesaler

Crowdfunding Platforms • Funding Circle

1919

Investment Market Regulation and InfrastructureThe infrastructure is emerging to support financing of impact investment

Investment Brokers / Advisers

Data Capture / Standard Setters

Research Houses / Product Reviewers Regulation

Providers of Standardised Approaches /

Documentation etc

Financial Product Developers

Capacity-buildingGrant giversMarket Builders

Angel Networks

2020

Investment Market Regulation and InfrastructureThe infrastructure emerging to support financing of impact investment

Investment Brokers / Advisers

Data Capture / Standard Setters

Research Houses / Product Reviewers

Regulation

Providers of Standardised Approaches /

Documentation etc

Financial Product Developers

• Limited brokerage – Investment and Contact Readiness Fund, ClearlySo • SIFIs – 16% offer brokerage, and 42% offer investment structuring• Almost no authorised capacity to give impact investing advice to investors

• EngagedX is emerging

• Research: ClearlySo, GHK, NPC, NCVO, SEUK, SE100, BCG• Financial Product Reviewers: Worthstone, Good Analyst

• Potential Tax Relief for social enterprise investment – but how broad will be the perimeter – beyond Charities / CICs?- Could take several years to mature

• Community Interest Tax Relief (CITR) for investment into CDFIs• Social investment duty on FCA/PRA to encourage sensitive regulation- Review of regulatory barriers to social investment (esp Advice and Distribution)- Crowdfunding consultation underway by FCA

• Centre for SIBs at the Cabinet Office

• Social Finance, ClearlySo, but in general intermediaries not yet operating at sufficient scale

Capacity-buildingGrant givers

• Big Lottery Fund’s Next Steps programme has invested several million• Esmee Fairbairn, Barrow Cadbury, Panahpur

Market Builders• Social Stock Exchange, Ethex, Abundance, MicroGenius, • Impact Base – international platform

Angel Networks • Toniic / Clearly So

Backup

2121

InvestorsWhere will impact investment come from?

Government investment (funding capital and capacity building)

High Net Worth Individuals

Local Funds

Traditional Institutions

Mass Retail

Trusts and Charitable Foundations

Corporates

2222

InvestorsWhere will impact investment come from?

Government investment (funding capital and capacity building)

High Net Worth Individuals

Local Funds

Traditional Institutions

Mass Retail

Trusts and Charitable Foundations

• Historically a strong source of capital, but likely to be squeezed – bootstrapping role diminishing• E.g. Future-Builders £200m - £80m outstanding

• High net worth individuals could provide £180m p.a. in the future (contingent on impact of Tax breaks)

• Vast majority want money to do social good as well as financial return – 15% have some investments with ethical. Community, or social benefits

• Regional Growth Funds, local authorities, housing associations• e.g. City of London Social Investment Fund - £20m

• Dominant Scale, but reticent investors often looking looking for opportunities that are not matched by market (i.e.. They want close to market returns, downside protection, liquidity, track record of success)1

• Exception - £250m Pledged from five local authority pension funds

• IFAs / IFPs• Substantial Interest in social investment – even with trade-off on financial return • Deposits at Charity Banks, Investment in Charity Bonds

• Existing foundations’ investment is limited – estimated £45m in 2011 (Esmee Fairbairn total pool £30m)

• Large Charitable foundations that hold significant reserves could help to rapidly extend and diversify the supply of capital (£100bn of assets)

• PRI potential – but no dedicated UK Channel

Corporates • Corporate Foundations emerging interest

Note 1: Source: ClearlySo

Growth highly contingent on tax relief

Backup

2323

Conclusion - Social investment is in the “marketplace building” phase

Source: CAF Venturesome, Data obtained from the Microcredit Summit Campaign Report (2009

Market Evolution – Micro-finance example

Marketplace building

Take-off

Maturity