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Template for Mapping Impact Investment Eco-systems: The UK Eco-system Social Impact Investment Task-force established b

Template for Mapping Impact Investment Eco-systems: The UK Eco-system Social Impact Investment Task-force established by G8 Update for country representatives Stephen Brien, 10 th January 2014.

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Template for Mapping Impact Investment Eco-systems: The UK Eco-system Social Impact Investment Task-force established b

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  1. Template for Mapping Impact Investment Eco-systems: The UK Eco-system Social Impact Investment Task-force established by G8 Update for country representatives Stephen Brien, 10th January 2014

  2. Overview of impact investment Eco-systemEach financial transaction has its own ‘signature’ across the many parties Supply of investment finance Addressing social need Government investment Social Investment Wholesaler • Procurement / Commissioning • Social need Finance • Investors • Non-profit Delivery Organisation Ageing • Channels of capital Charitable Service Providers Trusts and Charitable Foundations Social Banks Disability Non-profit service providers Education Local Funds Social Investment Intermediaries Cooperative Secured Loans Government Funded Service Delivery Children and Families Traditional Institutions Government procurement of for-profit delivery Unsecured Loans CDFIs Criminal Justice Development Trust Government procurement of non-profit delivery Charity Bonds Corporates Employment Social Impact Bonds Foundation / Charity procurement of social value Fund Managers Mutual / Public Service Spin-out Quasi Equity Grant-making / giving Healthy Living High Net Worth Individuals Equity Trading activities of social organisations Leisure Trust Tax Advantaged funds Housing Mass Retail Delivery Regulation / Infrastructure / Support Finance Regulation / Infrastructure ….. Non-profit (maximising) trading companies Crowdfunding Platforms e.g. Essex Children in Care Social Impact Bond with Bridges and Social Finance

  3. Overview of impact investment Eco-systemEach financial transaction has its own ‘signature’ across the many parties Supply of investment finance Addressing social need Government investment Social Investment Wholesaler • Procurement / Commissioning • Social need Finance • Investors • Non-profit Delivery Organisation Ageing • Channels of capital Charitable Service Providers Trusts and Charitable Foundations Social Banks Disability Non-profit service providers Education Local Funds Social Investment Intermediaries Cooperative Secured Loans Government Funded Service Delivery Children and Families Traditional Institutions Government procurement of for-profit delivery Unsecured Loans CDFIs Criminal Justice Development Trust Government procurement of non-profit delivery Charity Bonds Corporates Employment Social Impact Bonds Foundation / Charity procurement of social value Fund Managers Mutual / Public Service Spin-out Quasi Equity Grant-making / giving Healthy Living High Net Worth Individuals Equity Trading activities of social organisations Leisure Trust Tax Advantaged funds Housing Mass Retail Delivery Regulation / Infrastructure / Support Finance Regulation / Infrastructure ….. Non-profit (maximising) trading companies Crowdfunding Platforms e.g. Real Lettings Property Fund with Resonance

  4. Procurement / CommissioningWith £250bn of social service delivery funded by government, £150bn could be accessible for impact investment . . . UK Govt market for Social Impact (current and potential) Other Government Social Delivery 100 Other charitable service provision Other charitable service provision 13% CAGR . . . Foundations and Charities could also increase impact procurement Note 1: Sources NCVO cited in Barclays Charity Review 2012, The First Billion - BCG Note 2: Social Enterprise annual turnover is £163bn – so assume non Value-sponsorship revenue is primarily trading (need to remove grant revenue)

  5. Procurement / CommissioningHealth, Education and Communities dominate the accessible market Accessible market for UK Impact Investment (Incl Scotland, Wales, N Ireland) UK Government expenditure 2011-12(£Bn) Assumptions Total = £693bn Total = £346bn Total = £150bn Capital investment 20% of Policing Opex Other – non-social (e.g. Defense) Prisons & Probation Opex Scotland, Wales, NI (Devolved expenditure) Further Education expenditure Home Office “AME” (e.g. welfare, tax credit, debt interest) Justice Business Work & Pensions Service Provision(Not payment admin) Communities Local Authority expenditure (£20bn)Neighbourhoods (£6bn) Localism (£3bn) Education 60% of State Schools & academiesLearning & skills, Early years, Sure start, Children & Families expenditure Operational Expenditure1 Health 75% of General HospitalsGP, community health, mental illness, learning difficulties Note 1: Resource DEL in Government Accounts Sources Government Budget Tables for 2011/12 (April 2013) and Guardian Public Spending Chart for 2011/12

  6. Procurement / CommissioningApproach to defining accessible market – a set of broad assumptions • Identify total Government Spending = £694bn in 2011/12 • Focus on spend that corresponds to operating expenditure (mostly salaries and procurement) = £346bn • Select spend in departments with Social purpose (including Scotland, Wales, N. Ireland) = £285bn • For each department, identify potential for impact = £150bn • Health: Mostly already categorisedin 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

  7. Backup Procurement / CommissioningGovernment funding dominates the sector Government Funded Service Delivery • Central and Local Govtdominate 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 Potential mutualisation outsourcing to private and social providers Government procurement of for-profit delivery • 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 Opportunity for social enterprises to gain share Government procurement of non-profit delivery • 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 Foundation / Charity procurement of social value • 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) Opportunity for foundations to increase impact focus Grant-making / giving • 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 Donors beginning to drive achievement of impact Trading activities of non-profit (maximising) organisations • 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.gAgeUK offering domiciliary care services to consumers Note 1: Sources NCVO cited in Barclays Charity Review 2012, The First Billion - BCG

