Mark II: Finally! The potential market size of retail social investment quantified as 225,000 households

The recent report on tax incentives in social investment has provided many interesting insights. Social Finance is clearly interested in this debate, having launched the Social Impact VCT as a way of using an existing tax incentive to raise finance for successful social businesses and to enable UK tax payers to invest for impact through the VCT. We have pulled out the following from the report as of particular importance. Unless italicised, all text has been taken from the report.

Forecasted projections: What is the potential market size if tax incentives are offered on social investments?

  • Tax reliefs have been a highly effective policy lever in attracting mainstream venture capital and have raised close to £800m in 2010/11 alone.
  • If even a proportion of the estimated likely impact of creating such a relief for social investment materialises – around £500m of social investment over five years – this would provide a solid underpinning for the continued growth of the sector
  • This report presents a forecast of the amount of high risk social investment that could be generated from high net worth individuals if such a tax relief was provided. The forecast is for £165m over a three year period and £480m over a five year period.

£480m is arrived at assuming that there are 225,000 households which are likely to be interested in social investment and primarily motivated by a tax incentive. Assuming an overall conversion rate of 21% (based on Ipsos MORI 2011 research), this should result in 48,000 UK tax payers making one social investment over a 5 year period.

Research shows how many enterprises are investible propositions

  • The 2012 RBS SE 100 Index, which tracked the activity of 365 social enterprises, found that in 2012 the combined turnover of the 100 fastest growing enterprises (the SE100), was £319.4m – an 85% higher turnover than the 2011 SE100 enterprises (£172.7m).  Furthermore, these SE100 organisations grew on average by 60% – greater than the 48% growth experienced by the 100 fastest growing FTSE companies that year.

Next steps: looking beyond trusts and foundations to the retail market. Clear demand from mass affluent for investment opportunities that have a social impact as well as financial return

  • The challenge now is to find new financiers to take over the role of government, foundations and trusts, who have provided around £500m of social investment over the previous eight years. Research from Ipsos MORI  into wealthy investors (those with £50,000+ of investable wealth) has shown [that] there is an unmet appetite amongst different types of wealthy investor[s]. High net worth individuals (HNWIs) – those with greater than £100,000 of investable wealth – were found to hold social and ethical values. They want their money to ‘do good’ as well as to produce a return, to use their wealth to reflect their values, and are likely to be engaged in community activities.

Tax advice

  • Tax advice is a key aspect of the services that financial planners and accountants offer. An appropriate tax incentive would therefore become integrated into the decision-making process for wealthy individuals’ tax planning. A tax incentive based on adapting existing regimes would overcome a major barrier for financial planners, as they are familiar with these schemes. The financial planner/advisor will be a key route to market for social investment.

Existing schemes

  • The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) are difficult for charities and social enterprises to use. This is due to both being share relief schemes, whilst the majority of social sector organisations [do not have share capital]. Subsequently, would-be social investors wanting to use EIS and VCT to provide some relief on risk-bearing investments have almost no opportunity to do so. In comparison, over £500m and £300m of investments into SMEs were placed via EIS and VCT respectively in 2010/11.

In the Social Impact VCT we can through structuring enable risk capital to be deployed in supporting the activities of a charity which does not have share capital.  However, should the recommendations of the tax relief report be implemented, investments in charities and social enterprises would become more straight-forward, requiring less structuring and the universe of potential investments would be greatly expanded.  As such, VCT funds could most likely be deployed faster and at a lower cost to the investee ventures.

Role financial advisors have to play in growth of market

  • Financial advisers have a significant bearing on the success of the social investment sector. If tax incentives drive client demand, this will influence advisors’ level of engagement. The growth of socially-motivated investment is leading the industry to establish technical and advisory procedures which the new regulatory body is committed to taking into consideration. Adapting existing tax regimes such as EIS and VCT, will help ensure that the IFAs become engaged in helping distribute these opportunities to appropriately screened clients.
  • Research published by JP Morgan in August 2012 projected that 81% of £50,000+ household income earners will seek professional advice to varying degrees. Financial planners are also under considerable regulatory pressure to ensure that the investments of their clients are appropriate. Investment opportunities are often only provided to sophisticated investors (such as HNWIs) through their IFAs. For this reason, a tax relief for social investment will, by default, be largely taken up by such HNWIs (at least in the beginning). However, research from NESTA and Worthstone suggests that IFAs are most driven by client demand for impact investment products. This puts the onus back on HNWI clients to show sufficient awareness of social investment products for an advisor to discuss such opportunities with them.

Conclusion

The intention of a tax relief would be to see greater social investment from wealthy individuals into distinctive schemes for public benefit. The relief would need to provide sufficient incentive, but not be so complex or different that financial advisors and investors do not engage.

Next steps:  This is the first time that research has unveiled the potential size of the market (225,000 households). We hope that this and the conclusions of this report are acknowledged by the relevant authorities and that they consider how tax incentives could be used to scale up investments in UK companies which make a distinct positive contribution to improving society.

By Sarah Henderson and Annika Tverin, Social Finance 

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