In 2012, the UK’s Big Society Capital (BSC) became the world’s first domestic impact investment wholesaler dedicated to providing finance to the social sector and building the impact investing market. A year later, it was joined by the Social Impact Accelerator, a new entity within the European Investment Bank. In 2018, we expect two more to open. In 2019, it could easily be another four.
Wholesalers are pivotal to scaling up impact investment by building a market that extends far beyond their direct activity and developing strong intermediary structures, as we examine in a report to be formally launched at the Global Steering Group (GSG) for Impact Investment Summit this October. By placing a substantial pool of impact capital along with market development capability on a long-term mandate, an impact investment wholesaler can create confidence to co-investors, intermediaries and front-line social enterprises, speeding up the development of the impact ecosystem.
Social enterprises provide targeted solutions to the world’s pressing social and environmental issues, but to fulfil maximum potential many need investment that mainstream financial providers are often unable to provide. Individual funds may be available but find it hard to scale up. To fill these gaps, wholesalers have emerged to secure initial funding at appropriate scale for their goals and mandate.
Wholesalers invest into funds and other intermediaries, sometimes alongside other activities, while drawing in investment from other organizations – from foundations, philanthropists, and institutional investors – thus catalyzing wider investment flows. They seek to develop a broad impact investment market – to “build a market” rather than “be the market”.
For instance, BSC and its co-investors have made £1.25 billion ($1.6 billion) of capital available to date, with nearly £800 million taken up by over 800 social enterprises. In six years, BSC has boosted the availability of often highly important risk finance by six times, helped increase the number of intermediaries with over £50 million in assets under management from one to eight, and helped create Access – The Foundation for Social Investment to lend small amounts at affordable rates to small social enterprises alongside capacity building.
Following a series of interviews with wholesalers, co-investors, intermediaries, social enterprises and government officials, representatives from twelve countries put their heads together to come up with a vision for wholesale impact investment.
Firstly, a wholesaler must be agile in responding to the circumstances in its country and remit. How many social enterprises do you have? How many existing intermediary funds? What are your priority social issues? These are some of the key design questions for each country. But however careful the planning, market conditions will change, and its tangible engagement with co-investors and investees that will show the way forward.
Secondly, a wholesaler must recognize where it can help best and where it cannot make a worthwhile impact. Not all social problems can be addressed by social enterprises and not all social enterprises will benefit from impact investment. Wholesalers will need to keep testing and learning to achieve maximum impact. Further, impact investment is just one tool, and most social challenges require more than one tool. Partnerships may be crucial to success.Thirdly, a wholesaler must champion and develop the impact investing market and the wider ecosystem for impact, without ever becoming the market. A creative, innovative market will only emerge if every actor owns the market and feels able to push the edges and introduce new ideas. No single entity, however talented, can replace the energy of a broad network.
These do not constitute a prescription for the ideal wholesaler. We must keep in mind that there is no blueprint, but rather design choices for countries to fit their circumstances.
Pioneer work shows that wholesalers can achieve substantial growth in investment flows, new financial tools and methods, shifts in culture and understanding, and, above all, greater capacity in social enterprises to achieve impact for people and planet. It takes time to develop a well-functioning impact ecosystem. A combination of agility and resilience is essential for success.
Sources of co-investment matter. Foundations and philanthropists tend to be the first contributors, providing the kind of finance which can support risky, small, and new enterprises to break new ground.
Institutional investors also have a major role to play, often tending toward larger deals and where the risks are clear. They may introduce elements of the institutional investor world, such as extensive due diligence, tough negotiation and standardized investment structures, that professionalize the system but do not always fit the size and nature of impact investment deals.
A wholesaler seeking institutional co-investors may also charge more for its capital. To attract a co-investor, a wholesaler must hit a price that satisfies both co-investor and enterprise. Co-investor pressure, especially from institutional co-investors, to earn a satisfactory return can influence the price of a wholesaler’s capital more than the wholesaler’s own return target.
Threading the needle between the rate co-investors want to earn and the rate social enterprises want to pay is among the wholesaler’s most challenging tasks. To some degree, a wholesaler may rely on its financial acumen and deep understanding of impact to engineer products able both to pay a return and grow social enterprises.
There is still much more we can learn about how impact investment wholesalers can best address social and environmental challenges and build vibrant markets for positive impact – a topic that I’m sure will be examined and rigorously debated at the October summit. The experience of the pioneers shows not only the core value of the model as a key component of the supply of capital and the development of impact ecosystems, but also the long way we still have to go to achieve its full potential. That’s why the working group is going beyond publishing a report, to creating a continuing shared learning group for leaders running or developing impact investment wholesalers.
Cliff Prior, CEO of Big Society Capital, is chair of the Impact Investment Wholesaler Working Group set up under the auspices of the Global Steering Group (GSG) for Impact Investment. The GSG Impact Summit 2018 is taking place Oct 8-9 in New Delhi, India. Register here.