1. Template for Mapping Impact Investment Eco-systems: The UK Eco-system Social Impact Investment Task-force established by G8 Update for country representatives Stephen Brien, 10 th January 2014

2. 11 Overview of impact investment Eco-system Each financial transaction has its own ‘signature’ across the many parties Social need Procurement / Commissioning Investors Channels of capital Addressing social need Supply of investment finance Delivery Regulation / Infrastructure / SupportFinance Regulation / Infrastructure Ageing Housing Education Children and Families Healthy Living Employment Criminal Justice Disability ….. Finance Non-profit Delivery Organisation Government investment High Net Worth Individuals Local Funds Traditional Institutions Mass Retail Trusts and Charitable Foundations Corporates Secured Loans Charity Bonds Social Impact Bonds Equity Quasi Equity Unsecured Loans Development Trust Non-profit service providers Cooperative Mutual / Public Service Spin- out Leisure Trust Charitable Service Providers Non-profit (maximising) trading companies Government Funded Service Delivery Government procurement of non-profit delivery Foundation / Charity procurement of social value Trading activities of social organisations Grant-making / giving Government procurement of for-profit delivery e.g. Essex Children in Care Social Impact Bond with Bridges and Social Finance Social Banks CDFIs Fund Managers Tax Advantaged funds Social Investment Intermediaries Social Investment Wholesaler Crowdfunding Platforms

3. 22 Overview of impact investment Eco-system Each financial transaction has its own ‘signature’ across the many parties Social need Procurement / Commissioning Investors Channels of capital Addressing social need Supply of investment finance Delivery Regulation / Infrastructure / SupportFinance Regulation / Infrastructure Ageing Housing Education Children and Families Healthy Living Employment Criminal Justice Disability ….. Finance Non-profit Delivery Organisation Government investment High Net Worth Individuals Local Funds Traditional Institutions Mass Retail Trusts and Charitable Foundations Corporates Secured Loans Charity Bonds Social Impact Bonds Equity Quasi Equity Unsecured Loans Development Trust Non-profit service providers Cooperative Mutual / Public Service Spin- out Leisure Trust Charitable Service Providers Non-profit (maximising) trading companies Government Funded Service Delivery Government procurement of non-profit delivery Foundation / Charity procurement of social value Trading activities of social organisations Grant-making / giving Government procurement of for-profit delivery e.g. Real Lettings Property Fund with Resonance Social Banks CDFIs Fund Managers Tax Advantaged funds Social Investment Intermediaries Social Investment Wholesaler Crowdfunding Platforms

4. 33 Procurement / Commissioning With £250bn of social service delivery funded by government, £150bn could be accessible for impact investment... UK Govt market for Social Impact (current and potential) 13% CAGR Other charitable service provision Other Government Social Delivery 100 Other charitable service provision... Foundations and Charities could also increase impact procurement Note 1: Sources NCVO cited in Barclays Charity Review 2012, The First Billion - BCG Note 2: Social Enterprise annual turnover is £163bn – so assume non Value-sponsorship revenue is primarily trading (need to remove grant revenue)

5. 44 UK Government expenditure 2011-12 (£Bn) 20% of Policing Opex Prisons & Probation Opex Further Education expenditure Service Provision (Not payment admin) Local Authority expenditure (£20bn) Neighbourhoods (£6bn) Localism (£3bn) 75% of General Hospitals GP, community health, mental illness, learning difficulties 60% of State Schools & academies Learning & skills, Early years, Sure start, Children & Families expenditure Assumptions Health Education Communities Work & Pensions Business Justice Home Office Scotland, Wales, NI (Devolved expenditure) Other – non-social (e.g. Defense) Accessible market for UK Impact Investment (Incl Scotland, Wales, N Ireland) “AME” (e.g. welfare, tax credit, debt interest) Capital investment Note 1: Resource DEL in Government Accounts Sources Government Budget Tables for 2011/12 (April 2013) and Guardian Public Spending Chart for 2011/12 Procurement / Commissioning Health, Education and Communities dominate the accessible market Total = £346bn Total = £693bn Total = £150bn Operational Expenditure 1

