Posted on 25th February 2010
A financial instrument, a social investment club and a change in regulation are all set to boost the rapidly growing social enterprise sector.
Social enterprise group HCT has raised £3m to fund the growth of its community transport businesses through a financing instrument developed with Bridges Ventures and called a ‘Social Loan’. Generally, social enterprises have been restricted to traditional forms of borrowing when they wished to raise capital. This put them at a competitive disadvantage to their private sector counterparts because they were unable to offer potential investors the opportunity to share business risk and obtain potentially greater financial returns.
The Social Loan allows returns to investors to increase – or decrease – in line with the organisation’s turnover.
“We have tied interest payments to growth and social impact,” says Antony Ross, director of Bridges Social Enterprise Fund. “For this pilot deal, we have agreed that turnover is a good indication both of these, as well as an indicator of ability to pay.
“Our aim is to create a financial instrument that offers the same flexibility as equity investment and delivers growth and social impact. Investors will accept a single-digit financial return if the investment is achieving a strong social return. We want to prove that the model works and so attract more social investment."
“This won’t be the biggest deal done in corporate finance today, but it may well be amongst the most far-reaching in its consequences”, adds Dai Powell, chief executive of HCT Group. “This gives ‘proof of concept’ that social enterprises can now compete on a more level playing field in the capital markets. With innovative structures like the Social Loan, we can break down the barriers between investors seeking value and investors seeking values.”
Meanwhile, the UK’s first social investment club launched on 17th February and aims to raise £1m for social enterprises by targeting 200 female investors and philanthropists. Members of the Make A Difference (MAD) Investment Club must commit to a minimum of £5,000 to join the club and funds will be pooled and channelled to a wide range of social enterprise and philanthropic projects. MAD’s first investment will be the Big Issue Invest Social Enterprise Investment Fund (SEIF).
Elsewhere, new measures are to be introduced in April that are intended to make it easier for community interest companies, a form of social enterprise, to attract investors.
The CIC Regulator is to lift the cap on share dividend payments to investors to 20%, and the cap on loan interest to 10% of the loan's value. Previously the caps had been linked to the Bank of England base rate, with the dividend cap at five percentage points and the interest cap at four percentage points above this rate.
A consultation last year found that CICs thought the caps deterred potential investors by being too low and too complex, and made it difficult to make a return.
