Social enterprises — companies which hope to have a social impact and at the same time make a profit — are becoming a new asset class for pioneer investors who are more ethically-minded, especially after the financial crisis.
"It is a golden opportunity to clean up the (financial) system and become more responsible,” Krishna Gopala, former senior executive in Philips Electronics and an active social entrepreneur, told CNBC.com.
But this type of investment is not for everyone, as businesses are driven by social and environmental objectives. They are not vehicles for building personal wealth because the bulk of their profits are reinvested into furthering social aims.
In the UK, there are more than 55,000 social enterprises, generating a turnover in excess of £27 billion ($44.8 billion) a year and contributing more than £8 billion ($13.2 billion) to annual GDP.
“It is not about investing in maximization of profit. It really is a mission-related investment where you can be achieving measured social impact and financial return,” said Nigel Kershaw, CEO of Big Issue Invest.
This is a subsidiary of The Big Issue, a social enterprise that began a magazine which offers homeless and vulnerably housed people the opportunity to earn a legitimate income.
Big Issue Invest is a specialized provider of finance for social enterprises and trading arms of charities, and any dividends made by the group are paid to The Big Issue.
As of November 15 2009, Big Issue Invest lent over £6 million ($10 million) through 32 loans and quasi-equity investments to 29 social enterprises. To date, Big Issue invest has experienced no write-offs.
People who wish to maintain some sort of control or participation in the development of the activity to which they are subscribing invest in these kind of projects, explains James Bevan, chief investment officer at CCLA Investment Management, a UK fund manager who manages cash and investments for charities.
Such funding can be seen in a social enterprise like MEND, an organization sprung from its research on child obesity, which is now active in creating training programs implemented in some of the world’s top countries where the problem is most pervasive.
When it began, MEND received funding from The Big Lottery and Sainsburys — an amount these businesses “prescribe” to be used in a particular way.
The nature of social investing is equivalent or similar to private equity where there is relative illiquidity and relatively long-term time horizons associated with the provision of capital.
This makes social investing primarily deal-driven in that the opportunities tend to be associated with the identification of specific projects that match the investor’s own ideas, concerns and expectations of what social investing should involve, according to Bevan.
There are two groupings who engage in social enterprise: social entrepreneurs and philanthropists, who are typically wealthy individuals, many of whom have been successful in business and believe they can contribute entrepreneurial skills and talent or for whom social payback is a key part of their entire activity.
Social enterprises can show investors or companies genuine acts being carried out to benefit society and at the same time enhance the investor or company’s branding in playing a key role in that public good, Gopala pointed out.
Promise of Return
There are funds that do collective investment schemes like, like CCLA Investment Management, but not many funds that specialize in social enterprise investing.
Big Issue Invest is launching the first social investment fund of its kind in the UK where it will target high-growth social enterprises with the potential to provide both financial and social returns to investors.
The fund is structured to take in straight investment capital, mission-related investments and charitable contributions. “What is going to happen with the asset class is that it is going to be a piece of someone’s portfolio,” Kershaw said.
With the promise of a minimum 5 percent annual net return on capital, investors will be locked into the £10 million fund for 10 years.
The fund gives no “quick-term fixes,” Kershaw stated. Investors must take “a longer-term view, a more sustainable approach,” he added.
For many who want to endeavor in social investing, it is key for them to know what their money will be used for.
Since there is such limited information and statistics on social investment that can provide hard data and crisp analysis on the state of play of the asset class, Big Issue Invest’s fund will provide transparency to its investors through a Social Rating System.
This system will assess social performance at all stages of the investment process and report on social impact.
Time to Shine or Flounder
The problems that have beset the social investing arena in the past have included lack of discipline, lack of focus and a financial irresponsible allocation of resources.
“In a social enterprise, the basic intent is, from a business standpoint, to be profitable because without being profitable, you cannot sustain the business,” Gopala, chairman of the board at social enterprise MEND, and former chief executive of Cafedirect, told CNBC.com.
Social enterprises may “sometimes focus excessively on doing good” and the business side is forsaken, Gopala said. “It’s pure passion at play without realism at hand... You need someone to make the pennies without sacrificing the social cause,” he added.
It is time for social enterprises to shine or flounder, Kershaw said.
“We’re finding a whole load of start-ups happening and we’re also finding that the enterprise is starting to scale,” he said. “It can get larger.”
Indeed MEND, which started as a child-obesity focused business in the UK, has already expanded to Australia and New Zealand, where it got government backing, and the U.S.
To move “to the next level,” MEND is weighing up the benefits of private placement, where investors give you finance in return for equity the company deems is fair; versus an IPO, Gopala said.
“An investor has the unique advantage when he invests in a social enterprise like MEND: He gets a capital return from the money he invested in MEND... But what he gets balancing that is infinitely good karma for the good things that MEND ends up doing,” he added.