Subsidy in the social investment market – part 2

Subsidy has been and is being used to pursue a range different practical functions and wider aims within the UK social investment market. In my previous blog, I looked at some of the different ways that subsidies have been provided so far. This second blog looks at the apparent results of some of the subsidised activities based on publically available reports and evaluation. It presents a series of examples covering a range of different tools and functions rather than a comprehensive overview.

There are some notable omissions. There is no example of use of the tool ‘guarantees for investors’ as this tool has not been used in the UK market, though it has been used in both the US and Australia to support investment into social impact bond-style products. The Futurebuilders fund is also omitted but will be covered in the report that follows this series of blogs.

What happened next?

Each section concludes with some of the questions that might be considered to determine whether these activities have been successful in achieving their intended outcomes. Some of the wider questions about whether those intended outcomes are the right ones will be explored in part three. 

In all cases there is likely to be a supplementary question: “to what extent does available data enable us to reach a meaningful judgement on what has been achieved?”

Community Investment Tax Relief (2003 – Ongoing)

Tool: Tax break for investors

Function: De-risking investment

What Happened:

Community Investment Tax Relief (CITR) came into effect in 2003 offering a tax break of 25% over 5 years on investments by both companies and individuals into Community Development Finance Institutions (CDFIs) operating in ‘deprived areas’.

CITR has not been as successful as anticipated. In a government consultation response in 2013, the umbrella body for CDFIs, the CDFA (now Responsible Finance) explained that: “Since 2002, £95m has been raised mainly through bank loans to CDFIs and deposits into CDFI banks” with only 7 CDFIs raising money via using the scheme in 2012.

Previously, the NCVO Commission on Tax Incentives in Social Investment noted in its report, published in January 2012 that at that point: “one large social bank has raised roughly 52% of the total through a deposit taking scheme (with just the few bank CDFIs raising over 70% of total investments to date)”.

Responsible Finance believe CITR is currently too complicated for most investors to navigate and have put forward series of recommendations for making it more accessible and appealing by improving guarantees available to investors and loosening restrictions on how CDFIs can use the money.

The NCVO Commission’s Recommendations included: “The Government should consider how equity or equity-like investment made directly into enterprises established for community or social benefit should be eligible for CITR”. Whether directly or otherwise, the government response to this recommendation was the creation of a new tax break, Social Investment Tax Relief.                            


To what extent has the de-risking of investment available via CITR generated investment for CDFIs that would not otherwise have been available?

Is the limited uptake of CITR primarily due to the complicated specifications of the relief or to lack interest from investors?

Department of Health Social Enterprise Investment Fund (2007-?)

Tool: Grant funding / Subordinate investment*

Function: Promoting ‘investment readiness’ / Providing investment

The Social Enterprise Investment Fund (SEIF) was a £100 million fund set up to stimulate the role of social enterprise in health and social care by offering applicants a mixture of grants and loans. A further £19 million was made available in 2012.

An evaluation led by the University of Birmingham in December 2012 – which covered spending by the fund up to March 2011 – highlighted that:

The fund hand invested £80,712,510 into a total 531 organisations

  • £11,372,637 (14%) was invested as loans
  • £3,086,430 was invested as ‘repayable grants’
  • The remaining £66,253,443 (82%) had provided as grants

The report’s authors note that as the money was mostly spent as grants rather than invested as loans this raised: “considerable questions for the fund as a resource for the social enterprise sector” as the grant money (once spent) would not be available for reinvestment in future. 

They add that SEIF’s distribution of funds: “raises doubts over the willingness of social enterprises to take on loans, as the vast majority of social enterprises in our evaluation wanted grants only” adding that some organisations turned down loans despite the Fund Manager believing they could afford to take them on.

However, the evaluation also reported that SEIF had been:  “crucial in enabling new social enterprises to enter the marketplace” with around 52% of funded organisations being new startups.

Many of these organisations had used SEIF funding to pay for “business, legal and financial support.”

A survey of investees found that: “SEIF investment was felt by 65% of survey respondents to enhance their sustainability” and the report authors concluded that “Without SEIF investment, our survey indicates that many of the organisations involved in our research may not exist or would be considerably reduced in scope.”


Is the role of social enterprise in providing health and social care services greater than it would have been if SEIF had not existed?

Does the breakdown of spending suggest that SEIF should be regarded as:

(a) an unsuccessful investment fund

(b) a successful grant fund

(c) both

(d) neither

(e) it doesn’t matter if it supported more social enterprise involvement in health and social care?

Development of the Social Impact Bonds (2010-)

Tool: Grant funding

Function: Supporting specific products

What happened:

The Social Impact Bond is a new approach to Payment by Results contracting which deploys socially motivated private finance to support voluntary sector delivery of outsourced public services. The ‘market’ for social impact bonds can be viewed a standalone sub-section of the wider social investment and that market has been variously subsidised using all four tools cited in blog one as part of attempts to achieve all five suggested functions.

The £11.25 million grant from Big Lottery Fund to Social Finance in 2010 was a grant specifically designed to support the development of SIBs as product. £6.25 million of that money helped to cover the costs of develop the first SIB at Peterborough Prison (£6.25 million) with £5 million available to support the development of further SIBs.

At the time Big Lottery described their role as: “acting as joint commissioners of the Peterborough SIB with the Ministry of Justice (MOJ) as well as also funding the running costs for the development of the Bond.”

The evaluation of the Peterborough SIB, carried out by Rand Europe and published in December 2015, gives a generally positive impression of the effectiveness of the services funded via the SIB but, perhaps not surprisingly given that it was the first one, does not offer a clear view about the effectiveness of ‘the SIB’ as a contracting and financing model.

