Last week we launched our first major piece of research entitled 'Investor Perspectives on Social Enterprise  Financing'. It was a great piece of work and contains much the sector as a whole can work with. We dragged in report author, Katie Hill, to tell us more.

Is there a real interest among institutional investors?

Positive news comes in the fact that there is interest from institutional investors. Around 96% of all those I interviewed said they were interested in this space. There is demand from the client side and there are signs that they have spotted it. RBS, for example, has started training its staff in financing the needs of social entrepreneurs. However, much of this client demand goes unidentified - it would be great to capture that interest and see that convert into investment action.

What's holding it back?

Investors can  be very  risk averse at the moment, when considering this type of investment. Although they are very interested in the space, there is a nervousness about being the first to put their head above the parapet and being seen as the first to engage in what is perceived as high risk investment. And if you are investing other people's money, not your own, you do have to be careful about what you do with that 'fiduciary duty'. However, there is still so much that can be done which is consistent with that - infact, investing in the future of the people and the planet is possibly the ultimate responsible investment strategy.

What could spark social investment?

There is a need to raise the level of expected financial returns to nearer market rate. Of course, actual market rates of return may not be that much lower than in other investment sectors. But the difference at the moment in the social sector is that the expectations are lower. If you know in advance you are unlikely to get more than 4%, say, then you might be more tempted to invest in something that expects 7%, even though in actual fact, it only achieves 3%.

Investors  prefer the prospect of stable investment options. The idea of high risk and possibly low return investment is a concern. There is a common argument that a social business can provide greater stability for investment in uncertain markets. If that's the case,  investors are looking for data which proves it. Were actual rates of return closer to expected ones? That's important. A reliable 3% could be, in the long run, much more attractive than a spasmodic 10%. Does this sector move with the market trends or is it counter market? That would be powerful information to have when presenting to an investor the need to develop a portfolio with 'diversified risk'. It's crucial we start to build up the track record investors are looking for.   

How are investors regarding social impact?

I think this is a real bugbear for investors. They want to be able to see effectively reported social impact information presented in a way in which they can understand. There are some organisations which have provided extremely detailed and complex social impact analysis documents, but investors do not have time to read these.

Investors want better analysis, but proportional to the size of the investment itself. Some investors want to make social impact cross comparisons - that's something which is very difficult to achieve. Others want to be sure that impact generated is replicable - so then you have to know how it was created and that it was your action that generated it - not some external fluke. It is tricky, but the best brains in the business are working on it. We suggest holding forums with investors to move this issue forward.

What can social enterprises do?

There are three things social enterprises can do at the moment. The first is to compete with the traditional market as organisations such as HCT Group are doing. Here is a bus company which does its main job as well as any other, but also has a strong social aspect. The second is collaboration with corporate partners - to generate social impact in mainstream corporations in which social enterprises provide the impact while corporates create the market. This is one way to make social impact an important part of mainstream business.

What investors want to see is for social enterprises to know where they fit in with this model.  And social enterprises themselves  also need to know what type of investor they want, because they all look for slightly different things in any investment opportunity. Are they looking for someone to provide working capital or equity? Do  investors want returns in five years or is this about seeking out 'patient capital'? The answer  to these questions will have a massive bearing on who they approach.  

What does the future hold?

We can be upbeat about the level of interest. Entrepreneurs need to focus on their new business model, on the impact it may create and on the type of investor they seek to support their enterprise. No one size fits all, so entrepreneurs need to do the homework required to understand the preferences of investors and to speak their language. Here's how intermediaries can help - by bringing the investors and investees together and interpreting the needs of each side as required.

Investor Perspectives on Social Enterprise Financing was commissioned by City of London Corporation, City Bridge Trust and Big Lottery Fund. You can download a copy of the report here.