6. 55 Procurement / Commissioning Approach to defining accessible market – a set of broad assumptions 1.Identify total Government Spending = £694bn in 2011/12 2.Focus on spend that corresponds to operating expenditure (mostly salaries and procurement) = £346bn 3.Select spend in departments with Social purpose (including Scotland, Wales, N. Ireland) = £285bn 4.For each department, identify potential for impact = £150bn –Health: Mostly already categorised in govt accounts as a form of procurement (from Trusts) -75% of General Hospitals (salary and non-capital equipment/supplies) – care and support staff are major cost. -GP, community health, mental illness, learning difficulties –Education: Given some schools are already run by charities, no technical barrier to vast majority being commissioned -60% of Schools & academies -Learning & skills -Early years, Sure start, Children & Families –Communities: Much of its services are about social impact -Local Authority expenditure (£20bn) -Neighbourhoods (£6bn) -Localism (£3bn) –Department of Work and Pensions: expenditure on service provision, but not benefit administration –Department of Business Innovation and Skills: focus on further education budget (vocational training) - clarify –Ministry of Justice: Probation and Prison opex, which are already partly outsourced –Home Office: Assume that 20% of the policing budget could be shaped as social impact For the purpose of this template, we have taken broad assumptions that appear reasonable Clearly important to do it accurately - as impact investment matures this picture will become clearer

7. 66 Procurement / Commissioning Government funding dominates the sector Government Funded Service Delivery Government procurement of non-profit delivery Foundation / Charity procurement of social value Trading activities of non- profit (maximising) organisations Grant-making / giving Government procurement of for-profit delivery Central and Local Govt dominate Sector - ~£250bn p.a. social expenditure (DEL) -E,g, Health, Education & Training, Policing, Prison & Probation, Welfare to work, Communities Upper estimate ~£150bn p.a. accessible to impact contracting Small Scale yet growing share of public spending– was £4.3bn 1 in 2000, £13bn in 2012 – expected to be £25bn by 2016.Govt procurement doubling its share of non-profit sector income (15% -> 30%) More payment by results? – e.g. Troubled Families Social outcomes fund - £20m + BLF £40m to top-up outcome payments for SIBs Currently very small – foundations mostly grant funds, charities mostly self-deliver impact Opportunity for charities with large incomes to engage more with impact (e.g. City Bridge Trust, CIF, G Weston, Save the Children, NSPCC, RNIB, Comic Relief) Social Enterprise Sales (equivalent social impact procurement a small % of this) Purchase of products / services because of social value of delivery (employment, social inclusion, etc.) E.g. Pluss founded by group of Local Authorities (£20m sales– employing people with disabilities and supporting others into paid work) E.g AgeUK offering domiciliary care services to consumers Individuals (£13bn) / Foundations (£3.6bn) / Corporates(£300m) Of 70k social enterprises, 90% applied for some form of Grant funding in 2012 Government, trusts and foundations are targets of 60% of all funding applications, the rest go to high- street banks and specialists Significant scale - £48bn p.a. (80% of all Value Sponsorship) Mostly Fee for Service, some Payment by results – e.g. Work Programme, Elder-care providers New statutory requirements for commissioners to consider social value when awarding contracts Potential mutualisation outsourcing to private and social providers Opportunity for social enterprises to gain share Donors beginning to drive achievement of impact Note 1: Sources NCVO cited in Barclays Charity Review 2012, The First Billion - BCG Backup Opportunity for foundations to increase impact focus

8. 77 Procurement / Commissioning Impact investment has started in the smaller procurement areas addressed by Non-profits Non-profits activity in Government social procurement = £13bn Existing non-profit share of Government procurement Expected CAGR (2012-2016) Source: The First Billion – BCG 2012 Early Adoption of Impact Investment in Crim Justice, Children & Families and Employment

