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Social enterprises need patient capital if the sector is to meaningfully grow

Supply Change CEO, Beth Pilgrim, discusses below why social enterprises require equity investment now more than ever.

It is now well-established that the COVID-19 pandemic has had the biggest impact on the most vulnerable people in British society. From almost every perspective, the effects of restrictions and recession on people’s health and financial security have been felt disproportionately by those already facing hardship. This has in turn underscored the urgent role of social enterprises: organisations which are able to contribute to the economy, whilst also uplifting the vulnerable, are needed now more than ever. At the same time, social enterprises have struggled to stay afloat. The economic crisis has highlighted the fragility of a sector which is focused on generating social value, and not least when it comes to finance. A recent report has shown that social enterprises find it difficult to acquire ‘patient, risk-bearing capital’. This kind of dependable funding allows organisations to weather demand slumps and adapt to change. It is also crucial for innovation, in that it provides resources with which to experiment and trial ideas, without the condition of short-term profitability. But instead, social enterprises often rely on grants and credit. If we want to maintain a sector capable of confronting and surviving the turmoil of COVID-19, this has to change.

The most common and straightforward means by which to achieve this change is equity investment. By investing in equity, financiers establish an interest in the success of an organisation, without requiring conditional repayment. The majority of conventional businesses depend on this model, but the report showed that the need for social enterprises, and other Social Purpose Organisations (SPOs), to acquire this kind of investment is three times greater than the current demand. (Nearly a fifth of SPOs meet the criteria of needing equity, or equity-like, investment, but only one-third of this group demonstrates any actual demand). This emphasises the disadvantage of social enterprises compared with their corporate counterparts, and underlines the precarity of the sector.

The report suggests two causes for this problem: 1) the lack of approaches from the social investment sector; and 2) the lack of awareness amongst SPOs. In other words, there needs to be a cultural shift before any technical issues can be addressed. The reliance on grant funding, and the indebtedness of many social enterprises, also undermines the commercial credibility of the sector. If social enterprises can be found growing and innovating using long-term, independent funding, then the sector’s profile as a serious contender will inevitably be in the eyes of business and the private-sector. It is crucial, therefore, that social investors and enterprises collaborate, and find a way through this impasse. By working to guarantee long-term capital that isn’t impatient for immediate returns, we can build a social enterprise movement capable of thriving economically, and of tackling the most pressing challenges in our society.

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