Mainstream charity fund managers have been slow to get involved in social investment. Richard Maitland asks why.

Sarasin & Partners started to review social impact investing in 2012. Since then, only a few niche experts have emerged and proven capable of sourcing and managing investments.

While mainstream asset managers have invested in listed bonds and debt instruments issued by charities, we have yet to see significant resources deployed to source, analyse, invest in and monitor a wider range of unlisted social impact investment opportunities. Some mainstream investments like infrastructure and green energy have been classified as social investments, but given their security and (often subsidised) return profile, they probably shouldn’t be.

We suspect that the reasons for the relatively slow development of the market are:

1. Investment skills: at this relatively early-stage, it is unlikely that mainstream fund management firms have employed individuals capable of sourcing, managing and monitoring the unlisted, one-off, early stage opportunities that make up much of the social impact market.
2. Monitoring skills: reporting on the progress of social impact investments is not just about measuring the financial performance: at least equal time will need to be spent on measuring the social impact and if necessary, explaining the tradeoff between financial and social impacts. Again, this is something that will be “new” to mainstream investment managers and will require additional resources.
3. Scaleability: while the demand for social-impact-investment capital has grown, to date it appears there is more capital seeking investment opportunities than there are investment opportunities seeking capital. The competition among the few social impact investors has arguably driven prices up and returns down. The scale of individual opportunities has mostly been quite small too. If social impact investment is going to become mainstream, then the number of people seeking capital needs to grow, as does the average size of investment sought.
4. Risk: this is still a relatively new and unproven form of helping a charity meet its objectives. There is little long-run, analysable data on whether projects to date have been successful and whether this is better than the traditional approach of making money from conventional investments and using it as grants or funding for not-for-profit operations.

However, over time, we do expect an increasing number of operational charities to seek capital in much the same way as publicly-listed companies. Universities and housing associations have been at the forefront of raising cheap capital, repayable in 30 years or so, through the bond market and private debt financing. With interest rates so low, it is unsurprising that those seeking additional working and investment capital have resorted to borrowing money on a fixed-cost basis, as opposed to raising money where some form of profit participation is expected.

Richard Maitland is head of charities at Sarasin and Partners