The social investment market has grown by 22 per cent in a year to £202m, with secured loans making up 90 per cent of the market by value, according to a report released today.

Growing the Social Investment Market: The Landscape and Economic Impact, analysed social investment intermediaries activity in the market and social ventures who have received social investment.

It found that in 2011/12, the UK social investment market grew by 22 per cent from £165m in 2010/11 to £202m through 765 deals.

However, the deals were concentrated within thirteen organisations, accounting for 97 per cent of the market by value.

Secured lending is the dominant type of finance by market value, growing from 84 per cent in 2010/11 to 90 per cent in 2011/12 (£182m in total). In terms of volume it accounted for 59 per cent of the market.

Whereas unsecured lending has almost halved in value since 2010/11 from 11 per cent to 5 per cent of the market this year (just over £10m). In terms of volume it accounted for 32 per cent of the market. 

The average interest rates charged on secured loans is 7.4 per cent, while it is 8.4 per cent for unsecured loans. The report calls the similarity of rates of return for secured and unsecured loans “puzzling” and “contradictory.”

Lack of high-risk social investment

Quasi-equity and equity-based investments account for less than 3 per cent of the total social investment market by value in 2011/12 down from 5 per cent of the market in 2010/11.

Quasi-equity investments recorded the largest drop: from 3 per cent of the market in 2010/11 to just over 0.2 per cent of the market in 2011/12.

The report warns that an absence of sufficient high risk unsecured social investment suggest grants are playing this role, possibly unintentionally and without an investment mindset.

“It is therefore important to investigate the way in which grants can be best used to help bridge this finance gap, for the growth of social ventures, without creating artificial dependency,” says the report.

It continues that with the exception of secured debt, social ventures may remain unable to access the right type of finance for their organisation and risk their development.

Social investment intermediaries noted the lack of attractive social ventures to invest in and the current high transaction costs of deals.

Some two thirds of social investment intermediaries said they could meet less than half of expressed demand for social investment, says the report.

Big Society Capital: not enough builder finance

The issue of lack of high-risk unsecured social investment, typically sought by start-ups and smaller organisations, was also identified last week at an event organised by Tomorrow’s People and CIC Can Cook to launch the report Can Social Finance Meet Social Need.

Matt Robinson, director of strategy and market development, at Big Society Capital, said there was not enough builder finance in the social investment market: “Rhetoric is running ahead of reality,” he said. “Big Society Capital is guilty of this. I agree the tone and culture of the social investment industry has to be a right mix between finance and social. We are not there at the moment.”

He suggested a solution could be a blend of grant and investment capital to create convertible grants which converts to repayable capital when the business could afford it. “We are looking at models with the Big Lottery Fund on this,” he said.

He also said Big Society Capital could move some of its capital into grant funding, but said this was not straighforward. “We’d need agreeement from the Big Society Capital trust, the Merlin banks and government.”

But he added that there was also a fundamental question about tapping into deeper pools of capital. "Institutional and private investors want their money back," he said. "Sustainability is important."

The report Can Social Finance Meet Social Need argues that currently there is no provision in the social investment market for small early stage social enterprises and calls on Big Society Capital to think more creatively about the role they can play in this area.

Growing the Social Investment Market: The Landscape and Economic Impact, authored by ICF GHK in association with BMG Research, was jointly commissioned by the City of London Corporation, Big Lottery Fund, Big Society Capital, and Her Majesty’s government.