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In The Age Of Austerity, Investors Can Fill The Gap

Daniel Brewer, Managing Director Resonance discusses how the launch of social investment tax relief is changing the face of social investment
Across Europe the end of the summer holidays is almost upon us, but there seems no end in sight to the austerity and welfare cuts that most governments continue to push through across the continent.  

In the UK we have seen cuts of around 20% in local government spending over the last five years[1] and this has affected the provision of numerous social care services. The hope of both the UK and other European governments is that investors, large and small, will be able to fill the gaps that are created and I believe that a new fund, launched this month, is a fitting response to this challenge.
 

Harnessing new government tax relief for social investment

In last year’s budget the UK Chancellor announced generous tax breaks for those willing to invest in social enterprises (i.e. non-profit making businesses that tackle social problems). And last month a new fund developed by Resonance and sponsored by UBS Wealth Management became the first fund in the UK to harness this tax relief at scale.

The £5m Bristol SITR fund is simultaneously able to drive down the cost of access to capital for social enterprises (it offers loans of up to £275,000 at interest rates between 5-9%, unsecured); and also provides risk adjusted returns for philanthropic investors. The fund has a targeted post-tax Internal Rate of Return of 8% and its investors receive 30% of their return upfront in the form of tax relief.
 

How do we know SITR investment works?

Prior to launch of the fund in August, Resonance conducted an 18-month pilot programme, which delivered great results. This included a £70,000 SITR investment deal with local social enterprise FareShare South West, which diverts food waste to vulnerable people. The investment enabled FareShare to grow its catering arm to scale and expand its community food membership base – creating numerous training and employment opportunities for vulnerable people in the process. On top of this the anticipated IRR on the investment in FareShare Southwest is 14.5% including SITR benefits[2]. 
 

Scaling up SITR funding

The question for many responsible investors is can SITR funds get to a larger scale?

At the moment investment in SITR funds is limited to individuals (with at least £10,000 to invest). However, over the next two to three years we plan to develop upwards of £30m in SITR funds for other cities across the UK. It is hoped that through developing an SITR fund market, that delivers social returns through investment, the government will expand SITR rules to allow much larger investments to be made.

Expansion however, is dependent on the removal of an EU cap which limits SITR investment to c. £275,000 for each individual investee organisation – often well below the level of funding they actually require.  Removing the EU cap would allow bigger deals from larger funds, enabling social enterprises to raise more investment and further expand their impacts.  It is understood that if clearance is given, the cap could be raised to nearly 20 times current levels and there is considerable interest among EU member states about following suit.

In fact, contrary to government hopes, Social Investment can never substitute for public sector revenue cuts but it can accelerate new models of business that help manage the transition to an economy that mixes genuine trading of goods and services with the delivery of social impact that would otherwise need to be picked up by government.  SITR as with other tax reliefs are focused on growing SMEs but the increasing capacity and track record of social enterprises occasionally unlocks an institutional grade investment to take a model to scale.  Our £60m investment partnership with St Mungo’s Broadway is a perfect example of how a solution has taken root in London and is now poised to roll out across the country.  That would truly open the door for mainstream investors and governments to look at this type of fund as a trailblazing way for investors to help find opportunity in the impacts of austerity.

[1] Good returns for investors and society, FT money, 8 August 2015

[2] Social Investment Fund for Bristol

Daniel Brewer

Chief Executive Officer

Resonance Limited is a company registered in England and Wales no. 04418625

Resonance Impact Investment Limited, a subsidiary of Resonance Limited, is authorized and regulated by the Financial Conduct Authority (FCA). Firm number 588462.

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