Impact investment: Is it just 15 years of hype as some claim?

Impact investment: After 15 years of hype, what has actually changed? is the provocative title of a new report charting the history of the UK impact investment market.

The Organisation for Economic Co-operation and Development (OECD) recently listed the UK as a leader in adopting public instruments related to impact investment. And the UK has pioneered many initiatives such as launching the world’s first social impact bond, and first impact investment wholesaler, Big Society Capital.

But the ‘hype’ report, from London-based pan-European investment bank ClearlySo, argues that heavy government encouragement and subsidy may have — ironically — impeded the development of the UK impact investment market over the last 15 years.

ClearlySo describes itself as the largest impact investment bank in Europe in terms of capital raised – £250m across 175 deals, most recently £13m for renewable energy company Tonik Energy.

William Lowry, author of ClearlySo’s new report, joined the organisation from Credit Suisse. He says when he started he was surprised to find that impact investment funds represented such a small proportion of assets globally. “The fact that it was less than 1% was pretty shocking to me,” he says. “I had fallen into the trap of hype and seeing all these conferences on the subject popping up.”

The report says at the end of 2015, impact investment in the UK was estimated to be worth £1.5bn; the equivalent to less than 0.1% of professionally managed assets under management in the UK alone which had reached £5.7trn in the same year.

The report blames government intervention for the low number. It estimates that over £1bn in subsidy, grants and loans were given to the UK impact investment sector over 10 years. This includes Bridges Fund Management, Big Society Capital and Social Finance. ClearlySo itself has over £1m in investment from Big Society Capital.

“By offering finance to the value of over £1bn through a host of associated funds, the government’s role as an impact financier dwarfed all other players combined,” says the report. “In doing so, ClearlySo believes that the government may have flooded the market with a pool of public money which may have had the perverse effect of discouraging potential mainstream players with a more commercial approach.”

It notes that UK financial institutions, especially when compared with the likes of their Dutch or Nordic peers, are well behind in regards to assets allocated to impact investment.

However, some observers of the UK impact investment market disagree with ClearySo’s premise, arguing the UK government had a crucial role in pump-priming the sector.

They highlight how many contemporary successful industries benefited from government funding such as Silicon Valley.

Celebrity economist Mariana Mazzucato finds Apple, for example, at an early stage received funding from the US federal government’s Small Business Investment Company.

ClearlySo’s report also charts how the impact investment has been growing in recent times, accelerated partly by the entrance of mainstream players.

RI asks whether early UK government support has helped support this development.Rod Schwartz, founder and CEO of ClearlySo admits: “We don’t know if that would have happened anyway. It’s just impossible to say. Only in retrospect can you tell if something was overdone. We are just making the point that the transition has been really important. So diminished government involvement has been positive because it has now meant there is stuff that really makes sense in the market place as a result of some of those experimentations.”

“The government may have flooded the market”

In the same month, the UK’s Social Investment Business released a report on the fortunes of social investment tax relief (SITR), a five-year-old government retail tax break for investment in UK charities and social enterprises. The report argues it has been poorly designed and administered, with low take-up.

At launch, the Treasury predicted that SITR would be used to support £83.3 million worth of social investment in its first three years of operation. The actual figure turned out to be £5.1 million with just 35 deals completed (link).

But Resonance, a UK-based social impact investment company, which runs successful regional-focused SITR funds, says it will take time for the market to develop.

Simon Chisholm, Chief Investment Officer at Resonance, says the SITR market reflects the history of the Enterprise Investment Scheme (EIS) tax relief for venture capital schemes. “If you look at the first five years of the EIS market there isn’t a huge amount of activity in terms of both demand from business and the supply of capital from investors. They were figuring out what this could really do for them.”

Chisholm says the success of Resonance’s SITR funds, that have raised £4.2m so far, stem from their regional focus enabling them to be closer to the ground when making investments, and develop strong relationships with regional wealth managers and their clients inspired by impact investing in their area.

On the ClearlySo analysis of the UK impact investment market, Chisholm says:

“I guess where we agree with the report is that there are some interesting things happening with the convergence of mainstream managers with the impact agenda.

“The dynamic it misses is that the impact economy is also converging with the mainstream. Because the numbers in absolute terms don’t initially sound as grand it is sometimes a little bit overlooked. But some of the most interesting impact investment strategies are coming from that side, and now converging in scale and returns with the mainstream market.”

Resonance runs homelessness property funds that have generated £200m in investment to date, most recently a £5m commitment from Guy’s and St Thomas’ Charity. “This is as big as a mainstream property fund now, and beginning to attract interest from institutional capital,” says Chisholm.

As the interest in impact investment grows globally, the UK is keen to maintain its position as a leader. The government is supporting a taskforce led by Allianz Global Investors’ Vice Chair Elizabeth Corley to maintain momentum.

It recently announced it was designing a Core Competency Framework for Social Impact Investing with Investing for Good to develop educational programmes around impact investing.

And it has called for the government to include information on societal and environmental impact on a mooted Pensions Dashboard aiming to collate individuals’ pension data in one place.