The senseless and destructive aversion to investing in successful social enterprises

In a recent piece written for Social Edge, I commented on our destructive obsession with new and cool social enterprises.  Preferring these to the more established, but perhaps less exciting, existing businesses, makes no sense.  New ideas are like new love—marvellous as a fantasy, but requiring the test of time to assess durability.  Yet the social investment sector has a new/cool bias, which we have encountered regularly.

Perhaps an even greater threat to the eventual success of the sector is the hesitancy to back social enterprises which have achieved scale and profitability.  In a recent case, we at ClearlySo were asked to raise capital for a successful social enterprise.  It (let’s call it XYZ) is a sector leader and has the capacity to access conventional finance.  It’s commitment to growing the sector and other factors have led it to prefer to raise funding in the social investment space.  Yet some investors, especially foundations, seem reluctant because XYZ “could raise conventional finance”.  Their implied preference, therefore, is to conserve capital for those who lack this conventional market access.

On the surface this seems reasonable.  By concentrating social investment on those firms which cannot access conventional markets, foundations ensure a flow to new firms which are not conventionally backable.  Their scarce capital available for social investment is thus allocated to those firms which have no other choice.

But what are the implications of this?  It means that foundations will, by definition, back the less successful ventures and will likely suffer worse investment performance as a result (furthering the over-investment in the new and cool referred to above).  I contend that this will also put them off committing greater resources to social investment as their Trustees will have relatively depressing track records to assess when considering whether or not to enlarge their commitments.  It is no wonder, therefore, that with the notable but single exception of Panahpur, there is no UK foundation wholly committed to social investment.

What social investment does take place at UK foundations is done, for the most part, with specifically dedicated smaller pools run away from their main funds.  Esmee Fairbairn and Lankelly Chase have been leaders in this regard.  But the mainstream endowment funds of charitable foundations are still almost exclusively invested in conventional financial instruments.  Thus they are unlikely to invest in XYZ, because it is a new type of company, even though it might offer the same returns as conventional financial assets AND helps fulfil the charitable objects of the foundation.

Where should successful social enterprises like XYZ go for funding?  There is interest amongst conventional investors, but what are the long term consequences of forcing successful social enterprises out of the social investment market in this way?  Do we not run the risk that their objectives migrate in a non-social direction as they are jettisoned out of the social investment sector?

Would we not be better off to keep them in the sector and use these higher quality investment opportunities to attract larger pools of conventional capital?  In this way we could bring more money into the social investment sector, which puts a priority on social impact.  Surely this is preferable to casting out those we wish to establish as benchmarks, or credentials for our emergent sector.

First Published in Third Sector in June 2016.