  8. Procurement / CommissioningImpact investment has started in the smaller procurement areas addressed by Non-profits Non-profits activity in Government social procurement = £13bn Expected CAGR (2012-2016) Existing non-profit share of Government procurement Early Adoption of Impact Investment in Crim Justice, Children & Families and Employment Source: The First Billion – BCG 2012

  9. Backup 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

  10. Non-profit Delivery OrganisationsUK Charities and Social enterprises have a wide range of legal and organisational structures, with different abilities to absorb risk capital Legal structure of Social Enterprises Organisation type of Social Enterprises Source – Growing the Social Investment Market – GHK 2013

  11. Backup Non-profit Delivery OrganisationsUK Charities and Social enterprises have a wide range of corporate structures, with different abilities to absorb risk capital • 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 Charitable Service Providers • 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 I Non-profit service providers • 31% - often a limited company • Can take unsecured debt and equity-like capital Cooperative • 11% - Often a limited company • Can take unsecured debt and equity-like capital • 1% - engaged in social development/regeneration • A mixture of legal structures – but do not take equity Development Trust I Increasing ability to absorb risk capital Mutuals: Public Service Spin-out • 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) Leisure Trust 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

  12. Outcome Commissioning StructuresThe Commissioning structure also varies significantly • Commissioning • trigger • Contracting Structure Market shift from commercial to social enterprise Commercial Prime Shift from contracting for inputs to outcomes Social Prime Outsourcing of existing activities SPV (SIB) Commissioning of new outcomes (early intervention) Direct Contracting by delivery body

  13. Delivery Market Regulation and CapabilityInfrastructure required to support service delivery is emergingin six areas Regulation Innovation Support Delivery-Capability Building Accelerators / Incubators Impact 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

  14. Finance£200m+ of Social Investment made in 2012 in 765 deals – mostly for small (£10k-£250k) loans – up from £165m in 2011 Social Investment 2012 Secured Loans 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 Charity Bonds1 Social Impact Bonds Equity / Quasi Equity Capacity-building grants In addition, £150m of Big Society Capital Commitments – of which £15m drawn down Note 1: 2013 Data for Charity Bonds Source – Growing the Social Investment Market – 2012 – in many cases, net returns significantly lower than gross, due to high initial transaction costs

  15. FinanceUK Impact-first enterprises reluctant to raise capital if required return over 10% - A challenge, given the associated risks Source – Bridges Ventures

  16. Backup UK SIBs to date

  17. Variety of Channels of capital – directed at social impact

  18. Backup Channels of capital – directed at social impactA diverse landscape with many unprofitable small SIFIs Social Investment Wholesaler • Big Society Capital • 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 Social Banks • Triodos Bank, Charity Bank, Unity trust bank, Ecology Building Society Social Investment Intermediaries • Social Finance, Triodos, FSE, Allia, ClearlySo CDFIs • 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 Fund Managers • 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 Tax Advantaged funds • Not yet Crowdfunding Platforms • Funding Circle

  19. Investment Market Regulation and InfrastructureThe infrastructure is emerging to support financing of impact investment Investment Brokers / Advisers Market Builders Capacity-buildingGrant givers Financial Product Developers Angel Networks Data Capture / Standard Setters Research Houses / Product Reviewers Providers of Standardised Approaches / Documentation etc Regulation

  20. Backup Investment Market Regulation and InfrastructureThe infrastructure emerging to support financing of impact investment 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 Investment Brokers / Advisers • 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 Financial Product Developers • Social Finance, ClearlySo, but in general intermediaries not yet operating at sufficient scale Angel Networks • Toniic / Clearly So Data Capture / Standard Setters • EngagedX is emerging Research Houses / Product Reviewers • Research: ClearlySo, GHK, NPC, NCVO, SEUK, SE100, BCG • Financial Product Reviewers: Worthstone, Good Analyst Providers of Standardised Approaches / Documentation etc • Centre for SIBs at the Cabinet Office Regulation • 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

  21. InvestorsWhere will impact investment come from? Government investment (funding capital and capacity building) Trusts and Charitable Foundations Local Funds Traditional Institutions Corporates High Net Worth Individuals Mass Retail

  22. Backup InvestorsWhere will impact investment come from? Government investment (funding capital and capacity building) • Historically a strong source of capital, but likely to be squeezed – bootstrapping role diminishing • E.g. Future-Builders £200m - £80m outstanding Trusts and Charitable Foundations • 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 Local Funds • Regional Growth Funds, local authorities, housing associations • e.g. City of London Social Investment Fund - £20m Traditional Institutions • 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 Corporates • Corporate Foundations emerging interest High Net Worth Individuals • 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 Growth highly contingent on tax relief Mass Retail • IFAs / IFPs • Substantial Interest in social investment – even with trade-off on financial return • Deposits at Charity Banks, Investment in Charity Bonds Note 1: Source: ClearlySo

  23. Conclusion - Social investment is in the “marketplace building” phase Market Evolution – Micro-finance example Maturity Take-off Marketplace building Source: CAF Venturesome, Data obtained from the Microcredit Summit Campaign Report (2009

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