LONDON is fast emerging as a global centre for social investing. All of the ingredients are here: a vibrant entrepreneurial culture, a strong ethos of charitable giving and investing for good, a supportive government, and organisations whose aim is to grow the world of social impact investing.
In the last few months, London has hosted the G8 social impact investment task-force, the Global Impact Investing Network, and seen the launch of new accelerator programmes and social investment funds – Goldman Sachs and Morgan Stanley are the latest to enter the market. But while our own impact investment fund has seen a huge demand for risk capital in the last 12 months, to really grow this new market we need to encourage more investors who are prepared to invest across the spectrum of risk.
So far, the government has been a major catalyst for the growth of the sector, and rightly wants to open up the social investment market to new sources of capital. But when the chancellor delivers his Autumn Statement today, we are hoping he gives this market a further boost by revealing details of a new tax relief for social investment. There is a real opportunity to recreate the great success of schemes like the Enterprise Investment Scheme (EIS), and Venture Capital Trusts (VCT). By providing a tax incentive to the investor, these initiatives have supplied over £8.7bn of capital into over 20,000 firms in 20 years.
But a consultation on the tax relief over the summer has led to concerns that the chancellor’s announcement will be akin to baby steps, not a huge leap forward.
Focusing incentives around a tight definition of who qualifies, limiting how much they can raise (possibly only £150,000), and only giving relief for certain risk-based debt investments will limit the impact of this new scheme.
Of course, tax incentives should look to grow the market and not just subsidise the capital that is already in place, and tax incentives should reward risk taking. However, most investment in social enterprise is high risk – investments are made to grow impact, not to make large capital gains, so doesn’t it follow that the incentives need to be pretty broad?
So, what would create more opportunity?
The scheme could mirror the EIS and make £5m the qualifying capital raising limit, and the scheme could also provide tax relief for investments in other instruments like social impact bonds and unsecured debt. Proposals could try to encourage VCT-like investment for individuals into approved funds and make the scope broad. If that encourages the wrong investor behaviour then it can be changed, but why not learn the lessons from existing schemes and really try to grow the social investment market by promoting risk taking?
It will be interesting to see what emerges today. In 20 years’ time, I hope we will look back and say this was the moment that impact investing really took off.
Matt Mead is a partner at Nesta Investment Management.