For social impact investing,...
...often some type of financial subsidy is required to attract capital, according to the UK’s Impact Investing Institute (III) and Big Society Capital (BSC) in a recent report given “long-term market failures” including:
Information Asymmetry – social investments often lack track records
Unpriced positive externalities – social investments should create “social values” not captured in financial returns
High transaction costs – smaller levels of required funding for social investments, but similar levels of due diligence and administration costs as larger impact deals
Lack of collateral – “Many social enterprises … do not have assets of sufficient value to use as collateral due to their average age and size.”
Non-traditional legal structures – “The traditional angel/venture capital route is often not suitable as charities are not legally able to issue equity and raise commercial venture capital.”
BSC / III then studied how the type of subsidy affected the intended impacts of various social impact investments (through case studies, interviews, and other methods). Their findings are interesting – drawing a direct line between how a social impact project is subsidized among three major types – blended capital, guarantees and tax relief - and the “policy goal” (the intended impact) outcomes of the impact investment. They find overall that the subsidy method matters, though in almost all policy goal scenarios blended finance was found to be suitable. For example, if a policy goal of the social impact investment is “growing the local economy in deprived areas”, the study found that blended finance and guarantees are more effective than tax relief. More details and findings are in the attached report. To consider as one evaluates social impact opportunities.