9. 88 Social Need – government contracting with non-profits Growth coming equally from growth of non-profit share and overall contracting growth Other areas include: Climate Change, Social participation, Culture, carer’s services, school development, support services for crime victims Themes 2012 Non- profit contracting Non- profit % of govt contracting Expected CAGR 2012-16 Ageing Personal Care – residential and domiciliary £4.35bn20%13pts Disability Personal Care – for working age and children with disabilities £2.67bn40%16pts Education Special Educational needs, Special Schools School Service, Further Education and skills £2.66bn30%12pts Healthy Living Community Health, Adult mental health, Drug and alcohol treatment £1.43bn12%22pts Housing Niche housing & Homelessness £760m50%27pts Community Enterprises run with ex-public sector assets Transport - HCT provides 12 million passenger trips in the social enterprise bus company every year £760m60%27pts (right to bid) Children and Families Early Year childcare for disadvantaged families, Surestart Looked after children, Troubled families, Supporting young people £630bn10%22pts Employment Employment services for long-term unemployed and young people £188m20%19pts Criminal Justice Reducing reoffending – services in prison and in community £76m6%35pts Financial Inclusion CDFI-type lenders £20m10%10pts Backup

10. 99 Non-profit Delivery Organisations UK Charities and Social enterprises have a wide range of legal and organisational structures, with different abilities to absorb risk capital Organisation type of Social Enterprises Source – Growing the Social Investment Market – GHK 2013 Legal structure of Social Enterprises

11. 10 Non-profit Delivery Organisations UK Charities and Social enterprises have a wide range of corporate structures, with different abilities to absorb risk capital Development Trust Non-profit service providers Cooperative Mutuals: Public Service Spin-out Leisure Trust Charitable Service Providers 1% - engaged in social development/regeneration A mixture of legal structures – but do not take equity 31% - often a limited company Can take unsecured debt and equity-like capital 11% - Often a limited company Can take unsecured debt and equity-like capital 5% -Often Community Interest Company – (in some circumstances can take equity) Public Service Mutuals Growing: 71 established since 2010, Turnover now £1.1bn 1 Half in Health, 33% in Social Care, rest Community and Education - E.g. Plymouth Community Care 6% - often Industrial and Provident Society – can take Equity E.g. GLL (Community Leisure) 32% of Social Delivery - Employment in Charity Sector is 765k Many Large players – e.g. Mencap (£193m turnover), AgeUK (£156m), CRI (£81m) Development of impact model creates a challenge to typical delivery structure – many developing social enterprise arm (e.g. Age UK) – to take finance 90% have turnover <£1m p.a. Capital Requirements expected to grow from £18bn in 2012 to £35bn in 2016 Annual (commercial and social) Investment demand growing from £3.8bn to £7.6bn Shift towards PBR will increase social vs. commercial investment 56% of VCSEs expressing significant interest in social investment Non-profit (maximising) trading companies Represent a large employment and service base – but social impact is derivative of trading rather than procurement by third party. Can take equity E.g Café direct Note 1: Source – Soft Finance, Hard Choices - BCG I I Increasing ability to absorb risk capital Backup

12. 11 Outcome Commissioning Structures The Commissioning structure also varies significantly Commissioning trigger Market shift from commercial to social enterprise Outsourcing of existing activities Commissioning of new outcomes (early intervention) Shift from contracting for inputs to outcomes Contracting Structure Commercial Prime SPV (SIB) Direct Contracting by delivery body Social Prime

13. 12 Delivery Market Regulation and Capability Infrastructure required to support service delivery is emerging in six areas RegulationInnovation SupportDelivery-Capability Building Accelerators / IncubatorsImpact MeasurementBest-practice Sharing Community Interest Company (CIC) introduced in 2005 Right to run/provide New statutory requirements for commissioners to consider social value when awarding contracts Open Data – some development, but much more possible to facilitate market building Advising on commissioning -Social Finance Leadership accelerators Ashoka, Clore Social Leadership Programme Social Entrepreneur Schools Innovation Challenge funds -NESTA Big Green Challenge, Age UnLimited Social Innovation venture labs -Shaftsbury Partnership, Participle Innovation platforms -Social Innovation Camp Platforms -SROI Network, GIIN network, SustainAbility Consultancies -NEF, NPC, Charities evaluation services Standardising impact measurement would help to give investors confidence Cooperatives UK, DTA – supporting social enterprises scale up delivery models Social Venture Networks - Ogunte The HUB, CAN Mezzanine, Wayra, Social Accelerator