The authors’ suggested: “Conclusions and lessons for future payment by results and Social Impact Bond schemes” include: “Stakeholders reported a number of innovations in the pilot, although these were not necessarily as a result of SIB funding”                                         

With the further explanation that: “The evaluation examined whether the fact that this pilot was funded through a SIB contributed to benefits (or introduced costs), led to innovation, or improved efficiency. Certainly, the primary innovation of this pilot was its use of the first-ever SIB, which was a global innovation that has since grown rapidly in its use.”

What we do know is that the Peterborough SIB was the first of (at time of writing) 32 SIBs launched in the UK with more than 30 others launched worldwide.


How important was grant funding in enabling the first SIB to be developed and launched?

To what extent have lessons learned from the first SIB been helpful in developing the wider market for the product?

Investment and Contract Readiness Fund (2012-2015)

Tool: Grant funding

Function: Promoting ‘investment readiness’; Funding market infrastructure

What happened:

The Investment and Contract Readiness Fund was a 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’.

An evaluation carried out by Ecorys, published in October 2015, reported that 155 ventures received £13.2 million in grants to pay for investment readiness and contract support with an average grant size of £85k.

The report states that: “The four most commonly requested types of support were: financial modelling (requested by 86% of ventures); impact measurement and social mission (72%);  investment structuring (57%); and tendering and bid writing (57%).”

The headline reported outcomes were that:

  • Every £1 spent unlocked £18
  • £233 million unlocked – £154 million in contract / £79 million investments
  • 78 (50.3%) out of 155 ‘successfully secured at least one contract or investment as a consequence of the support they received’

The report authors noted their surprise at the “success of contract opportunities relative to investment opportunities” particularly given that: “most stakeholders felt that the fund was geared more toward supporting investment over contract opportunities.”

Suggested reasons for this included that: “Investment raising is relatively new and uncertain”, “It takes longer to secure investment opportunities” and “Investments were more speculative.”

The report noted that amongst organisations who been successful in raising investment or securing contracts: “Around one in three ventures interviewed reported they would not have secured the deals without the support they received.”

The other two thirds believed that: “the ICRF support did add value, though they already had USPs that the ICRF support did not contribute to (e.g. track record).”

In terms of its effect on market infrastructure, 40 support providers were approved to bid for ICRF funding with 25 successfully accessing at least one grant.

The authors report that the programme “seems to have strengthened the provider market”. They add that: “Small- and medium-sized providers reported that their involvement in ICRF had sharpened their investment readiness support, through the close scrutiny of the Investor Panel and by providing more opportunities to work in this area. It helped some with more private sector experience understand the needs of social ventures as well as increasing their track record and services in this area.”

Considering the future development of the market for investment readiness support, the report noted that: “Around a quarter of ventures interviewed would pay for their own provider support in the future, but would need to have a strong business case for doing so”.  


To what extent did ICRF ‘unlock’ investment that would not have been raised otherwise?

How do we assess and value the wider benefits of ‘investment readiness’ support – for example, in terms of developing an organisation’s ability to seek investment or bid for contracts in future?

Is there ever likely to be a viable market for investment readiness support without grant subsidy?

Big Society Capital (2012- Ongoing)

Tool: ‘Free capital’ / Subordinate Investment[1]

Function: Providing investment; De-risking investment; Funding market infrastructure

Big Society Capital (BSC) is a £600 million wholesale finance institution, supported by £400 million of public money – ‘unclaimed assets’ from dormant bank accounts, launched in 2012 with the aim of turning social investment into a ‘self-sustaining independent market’.

The organisation is both a ‘wholesale investor’ providing funds alongside co-investors for intermediaries to invest directly into charities and social enterprises and a ‘market champion’ responsible for promoting the overall development of a social investment market in the UK.

BSC’s 2015 Annual Review, published in 2016, reports that by the end of 2015 the organisation had received £357 million received from reclaimed public funds plus investment form banks. It had used its resources to support over 30 intermediaries and, primarily as a result of wholesale investment into intermediaries, had provided social investment into over 270 charities and social enterprises.

BSC noted that: “For each £1 of our drawdown we have mobilised almost £2 of third-party investment.”

The outline breakdown of wholesale spending was:

£587 million – signed plus match

£261 million – signed

£195 million – drawdown plus match

£68 million – drawdown

‘Signed’: denotes deals signed with intermediaries to make investment funds available.

‘Drawdown’: refers to investment drawn down by the end investee, in most cases a charity or social enterprise.

In its ‘market champion’ role BSC reports that the overall value of investment in the social investment market by the end of 2015 was £1.5 billion, with over 3,000 charities and social enterprises benefitting from investment.

It noted that in 2015, the BSC team had held 70 1 to 1 meetings with charities and social enterprises and presented at 46 with a cumulative total of 3400 attendees.

As well championing the market via lobbying and campaigning, BSC has also made a range of direct investments (rather than investment of wholesale funds) to support market infrastructure. These include loans to Key Fund, Numbers for Good and EBSI in 2015. 

Key questions:

How big a factor has BSC investment been in ‘crowding in’ matching wholesale investment that would not otherwise have been available?

How much closer is the social investment market to being ‘self-sustaining and independent’ as a result of BSC’s activities?

Next blog:

This blog has considered the apparent results of some subsidised activities within the UK social investment market and some ways to consider whether they have been successful in their own terms: the third blog will consider key questions about the role of subsidy in the future.


[1] There is significant room for debate about tool(s) is being in this instance. My initial position is that the government’s funding of Big Society Capital via Unclaimed Assets is an example of ‘Free Capital’, while (some or all) the investments made by Big Society Capital may be examples of ‘Subordinate Investment’.