Social Investment Fund FAQs

Below are some of the questions we are regularly asked regarding Social Investment.

If you have a question which isn’t included here, please email

Social investment is the provision and use of finance to generate social and financial returns. The range of expected financial returns can be from capital returned through to capital with interest. Usually there is a cap placed on returns (typically up to 20% on interest or dividends).

Philanthropic donations and grants are gifts given with no expectation of financial return. Social investments have the potential to return the original funding, and in many cases interest. Funds can therefore, be recycled. Investments made with an expectation of less than capital protection are often referred to as Venture Philanthropy.

There are two key reasons why there may be a trade-off between the financial and social returns paid to an investor. Firstly, whilst charities and social enterprises use the market mechanism to deliver social outcomes, and compete against mainstream competitors to deliver these services, they reinvest the majority of the profits into the business, rather than distribute them to investors. This has the effect of dampening some of the financial returns that would be expected in a mainstream investment. Secondly, charities and social enterprises often deliver services in areas where there is a weak market and / or where provision is highly bespoke and therefore costly, (for example, supporting those hardest to reach with employment skills). Enterprise surpluses might be lower, but social impact gained might be correspondingly higher as the service is filling a gap. The price paid by the purchaser of these types of service is critical to an organisation’s financial sustainability.

Social investments can be made directly into an enterprise or indirectly into a social investment fund. Direct investments are commonly made as secured loans, unsecured loans, loan guarantees, quasi equity (taking a share in the extra revenue generated as a result of the investment) and occasionally, equity. To date, most UK social investments have been loans as many social enterprises do not offer equity. A well-known example of a social investment is the Peterborough Prison Social Impact Bond, which is structured using quasi equity (a share of the cashable savings from the Ministry of Justice). Indirect investments into a social investment fund can usually offer the investor an equity stake in the performance of the fund. Examples of such funds are Bridges Ventures, Big Issue Invest and Oxfam’s Small Enterprise Impact Investing Fund. Alternatively, investors can place money on deposit with a social lender, such as Charity Bank, Unity Trust, or Triodos for onward lending to a social organisation. The underlying investee organisations might be determined by sector, location, or state of development. Investment options are expanding as a range of new funds have been established in the last two years.

Grants usually provide income for service delivery but may not always assist with core costs or with business development. In addition, it can be hard for charities and social enterprises to raise funds for substantial capital items through grants or obtain grants for working capital.

As a new market with limited track record it is difficult to assess risk. However, the forms outlined above are often presented as a risk continuum with secured loans much less risky than equity. There are underlying risks to the charity or social enterprise offering the investment, and these may be underwritten by a third party.

The largest social investor in the UK since 2012 is Big Society Capital (BSC). Established as a wholesale bank, it has £600m of Assets under Management. £400 million of this is from the allocation of Dormant Bank Accounts, and £200 million forms equity investments from the four Merlin banks. BSC has already committed over £50m to social investment financial intermediaries (SIFIs). These SIFIs then provide investment into social sector organisations which meet their terms, namely: –

  1. That the organisations are primarily concerned with providing benefit to society;
  2. That any surpluses are principally used to achieve social objectives and payments to shareholders are capped;
  3. There is a constitutional or contractual lock on its Social Objects, dividend policy and an asset-lock”;
  4. That remuneration levels reflect social sector organisation norms and are disclosed in line with the accounting requirements for charities; and
  5. In the event of a change of ownership, the organisation will take steps to preserve the mission as that of a social sector organisation.

As of February 2014, it has currently available for front line organisations approximately £100m to draw down. See

Big Society Capital is also established as a market champion and is working on policy, promotion and tackling the regulatory barriers that restrict the growth of this market place. City of London Corporation works closely with BSC on these issues.

Risk capital to the sector is currently estimated to be around £202m (2012/13), whilst total loans to social sector organisations by all types of investors are already well in excess of £1bn. With the creation of Big Society Capital, rapid growth is forecast. Research for BSC forecasts the UK social investment market could grow to over £1bn by 2015, mainly driven by public sector requests for services.

Until 2012, Government had been the largest social investor to date, mainly through repayable grants and loan funds. There are also four leading social banks providing loan finance: Charity Bank, Triodos, Unity Trust Bank and the Ecology Building Society. Several charitable trusts and foundations are also providing loan and equity finance. These include City of London Corporation as trustee of Bridge House Estates, Esmée Fairbairn Foundation, Trust for London, Lankelly Chase, Panahpur, Barrow Cadbury and the Big Lottery Fund. There have also been several notable commitments by mainstream investors. Deutsche Bank and HSBC created social investment funds of £10 million and £4 million respectively. J P Morgan has a social finance unit making impact investments in less developed countries and Goldman Sachs has established a $250m fund for use in payment by results in the US. Individual investors still play a relatively small part in this marketplace, and much of it is under the radar’ and difficult to track. However, there is evidence of an unmet appetite amongst high net worth individuals and retail investors to engage in social investment which tax reliefs could help to incentivise.

On the demand side, charities and social enterprises need to bolster their business models so they are able to take on and repay any investment. More and varied social investment products are needed to meet the different complex business models of these organisations. The results of programmes to provide investment readiness support to charities and social enterprises are eagerly awaited. On the supply side, there is a need for greater engagement by mainstream investors and increased risk appetite by social investors. The type of capital demanded is unsecured risk finance but the capital largely on offer is secured low risk loan finance.

Tax relief for retail investors and improvements in the regulatory framework to allow for the motivations of investing for impact, not to maximise profit, are important factors in building this nascent marketplace. Independent Financial Advisors and wealth managers should develop knowledge and offer these products to their clients. Over time, retail investors will also be offered social investment products, once the track record, understanding of risk levels and liquidity of social investments have improved to accord with consumer protection requirements.

The roles of intermediaries, such as brokers, deal originators, capacity builders, product designers are all features of a growing marketplace. These largely remain in need of subsidy while the market is still small in value.

There are three principal reasons. First, at a time when there is increased demand for their services, there is less grant-funding available to support charitable and social enterprise activity. Social investment can represent new income. Second, statutory agencies are increasingly offering contracts with payments contingent on results. With often limited reserves, if charities and social enterprises are to compete for such contracts they need operating capital. Social investment can offer such finance. Third, a great deal of work has been done to develop a social investment market, and increased evidence of interest from mainstream investors such as Deutsche Bank, HSBC and Triodos to demonstrate a demand for these investments. This emerging asset class could have growing significance on the UK’s economy and society.

Investment proposals usually set out how financial and social returns will be measured. There are many methodologies each with their own suitability to measuring the outcomes and impact of financing social initiatives. Big Society Capital is leading a project to standardise reporting on outcomes, by establishing a matrix of possible beneficiary groups and outcomes, the investments made by individual social investors can be aggregated to give an estimation of social outcomes generated. There are other international initiatives with which BSC’s work dovetails to tackle the issue of measurement of social outcomes but no one system claims to have the monopoly on the right approach.