14. 13 Finance £200m+ of Social Investment made in 2012 in 765 deals – mostly for small (£10k-£250k) loans – up from £165m in 2011 Secured Loans Charity Bonds 1 Social Impact Bonds Capacity-building grants Equity / Quasi Equity Unsecured Loans Social Investment demand expected to grow 38% per year – to £1bn in 2016 (increasing share of finance) 75% of social capital will need to be risk- taking (vs 10% today) -15% Equity-esque -60% Unsecured lending Direct Grants / Investment Financial Lending Charity Banks Large SIFIs Small SIFIs Typical Gross returns £600m+ ~80% of £3.5bn Pool of debt £165.5£15.6m£1.3m6%-8% £0.3£8.8£1.4m7%-10% £41m (often direct, with Charity banks, large SIFIs arranging) 2%-6% £22m (2012 a stand-out year - 11 SIBs) 7%-13% £5m£5.7m £2.3m (+ £2m Incubators) Big Lottery Fund £30m Cabinet Office £10m Note 1: 2013 Data for Charity Bonds Source – Growing the Social Investment Market – 2012 – in many cases, net returns significantly lower than gross, due to high initial transaction costs Social Investment 2012 In addition, £150m of Big Society Capital Commitments – of which £15m drawn down

15. 14 Finance UK Impact-first enterprises reluctant to raise capital if required return over 10% - A challenge, given the associated risks Source – Bridges Ventures

16. 15 UK SIBs to date #LocationPolicy areaCommissionerContracting body Investment size Delivery Body 1NationwideAdoption Voluntary Adoption Agencies & Baker Tilly (Consortium) £3m Action for Children, Adoption Matters Northwest, After Adoption, Caritas Care Limited, Family Futures CIC, PACT 2LondonHomelessnessDCLG Greater London Authority £5mSt. Mungo's and Thames Reach 3 Wales - Cardiff and Newport NEETsDWP3SC£500k Dyslexia Action and CfBT Education Trust 4 West Midlands - Birmingham NEETsDWPAPM UK Ltd£800k 5 Thames Valley, NW England NEETDWPSocial Finance£900kAdviza 6 Perthshire and Kinross NEETsDWP Indigo Project Solutions £300k 7NottinghamNEETsDWP Nottingham City Council £2.7m 8West LondonNEETsDWPPrevista 9 Shoreditch, London NEETsDWP Impetus-Private Equity Foundation £900kTomorrow’s People 10 East London - Newham / Waltham Fst NEETsDWP Stratford Development Partnership 11Gtr ManchesterNEETSDWPSocial Finance£800kTeens and Toddlers 12Gtr MerseysideNEETsDWPTriodos Bank£1.5m Greater Merseyside Connexions Partnership 13EssexChild ProtectionEssex CCSocial Finance£3.1mChildren Support Service 14PeterboroughRe-offendingMOJSocial Finance£5m St Giles & Ormiston Trusts Backup

17. 16 Variety of Channels of capital – directed at social impact

18. 17 Channels of capital – directed at social impact A diverse landscape with many unprofitable small SIFIs Of 25 SIFIs, 9 had investments >£1m p.a. 16 SIFIs had investments <£1m p.a. 89% of SIFIs expect to increase their investments in social ventures over next 2-3 years Growth Constraints: Transaction Costs Variable Commissioning Practices Lack of attractive social ventures to invest in Grant-making suppressing demand No dedicated funds channel for endowment PRI Triodos Bank, Charity Bank, Unity trust bank, Ecology Building Society 16 Small CDFIs – e.g. Social Investment Scotland, Key Fund For CDFI – Pool of investments is £750m by 2011 # of CDFIs peaked in 2006, and now in decline Bridges / Big Issue / NESTA / SASC (part of SIB group) / Berenberg Retail – Allia, CAF (Venturesome), Apposite Capital (Health Specialist) Commercial bank with social fund – e.g. Deutsche Bank Not yet Social Finance, Triodos, FSE, Allia, ClearlySo Big Society Capital Backup Social Banks CDFIs Fund Managers Tax Advantaged funds Social Investment Intermediaries Social Investment Wholesaler Crowdfunding Platforms Funding Circle

