Subsidy in the social investment market – part 1

Most social investment requires subsidy, and subsidy should not be a dirty word. The enterprises we invest in typically lack scale, carry levels of risk that are disproportionate to the financial return, provide goods or services in markets or to clients where the margins are too thin, rarely provide any visibility on exits and often have capped returns to shareholders.”

Big Society Capital’s first chief executive, Nick O’Donohoe, speaking in 2013, about the ongoing role of subsidy in the social investment market.

This quote outlines some of the major functional problems with social investment that (mostly government) subsidy has sought to tackle over the past 15 years. While individual subsidy schemes have been evaluated, some several times, there has not yet been any research to consider the overall purpose and impact of subsidy within the market.

This blog – an overview of the ways subsidy has been used in UK social investment – is the first of series of three posts to be published as part of some scoping work for a wider project that Access are undertaking to consider the topic. The second blog will look at the results of subsidy and the third will consider the big questions for the future.

These blogs are not intended to be comprehensive but aim to stimulate discussion, with some potential questions listed at the end.

Tools and functions

While individuals and institutions investing money with both commercial and social aims is not a new idea in a general sense, UK government-backed efforts to support social investment began in the early 2000s.

The practical tools that have been used to support the market have included:                             

  • Grant funding (and other ‘free capital’)
  • Tax breaks for investors
  • Guarantees for investors
  • Subordinate investment

Five of the most important functions of (mostly) government subsidies for UK social investment since then have been:

  • Providing investment: funds (including match funds) made available to be invested into charities and social enterprises
  • Funding market infrastructure: grants and investments into organisations and resources that enable the market to function effectively
  • De-risking investment: tax breaks and ‘blended capital’ – grants and subordinate investment used to ‘crowd in’ other investment and/or make investments viable
  • Promoting ‘investment readiness’: funding and support to enable charities and social enterprises to become better able to take on repayable finance
  • Supporting specific products: funding for the development of new social financial instruments such as Social Impact Bonds

A short history of subsidy in the UK social investment market[1]:


Three out of the five recommendations made by Sir Ronald Cohen’s first Social Investment Task Force report back in 2000 were calls for government subsidies to :

  • Create Community Development Venture Funds (CDVF) with government match funding for investment from venture capital and institutional investors
  • Support Community Development Finance Institutions (CDFIs), including via the creation of a trade association
  • Offer a Community Investment Tax Credit (CITC) for investment into CDFIs

Since then, (primarily government) subsidies have supported the development of the market through several phases:

Phase One – 2000-2004: What’s the big idea?


At this point there was limited awareness of social investment as a concept. There was not much money available and no examples of social investment working in practice.


Bridges Ventures (2002) – an example of the CDVF’s proposed by the Social Investment Task Force. The UK government provided a £20 million matching investment to ‘crowd in’ funding from the private sector.

Adventure Capital Fund (2002) – the first blended capital fund, offering a mix of grants and loans, originally launched as £2 million fund to create sustainable community enterprises through social investment.

Community Investment Tax Relief (2003) – a tax break for investment into CDFIs worth up to 25% over 5 years, designed to encourage investment in ‘deprived areas’.

Phase Two – 2004-2010: Making something happen (in public services)

Problems: Social investment had become popular as an idea but there wasn’t much of it going on. The then Labour government wanted charities and social enterprises to become more businesslike so that they could compete for contracts. The government was also keen to see innovative new approaches to public service delivery supported by private finance.


Futurebuilders (2004) – launched as a £125 million fund offering a mixture of grants and loans to support voluntary sector organisations to engage in public service delivery.

Department of Health Social Enterprise Investment Fund (2007) – initially a £100 million fund set up to stimulate the role of social enterprise in health and social care, also offering applicants a mixture of grants and loans.

Development of the Social Impact Bond (2010) – a new approach to Payment by Results contracting supported with voluntary sector service delivery support by private finance. £11.25 million grant from Big Lottery Fund supported Social Finance to develop the first SIB at Peterborough Prison (£6.25 million) and further pilot uses of the model (£5 million).

Phase Three – 2011-2016: Building the market

Problems: The social investment market that had emerged from 2004 was heavily dependent on government funded programmes. The market was not big enough – either in terms of size of investments or volume to investments – to support a viable market of social investment intermediaries. More private money was needed to grow the market. Equally not enough charities and social enterprises are willing/able to take repayable investment.


Big Society Capital (2012) – a £600 million wholesale finance institution, supported by £400 million of public money – ‘unclaimed assets’ from dormant bank accounts. The aim was turn social investment into a ‘self-sustaining independent market’.

Investment and Contract Readiness Fund (2012) – a £10 million grant fund supporting organisations seeking to bid for contracts or raise over £500,000 in social investment to work with approved consultants to become ‘investment ready’.

Big Potential (2014) – an initial £10 million grant fund for organisations to ‘help charities and social enterprises get investment ready’. A similar model to Investment and Contract Readiness Fund but for organisations aiming to raise less than £500,000 in social investment. This was followed by a further £10 million fund, Big Potential Advanced, to support organisations aiming to raise over £500,000.

Social Investment Tax Relief (2014) – a 30% tax break for individuals investing into charities and social enterprises.

Access (2015) – A £100 million+ foundation with a £45 million Growth Fund, offering a mix of grants and loans to charities and social enterprises seeking investments of £150,000 or less, and £60 million to support investment readiness and market infrastructure.

Key questions:

To what extent should these activities – for example, the creation of Big Society Capital – be regarded as subsidy?

Which important funding streams or other subsidy activities have been missed out?

How big a role have trusts and foundations, such as City Bridge Trust and Esmee Fairbairn Foundation, played in subsidising the market?

Which other stakeholders have been seeking to subsidise social investment?

Are the suggested problems the right ones?

Please get in touch with your answers to these questions – or with any other thoughts prompted by the blog.

Next blog:

This blog has given an overview of some of the subsidy that has been provided in the UK social investment market so far: the second blog will look at what happened as a result of that subsidy.


[1] The fund sizes listed in this overview of the amounts made available at the launch of the funds, in many cases additional funds were made available over the course of the programmes and this will be reflected in Blog 2.