New research from the Association of Charitable Foundations warns that social investment funding provided by foundations could quickly become tied up for some years, given the illiquidity of the market and the concentration of social investments in a small number of foundations.
The research, Charitable trusts and foundations’ engagement in the social investment market, has been published today to coincide with the Association of Charitable Foundations' annual conference. It is based on a survey of 83 trusts and foundations, and interviews with key figures.
The survey finds that ten foundations with endowments exceeding £100m, without permanent restriction and with staff, have provided nearly 90 per cent of foundations' social investment. There are only 20 such foundations with a similar profile in the UK.
This suggests that half of the foundations most likely to get involved in social investment - large, non-permanently endowed, and with staff - are already engaged in the market.
“It could be that the ‘low-hanging fruit’ of capital from such foundations could quickly become used, especially given the relative illiquidity of many social investments,” the report warns.
It says that creating liquidity is essential to freeing up more social investment: “Given the relatively illiquid nature of most social investments to date, attempts to make a secondary market will help make recycling a reality as well as enable more foundation investors to become involved.
“Otherwise there is a risk that the most readily available foundation funding could quickly become invested and effectively out of reach for some years.”
Most typical social investment is a loan
Elsewhere, the research finds that a typical foundation social investment is a direct investment of £100,000 for a term of about five years, usually in the form of a loan (often unsecured) and often with income return that depends on the success of the project.
In a focus group discussion as part of the research, it found that though such investments can often be risky and produce a lower rate of financial return than commercial venture capital, foundations felt that the social return compensated for a lower financial return.
The survey also looked at attitudes and behaviours around social investment within foundations, and found that they see social investment as one tool in the toolbox alongside other forms of support such as grants.
But, foundations also report that significant governance and staff time are needed to set up and manage social investments. Further, a lack of social investment deals is the biggest barrier to doing more.
Social investment diminishes partnership between funder and fundee
The ACF said its research suggests a number of implications for those building the social investment market. Firstly, unless the investment can be justified on financial grounds alone, foundations will need social investments to match their particular mission.
And the research suggests that some foundations may decide not to socially invest even where funding can help generate a return, as some wonder whether the act of investing fundamentally shifts the relationship between funder and organisation to a transactional model that diminishes some aspects of the partnership.
Speaking at the ACF conference, its chief executive, David Emerson, said: “We are pleased to be able to launch this new research which highlights the absolutely key work trusts and foundations are undertaking.
"They are one of the few sources of genuine risk capital for social enterprises and charities who cannot attract capital investment from mainstream lenders and it is vital that their role be both appreciated and understood."
The survey estimated that trusts and foundations have allocated around £100m to the social investment market, of which about £50m has been committed to specific deals.