19. 18 Investment Market Regulation and Infrastructure The infrastructure is emerging to support financing of impact investment Investment Brokers / Advisers Data Capture / Standard Setters Research Houses / Product Reviewers Regulation Providers of Standardised Approaches / Documentation etc Financial Product Developers Capacity-building Grant givers Market Builders Angel Networks

20. 19 Investment Market Regulation and Infrastructure The infrastructure emerging to support financing of impact investment Investment Brokers / Advisers Data Capture / Standard Setters Research Houses / Product Reviewers Regulation Providers of Standardised Approaches / Documentation etc Financial Product Developers Limited brokerage – Investment and Contact Readiness Fund, ClearlySo SIFIs – 16% offer brokerage, and 42% offer investment structuring Almost no authorised capacity to give impact investing advice to investors EngagedX is emerging Research: ClearlySo, GHK, NPC, NCVO, SEUK, SE100, BCG Financial Product Reviewers: Worthstone, Good Analyst Potential Tax Relief for social enterprise investment – but how broad will be the perimeter – beyond Charities / CICs? -Could take several years to mature Community Interest Tax Relief (CITR) for investment into CDFIs Social investment duty on FCA/PRA to encourage sensitive regulation -Review of regulatory barriers to social investment (esp Advice and Distribution) -Crowdfunding consultation underway by FCA Centre for SIBs at the Cabinet Office Social Finance, ClearlySo, but in general intermediaries not yet operating at sufficient scale Capacity-building Grant givers Big Lottery Fund’s Next Steps programme has invested several million Esmee Fairbairn, Barrow Cadbury, Panahpur Market Builders Social Stock Exchange, Ethex, Abundance, MicroGenius, Impact Base – international platform Angel Networks Toniic / Clearly So Backup

21. 20 Investors Where will impact investment come from? Government investment (funding capital and capacity building) High Net Worth Individuals Local Funds Traditional Institutions Mass Retail Trusts and Charitable Foundations Corporates

22. 21 Investors Where will impact investment come from? Government investment (funding capital and capacity building) High Net Worth Individuals Local Funds Traditional Institutions Mass Retail Trusts and Charitable Foundations Historically a strong source of capital, but likely to be squeezed – bootstrapping role diminishing E.g. Future-Builders £200m - £80m outstanding High net worth individuals could provide £180m p.a. in the future (contingent on impact of Tax breaks) Vast majority want money to do social good as well as financial return – 15% have some investments with ethical. Community, or social benefits Regional Growth Funds, local authorities, housing associations e.g. City of London Social Investment Fund - £20m Dominant Scale, but reticent investors often looking looking for opportunities that are not matched by market (i.e.. They want close to market returns, downside protection, liquidity, track record of success) 1 Exception - £250m Pledged from five local authority pension funds IFAs / IFPs Substantial Interest in social investment – even with trade-off on financial return Deposits at Charity Banks, Investment in Charity Bonds Existing foundations’ investment is limited – estimated £45m in 2011 (Esmee Fairbairn total pool £30m) Large Charitable foundations that hold significant reserves could help to rapidly extend and diversify the supply of capital (£100bn of assets) PRI potential – but no dedicated UK Channel Corporates Corporate Foundations emerging interest Note 1: Source: ClearlySo Growth highly contingent on tax relief Backup

23. 22 Conclusion - Social investment is in the “marketplace building” phase Source: CAF Venturesome, Data obtained from the Microcredit Summit Campaign Report (2009 Market Evolution – Micro-finance example Marketplace building Take-off Maturity