City of London’s Hewitt: The challenges of deploying a social investment fund

A pool of capital with its origins in the 13th Century has difficulty making social investments

“I’ve got roughly £10m (€11.4m) to spend. We are known in the market as having money. But we are in this bizarre situation of not being able to get rid of it,” says Alderman Peter Hewitt, chairman of the social investment board at the City of London, when describing its £20m social investment fund that launched in 2013.

It was set up in part to help develop London as a global hub for social investment but four years later it has only invested £8m of the £20m pot.

“What we’ve found, surprisingly, is the ability to deploy this money is really difficult because there aren’t the credible products out there. The ones that are good are snapped up quite quickly,” explains Hewitt.

The £20m fund was set up with money from charitable trust Bridge House Estates – which was founded by the City of London in 1282 (Ed: You read that right: 1282) to maintain bridges; it now uses surplus income for charitable purposes across the wider city.

Instead of using income from the Trust’s charitable funds – which can be invested in a riskier way – the decision was taken to use the Trust’s capital, bringing with it an obligation to preserve the capital and have a less risky approach of cash-flow or asset-backed investments.

Hewitt says this was a conscious decision: “We did a little bit of research around other social investment schemes and found some who had invested £1 five years ago said it was worth well below a pound now. We thought if we are trying to promote social investment as a credible investment medium this is not going to be a great message ‘give us £1 and we will turn it into 80p’”.

But the fund has struggled to find viable investments. It has placed £8m with 16 social investments including the Columbia Threadneedle UK Social Bond Fund, the Resonance Affordable Homes Rental Fund and the transport social enterprise HCT Group.

Its most recent social investment in March of this year – a £1m investment into the £30m Resonance National Homelessness Property Fund – followed a two-year gap of no money leaving the fund. It mirrors issues in the wider UK social investment market, with UK social investor Big Society Capital often criticized for not getting money out the door quickly enough.

“It’s an interesting problem to have,” says Hewitt, saying the experience has led him to believe that the social investment market is not do-able for institutional investors in the short-term.Tim Wilson, Principal Grants and Social Investment Officer, who manages the social investment fund, shares Hewitt’s sentiment: “There is an issue with how liquid the market is. With quite a few exceptions you haven’t got any secondary trading and the expectation is that you will hold to maturity.”

He highlights that fact that there a few institutional investors engaging with the space, including Columbia Threadneedle which runs a social bond fund with social enterprise Big Issue Invest, and UBS which is trying to engage its clients to use Social Investment Tax Relief, but he says “there is definitely more to be done to get institutional investors on board. It’s about where is the home for this money in this space is at the moment”.

“The ability to deploy this money is really difficult”

Hewitt says: “I can’t help thinking that somehow we need to create a completely new initiative that creates this type of environment for retail investors. If we look at institutional investors then you have pension funds that only want to invest large lumps of money and don’t want to have a controlling interest. So that’s typically not less than a £50m investment and not ultimately holding more than 10% of the fund.”

Linked to the City of London’s social investment fund is the Stepping Stones Fund, which in partnership with UBS provides grant finance to help organisations seeking social investment become “investment ready”.

Products in the current UK social investment market are usually much smaller than £50m. So Hewitt thinks that retail customers, investing much smaller amounts are much more viable. “But again they’ve got to find something to put the money into. Therein lies the problem,” he says.

Hewitt highlights a UK government advisory group – chaired by Elizabeth Corley, Vice Chair of Allianz Global Investors – tasked with opening up social investment products to individuals.

“It’s an absolute delight that the government has recognized this and set up an advisory group to create a culture of social investment. I was very privileged to be invited on the advisory board. In my personal view what we need are some new government-led initiatives, possibly as a result from this group that creates a whole new investment medium.”