Create a tradeable market for charity ‘debt instruments’, peers told

14 Apr 2016 News

A market should be created to allow investors to buy and sell charity "debt instruments", the chief finance officer of transport charity HCT told a parliamentary group heard yesterday.

Credit: Fergus Burnett

A market should be created to allow investors to buy and sell charity "debt instruments", the chief finance officer of transport charity HCT told a parliamentary group heard yesterday.

John Smart was speaking at the All Party Parliamentary Group on Charities and Volunteering, organised by NCVO, which met yesterday to talk about social investment.

Smart said that HCT had raised several millions of investment using a "social loan".

This is a debt - one of a type known as "quasi-equity", which had similar characteristics to share capital, because repayments increase as the charity grows in size.

He said that HCT had increased its level of investment, and it became clear that some investors wanted to stick with them, some wanted to come in, and others wanted to leave.

But the legal cost of closing down one set of loans, and writing terms for six or seven new lenders were over £500,000 for HCT. Smart ackowledged that this figure is particularly high, and that it could have been slightly reduced by doing some of it in-house.

Smart said that HCT could “put that £500,000 to far better use in delivering social impact, rather than just paying legal and professional advisers”.

Smart said the current rules make it hard for HCT to compete with commercial operators which can use equity - stocks and shares - to grow their business easily.

Smart said that because charities cannot raise equity, the charity has to rely on loans and quasi-equity to raise funds. Smart said that HCT “considers its social loans to be as close to equity as they could legally get them, without them actually being equity”.

He said charities would be more able to compete if social loans could be traded like equity and recorded like equity on balance sheets. 

He called for the creation of a “tradeable market for these kind of debt instruments”, which he said would make life “a lot simpler, a lot quicker, and a lot cheaper for social enterprises”.

Smart said HCT's balance sheet would look better if its “quasi-equity” could be reclassified as equity. He said this would allow the charity to borrow far more.

Smart said that “he wasn’t going to miss the opportunity to tell a group of legislators how they could improve social finance”.

He said it has taken HCT about two years to get “investment ready”, while its loans are only five years long – meaning it takes a big chunk of its time taken out in just getting investments done. He said that if it could sell equity, it would not have this sort of restriction.

Smart said that one of the key take-aways for HCT on social investment is “that we’ve used it to scale our business, but also to scale the impact we’ve been able to deliver”. He said social enterprise is a “vital part of the UK economy, and anything we can do to make it better should be done”.

Politicians cause confusion around social investment

Other speakers included Geetha Rabindrakumar, social sector leader at Big Society Capital; Seb Elsworth, chief executive of the Access Foundation, and David Floyd, managing director of Social Spider CIC. 

David Floyd also told the APPG that politicians are the cause of a lot of the confusion and feelings of failure around social investment.

He said: “Unfortunately, while they may be operating with the best of intentions, politicians are the single biggest source of misinformation about the social investment market that you can possible find”.

He said that that actually creates difficulties for some organisations to try and understand how the market works.
He said that the “simplistic messages put out by politicians tend to be the ones that have the most cut through in the national media”.  

Hilary Armstrong from the House of Lords told the APPG that organisations outside of London are missing out on discussions around social investment. 

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