Anatomy of a deal: the five core principles of a successful social investment

Social investment is an alluring concept but difficult to do in practice. So what are the key factors that social enterprises and charities need to have in place to secure an investment?

On 23 November, Numbers for Good brought together three social enterprises and three investors who had successfully completed worked on three very different deals. We heard from:

  • Mark Grant, Chief Executive, Action Homeless and Peter Hughes, Charity Bank who discussed a £400,000 investment (with an in principal commitment for a further £200,000) to help Action Homeless buy empty properties to provide safe accommodation for homeless people in Leicester (with the support of Numbers for Good via Big Potential)
  • David Holmes CBE, Family Action and Peter Morris, Social and Sustainable Capital (SASC) to discuss a £1m unsecured loan to deliver an outcomes-focused contract supporting teenagers
  • Sam Conniff, Livity and Lucy Inmonger, Impact Ventures UK (IVUK) who discussed a £1.5m equity investment Livity raised to help grow their social business youth marketing agency.

The scale, social impact and legal set up of each organisation was very different, but despite this, there were some striking similarities between all of the investments.

1. Track record and operational excellence

Each organisation had been embedded in their field for many years. Plucky upstart Livity was the youngest organisation represented at the event, running since 2001. By contrast, Family Action was founded in 1869 and measures its existence in decades not years. All three organisations deeply understood the social impact of their work, what they were good at and what they were not, what worked and what didn’t. This experience is hugely reassuring to investors who know they are working with organisations who intimately understand their work and are good at what they do.

Long-standing existence alone is not enough to secure an investment however. Investors also need to see the proof of an effective operational structure. Effective and well organised operations, a high standard of financial literacy, competent boards and commercial astuteness were all considered essential by all in attendance. In short, social investors seek excellence in their portfolio of investees, and Action Homeless, Family Action and Livity were able to demonstrate these qualities throughout the due diligence process.

Due diligence can be daunting, but as Sam Conniff pointed out, the experience is a ‘breath of fresh air’ giving organisations the incentive and opportunity to improve at what they do and weed out bad practices.

2. Social impact and profit being ‘lock step’

This phrase was used by Lucy Inmonger and it’s a key consideration for all IVUK deals. Impact and profit being in lock-step means that the commercial success of the organisation is directly aligned to the social impact it creates.

In Livity’s case the more business they win, the more young people they work with and the more young people they work with the better the quality of their client work. This also applies to SASC’s investment into Family Action, where the more teenagers Family Action successfully assists, the higher the financial return to investors.

3. People matter

Investors spend a lot of time thinking about people. Does the leadership team have the right skills to grow their organisation? Are they committed to the business and do they have the resilience to persevere when times are hard? Does this resilience permeate throughout the entire organisation? It was evident in all the deals dissected that the investors had taken considerable time and effort to evaluate the credibility, character and commitment of the team responsible for making the organisation a success.

These questions were not just asked by the investors, but by the investees too. Both Action Homeless and Family Action carried out thorough selection processes to determine the right investor for them, while the founders of Livity began profiling Impact Ventures UK years before deciding to seek investment in order to scale. It was not because Charity Bank offered the cheapest deal that convinced Action Homeless to choose them, what mattered was Peter Hughes’s demonstrable experience in social housing, his empathy with the aims and objectives of Action Homeless and the relationship he and Mark built over time.

4. Trust

The experiences of all our panelists made clear that social investment is about partnerships, not financial transactions. Underpinning great partnerships is mutual trust, and this factor resonated most strongly with those in attendance at the event. Each investor/investee pairing clearly shared a strong rapport, similar values and a shared vision for the purpose of each investment. While trust was the most important factor, it was also the most intangible. Often decisions about trust are unscientific. Compiling and assessing skills matrixes is all well and good, but these don’t indicate how individuals and organisations behave in the real world. For better or worse, instinct and relationship building are the best method for assessing character.

5. It takes time

Building trust and relationships, demonstrating expertise and completing sometimes lengthy due diligence processes all take time. When another partner is involved, for instance the commissioners of the Family Action ‘Safe Haven’ programme, even more time is often required. All of the investees prepared thoroughly for their investment raise and chose a deal that best matched their needs.. While all the investments solved a particular problem, Family Action, Action Homeless and Livity would have continued to be successful organisations with or without the investments. This gave them the space to choose an investor on their terms.

But not all deals are the same.

Although the core principles of investment were the same, each organisation had very different answers to the question ‘What type of investment is right for me?’ What’s appropriate for a charity buying property is very different to that for a privately-owned organisation seeking to grow, something we will unpick in future blogs and events.

If you are seeking social investment, or even just thinking that it could be relevant to your organisation and want to know more, the Numbers for Good team would be delighted to help. Tweet, call or email us on to start the conversation.


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