Increasing capital flows into CICs, and how best to go about that, is undoubtedly one of the largest challenges facing CICs. Access to secure and sustainable funding, whilst a general challenge to all small business, can prove especially tricky for CICs. Anecdotal evidence suggest both CLS and CLG suffer from systemic awareness issues when trying to access funding, (indeed trying to do anything!) and it will be interesting to see what findings come out of the questionnaire.
Specific issues such as exit strategy, lack of investor awareness and the dividend cap create further challenges that require creative thinking. We think it’s important to challenge the (sometimes unduly negative and inaccurate) status quo that is the current opinion on investing in CICs. It’s interesting to note that research indicates investment in social enterprises is in fact, likely to be less risky than regular small business investment.
Concepts such as patient capital, debt with equity characteristics and quasi equity may sound like science fiction to some, but in practice they’re useful everyday tools that CICs can use to attract investment. Whilst it is true that some of the levers available to us can seem very complicated, we want to provide online tools and relevant resources to demystify some of the technical issues and improve access.
CIC Association see Community Interest Tax Relief (CITR) as a crucial tool in maintaining the principles of the asset lock, whilst attracting more funding into CICs. We propose partnering with a CDFI or CDFIs to develop a pilot CIC specific portfolio fund, attracting funds from private and institutional investors. Creating a pooled fund would create greater diversity and reduce investor risk. This fund could be equity or preferably loan based (so as to include access for CLGs), attracting CITR , which we see as a useful counterweight to the negative impact the dividend cap can be perceived to have on investor engagement. I’ve had initial discussions with the CDFA, and two CDFIs, TSELF and GLE, to discuss the various technical issues. There doesn’t seem to be any fundamental reason why we can’t achieve it, the recent BofE base rate reductions have actually increased its viability. FSA authorisation, developing a compliant prospectus and communicating the opportunity are all that stand in the way of tapping into a new source of funds for the sector.
Patient capital models such as the Adventure Capital Fund are a great source of confidence and proof it can work. It’s been a great success for all parties involved, most notably the investee community organisations. In the two years after being offered funding, they more than doubled trading income and increased capital assets by nearly 400%.
One important finding from the ACF was how fragile some of the investee organisations were, and this seems to mirror a general consensus that there is still a lot of work to do in preparing social enterprise for investment. They now phase their development in two stages, pre- development and implementation phase. Getting expert advice and training to develop the skills to successfully transition from great ideas to sustainable social enterprise has played a key role in ensuring the success of the fund, and we’ll be looking closely at how they have tailored the support for different sized organisations, and feeding best practice back to CICs.
CICs can also potentially qualify for the five separate Enterprise Investment Scheme (EIS) tax reliefs, and we hope to promote better understanding of how this can secure more investment into CICs. Whilst there’s plenty of reasons you might not qualify, it will be very relevant to some. One relief allows an individual investor to offset their income tax liability by 20% of the total amount invested (subject to terms and conditions), another interesting example is the Total Loss relief, which potentially comes into play if the shares become worthless. Put very simply, it can reduce the investor’s exposure to 48p in the £1 of the original investment, (assuming a higher rate tax payer) if the loss is offset against income tax. In the world of high risk social enterprise start ups, demystifying the process of structuring such an investment could provide a fantastic gateway to more private investor involvement.
In October I met with the EIS Association, and briefly discussed the qualifying issues with John Halliday, technical consultant at HMRC. Whilst confirming CICs were treated no differently to ordinary SMEs, he agreed there was a lot of work still to be done to improve the access to relevant and timely information. I certainly don’t think building the funding infrastructure will happen overnight, but most of us are in it for the long haul anyway and these types of instruments could well come in handy for CICs as they progress through their own individual development cycles.
There’s strong evidence that investors are ready. A recent report by Eurosif in Brussels showed that in the two years ending 31st Dec 2007, socially responsible investment (SRI) funds invested in Europe nearly doubled to 2.7 trillion euro! Oh baby! Bring it on! CICs have a unique position in the social enterprise sector, in that we already have our social outcomes scrutineered in our annual community interest company report. We think it’s a perfect tool to express (SROI) social return on investment and could attract the interest of fund managers from a number of leading institutions and high net worth private investors alike. A lot of work is being done on SROI within social enterprise at the moment and we feel CICs can bring a lot to the table.
It’s early days for sure, and capturing the public imagination will undoubtedly require some big showcase ideas to stick us on the radar. A lot of CICs are start ups and require a completely different type of funding, but conversions could be a huge growth area. One idea to hit my inbox this week was for CICs to be the preferred legislation for any company approved to commission services to patients, allaying some of the fears of NHS privatisation. Any surplus generated from the contracts would be ploughed back into the community, and the annual interest company report (CIC34) could be used to quantify a social return on investment. How many people would invest a few quid in that?
Patricia Hewitt recently said there were tough decisions ahead for Primary Care Trusts, who manage 80% of the NHS budget in England, and senior health officials are warning the NHS faces its biggest financial challenges for more than a decade. Using CICs as a way to attract community investment in local services could be an idea worthy of debate.
All crazy stuff some may say, but Salford Health Matters CIC, founded by local doctors and nurses is already bidding to take over a number of services currently offered by Salford Primary Care Trust, and its not a huge leap of the imagination to suppose the local community might well be interested in supporting such a venture.
Whatever else, its certainly a big idea!
On the other end of the scale, us little ‘uns require our own special tlc. Growth should be seen from a wider perspective than achieving investment readiness, although it obviously forms a key part of what is required for a start up to progress into a sustainable business model. Existing support organisations such as Business Link have some excellent services, and raising awareness of what works is a quick win for everyone concerned. Law Works is a prime example of a great source of help, they provide access to pro-bono legal advice that can be crucial to getting things right.
When I first started I naively thought I would just find somewhere to plug in, instead of getting bogged down, which can happen if your not very, very careful. Sharing best practice through practitioner case studies will help us learn from those already in the field, and rather than just focussing on showcasing our positive social outcomes, we also want case studies that are relevant for practitioners, detailing experiences of the business lifecycle, such as applying for funding and the mistakes that can be easily avoided.