Gillian Donald: Social investment goes mainstream
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Created to encourage investment in unlisted and potentially riskier ventures in the UK, until recently the qualifying conditions meant that entrepreneurial activity had to be for commercial purposes. This changed last year when social enterprises were given the same opportunities through the social investment tax relief provisions.
Social enterprises can be defined as commercial businesses whose main purpose is to return benefit to their community. This might be in provision of services – such as a café providing training and/or employment for young people. It could equally be in provision of facilities – such as a community nursery, providing a local, financially accessible care facility which helps both the children and their parents.
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Hide AdTraditionally, commercial businesses would do this by donating money, goods or services to their communities. Larger businesses might even set up their own charities to make donations. The alternative route was through charities – government policy was to make “top-down” funding available to charities, which obviously influenced organisations to take charitable status.
However, the opportunities presented by charitable status also brought constraints. One of the main ones being that charity directors are essentially voluntary and not many unpaid board members would be willing to take on a bank loan which, for an SME, typically comes with a requirement for personal guarantees from the directors. This has resulted in a general aversion to borrowing within the charity sector. And as we know, borrowing to fund business development is an essential aspect of most commercial entities.
The difference now is that a generation of social entrepreneurs has grown up without the “top-down” grant funding available throughout the 1990s, so there is much less of an incentive to obtain charitable status. They don’t have the cash reserves to fund investment but these emerging business leaders want to effect the same changes and are more accepting of the need for risk capital to achieve social objectives.
At the same time, the new tax breaks have opened up finance opportunities to social enterprises, which now have opportunities to access finance on a level playing field with the rest of the commercial sector – free from the personal guarantees required by the banks, and the constraints of charitable status. The government policy changes are set to enable a step change in growth in this sector.
The market is already responding to this opportunity with one local community development finance organisation taking the lead on this – award-winning Social Investment Scotland has created Scotland’s first bespoke qualifying social investment fund – SIS Community Capital. Fully subscribed on opening, it matches individual investors with social enterprises and ensures both the investors and the enterprises meet qualifying criteria and carries out the due diligence to confirm the enterprises are expected to be able to repay the finance. Then the funding is given and the social enterprise is expected to deliver to the same standards as a commercial entity, making a profit and returning the agreed value to the investors.
Social enterprises are usually micro-businesses and are a tiny part of our economy. But government policy changes and how the market is responding mean we expect to see significant and sustained growth in social enterprise in the medium term.
• Gillian Donald is a partner at accountant and business adviser Scott-Moncrieff