When Muhammad Yunus founded the Grameen Bank in 1983, he institutionalised a new category of lending through microfinance, lending small amounts to the poor in Bangladesh. Lenders were not subjected to credit checks and had no collateral. Some could not even read or write.
There were those who thought he was crazy, but of the 7.8 million people who have since borrowed from the bank, 97.94% have repaid their debts in full. Yunus has helped lift millions of people out of poverty who were previously excluded from mainstream credit, after pioneering an industry on the basis that poor people can, and do, repay loans.
Nigel Kershaw, CEO of Big Issue Invest, the financial arm of The Big Issue that funds social enterprises, is now embarking on a similar mission to that of the microcredit pioneers. Through the launch of a £10m fund for social entrepreneurs, he hopes to create a new category of social investment. The fund offers investors a real, if modest, financial return from social enterprise, although the underlying mission is the same – dismantling poverty.
It is different to other social investment funds, Kershaw says, which are either purely charitable or profit maximising using negative social screens, such as not investing in tobacco or arms, or positive screens like investing in certain postcodes.
“There’s nothing wrong with that, but what we’ve done is taken a pioneering approach, where we’re going to give a financial and social return, and you say it in one breath. It’s not what some people call a blended return. It’s not about dilution. It is a 10-year, fixed-ended fund, which means we’re going to give the money back to our investors, with a modest return, and we’re going to deliver social returns,” he says.
A dual return
Like microcredit before it, Kershaw sees this as a new asset class, which is neither asking for investment to maximise profit or purely philanthropic. “We’ve named this asset class INVERSE: Investment return in social enterprise,” he says. “We’re not taking the toxic thinking into the market. We’re not taking philanthropic thinking into the sector. We’re combining the two together to create something new.”
Kershaw has enlisted the help of Sarah Forster, who previously worked at the World Bank and played a key role in growing the microfinance industry in post-conflict countries such as Bosnia, to help launch the fund, which he believes has turned a corner in social investment.
“When [microfinance] started, a lot of people said, ‘how can you lend money to the poor?’” Kershaw says. “It is now one of the fastest growing areas in the finance industry. Who would have thought so, 15 years ago? So we took a lot of learning from Sarah, because she was saying let’s look for the pioneers. Let’s look for the people who want to grow an asset class, grow a marketplace, and come with us.”
The fund requires those who are attracted by this unique return on their investment – both social and financial. It’s this same unique duality that has helped drive sales of The Big Issue magazine, founded by John Bird and Gordon Roddick in 1991. Kershaw joined as operations manager in 1995, and is now chairman.
The street paper is a paradigm of social enterprise – business being used to bring about social change. “A lot of people ask us, do people buy The Big Issue because of the editorial or do people buy it out of an act of charity?” Kershaw says. The answer is both.
“At it’s best there is something very new that is indistinguishable, that you have a great read while feeling good because you know that you’ve created social change and transformation. That’s very much like the fund for an investor. If you invest in this, it’s not about an either / or, it’s a financial and social return.”
The target for the first fund is £10m, and he is hoping to launch others off the back of its success. He is aiming to close the first round, at £3m, in the second quarter of this year, while the first dividends are expected to be paid to investors on the fourth anniversary of its launch. He is aiming to give investors a return of between 3-5%.
“The fundraising really seems to be hitting a nerve at the moment,” Kershaw says. Although investments are expected to range from £100,000 to £500,000, grantmaking organisation the Esmee Fairbairn Foundation has kicked things off with £750,000 as a founding investor. Kershaw is now in “advanced negotiations” with a number of institutions for sums at around that level and above.
A number of large organisations have also offered their services to Kershaw and his team on a pro bono basis, including law firm Nabarro, HSBC and business advisory firm PricewaterhouseCoopers, to help structure the fund. Ron Sheldon, MD of global private equity firm Advent International, is chair of the investment committee, and potential investors are eager to be active, through mentoring investee companies or sitting on the board.
The question of scale
One of the fund’s primary objectives is to bridge a gap in the market for social enterprise financing – where businesses often struggle to access sufficient capital for growth. Toby Eccles, development director of Social Finance, which is looking to find new models and opportunities for social investors, says the growth of social enterprises has historically been restricted by the way they are funded, which prevents them from being a real force for change.
“When you look at the way that social organisations are financed, you find that they are typically under-capitalised,” he says. “We ask the question, where’s a social organisation that’s grown from zero to huge in a relatively short space of time? And the answer is there isn’t one.”
According to Kershaw, the fund represents a maturing of the sector, by investing in a number of different ways. Big Issue Invest has been providing loans to social enterprises since 2003, but the loan-based model has taken a hammering from the recent spate of interest rate cuts. The fund will see Big Issue Invest offer equity investments for the first time.
“Big Issue Invest currently provides loans to social enterprises, but these are targeted at those with a track record and the cashflow to repay a loan,” he says. “It cannot provide longer term capital for growth. The investment fund is intended to help address this market gap by providing long-term funding that helps social enterprises achieve greater scale, sustainability and a bigger impact.”
By using a range of investment methods, ranging from loans and cashflow loans, to mezzanine, quasi-equity and pure equity finance, investee companies will have access to finance models that can offer real scale. They are even looking at buying private companies and backing them into social enterprises. “What really is unique about the social enterprise investment fund, is that it’s acting as an embryonic social investment bank,” he says. “The idea is that if you want to invest in social enterprise, you would come to us, because we will invest in a whole range of ways.”