The value of benchmark transactions

What will finally get this social investment industry going?  Many observers seem to believe that the Social Investment Wholesale Bank (SIWB) will help.  In part, they argue that “an institution of scale” is necessary.  Why this is required eludes me.  Also, in the aftermath of the great financial meltdown, I think the arguments against scale are quite compelling.

I have a slightly different view.  What makes markets are deals, NOT structures, and transactions NOT entities.  This is especially true if the entities are just heavily Government subsidised intermediaries.  Fortunately, there are many new deals which either have happened or are happening which will become benchmark transactions and lead by example in creating the social investment space.

One in which we at Catalyst have played a role as advisor is the expected £5 million transaction for the HCT Group.  In this deal, cornerstoned by Bridges Ventures, investors are to purchase fixed rate loans and “social loans” (where interest is tied to HCT’s turnover growth).  The size of HCT within the social enterprise sector, and its long and successful track record, make this a deal other investors may key off of.

Not long before the largest and perhaps most important deal in the sector was announced, the EU 102 million financing for Triodos Bank.  Done at a time when many of the largest banks were relying on government infusions, this Dutch ethical bank was able to announce a transaction that was funded purely by investors without the need for a state subsidy, which is being used to fund Triodos’ rapidly expanding loan book.

In the coming weeks Social Finance will at long last formally launch its widely heralded “Social Impact Bond”, where the Treasury will pay to the investors some of its own savings from the reduction in prison reoffending rates expected to be caused by the programmes undertaken within the scope of the bond.  This is an important and breakthrough benchmark instrument because it connects returns and social benefits—in this case in the form of Governmental cost savings.

Finally, later this year, the Ethical Property Company will raise several million in its sixth financing from the markets (one of which was in Europe to Belgian investors).  The fact that the firm (I must disclose that I am a Non-Executive Director) has been able to routinely tap the market for capital over the past ten years sets a standard that other firms issuing, or thinking of issuing ethical shares, may hope to aspire to.

Such deals are invaluable for the sector.  Others considering similar issues may copy these formulae.  In fact, these four deals are not themselves unique but build on the work of others.  What makes these important is their size and scope within the sector.  That they have all occurred within a year of each other is a great sign of hope.

First Published in Third Sector in March 2014.