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Nesta opens £17.6m impact investment fund

Joe Ludlow, director, Nesta Investment Management
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Nesta opens £17.6m impact investment fund

Finance | Tania Mason | 23 Oct 2012

Innovation charity Nesta has today opened applications to its new £17.6m Impact Investments fund, for projects that will improve the lives of old people, boost the learning and employability of young people, and make local communities better able to sustain themselves.

The fund has already got £17.6m available to invest - £8m each from Nesta and Big Society Capital, plus £1.6m from Omidyar Network – and intends that eventually this sum will grow to £25m as more investors come on board.  Investors are expected to get their initial investment back along with a “modest sum above inflation”, according to Joe Ludlow, the fund’s director (pictured).

But although the fund has not yet reached its target, its managers felt that £17.6m was a substantial enough amount that it could open for applications and begin making investments now.

The aim of the fund is to provide “risk capital” for innovative social ventures that will boost:

  • The health and wellbeing of an ageing population
  • The educations attainment and employability of children and young people; and
  • The sustainability of communities

Projects must be able to demonstrate that they will be sustainable, in that they produce profits, and must commit to rigorous and ongoing evaluation of their impact. “It is not just enough to assess impact up-front,” said Ludlow. “Especially as early-stage innovation might not work in the same way when it is scaled up.”

Not for first-stage projects

The fund is looking to invest in projects that have already shown some promise; where a prototype has already been produced or some customers already secured, and there is some evidence of impact.  It is not suitable, said Ludlow, for ideas still in their very early stages.

He also said that Nesta would look favourably upon projects that utilise technology as a core component of providing the service – for instance by automating processes, speeding up communication, or reducing the cost of delivery.

The minimum investment will be £150,000, but Nesta is hoping that over three or four years the total investment in each project will be more like £1m. Investments can take one of three forms: equity, where the fund buys shares in a social-purpose business; quasi-equity, where the investee organisation cannot issue shares because of its constitution and so provides the fund with a share of revenues in return for the investment; or loans, though Ludlow doubted that many of the applicants would be able to meet the stricter criteria needed for loans.

Alongside the fund, Nesta has launched its Standards of Evidence for Impact Investing, which each investment will be assessed against.

Ludlow said no deals had yet been done, but that Nesta was talking to four or five potential investees already.

Fund to be managed by Nesta subsidiary

The fund will be managed by Nesta Investment Management (NIM), a wholly-owned subsidiary of the Nesta charity. NIM, which has been awarded an eight-year contract to manage the fund, is authorised by the Financial Services Authority to manage and invest money on behalf of Nesta and external investors.

It is the first time Nesta has used this subsidiary to run a fund of this scale.

Ludlow said investors into the fund would not expect to get their capital and interest back before eight years, as the fund will not end before that.  “This is a long-term investment, like venture capital,” he said.

While the fund is not permitted under FSA rules to market itself to the general public, it is aiming to attract the remaining £7.4m from institutions and wealthy individuals with an appetite for investing in a way that provides social as well as financial returns.

Ludlow said the size of the fund would produce a step-change in the UK’s social investment market.

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