Social Investment Tax Relief Round Table

This morning, in conjunction with Big Society Capital, we held a roundtable event for EIS managers on the topic of Social Investment Tax Relief.

SITR is based on the existing EIS reliefs and the government is proposing to lift the limit on the maximum investment per investee organisation to £5 million per year (up to £15 million in total), subject to EU State Aid approval. This change could open up the market and make specialised SITR funds a viable proposition for the first time, and we wanted to find out if EIS managers were preparing to enter this market.

Prior to the event, we surveyed the managers and encountered a range of responses, from those who had never heard of SITR, to those who had considered it and decided that it was not for them, to those who have a product ready to launch, subject to approval for the new higher limit.

We’ll publish the full survey results in a later post.

At the event itself, Greg B Davies from Barclays kicked off by talking about some of the behavioural drivers for investors who are interested in social impact funds. His research makes it clear that there is a demand for these products, provided that the industry makes it easy for investors. In my opinion this will require joined up thinking on the part of both providers and advisers, and I could easily see how the tools Greg and his team have developed could eventually be used by advisers to determine how much a client might want to allocate to social impact investing. The other thing that jumped out at me was that many investors expect market-level returns from social impact investments – to date has not been possible by and large, and is something that consumers will have to be educated on.

The most encouraging thing to come out of the research is that many consumers would make allocations to social impact investments from their current cash holdings. This is a win,win, win. The consumer (traditionally overweight cash) will put money to work, society should benefit (via the social impact organisations) and the investment industry brings new money under management. Social Impact investing won’t cannibalise charitable donations OR traditional investments.

We also had a spokesperson from HM Treasury. Practically everybody in the room agreed that the single most important change that could be made in order to encourage the development of SITR retail investment products would be the lifting of the limit that can be invested, but today’s update from HM Treasury suggests this change is at least a year away. After focusing on achieving State Aid approval for the VCT and EIS schemes, HM Treasury think that it’s unlikely we will get approval for the higher limit on SITR in the next six to twelve months. A Social VCT would then be considered once the limit for SITR was agreed. Securing approval for these schemes remains a priority for HM Treasury.

Finally, some of the current managers of social investment funds shared their experiences to date. They have not had a problem securing deal flow in terms of volume, but getting larger deals that make the business more scaleable has been harder for them. We also learned that there is a point where returns flatline – very, very roughly at a level of return of around 10%, taking on more risk doesn’t necessarily increase the level of return. This makes portfolio construction harder (there are no stellar performers that offset losses). However, the underlying investments might be less risky that intuition would suggest, because the management teams are so committed – in one case study that was shared with us the investee organisation failed, but still raised additional funds to pay back a small, unsecured debt simply because they felt it was the right thing to do.

All of the current social investment fund managers agreed that it was crucial to start with the management, and the impact they wanted to make when sourcing deals.

Conclusions – well the UK is seen as a leader in this space with the combination of the Big Society Capital as market champion (and investor) and the tax reliefs. We know that there is demand from investors, and that there are organisations that can put the capital to work. Investment providers are ready to launch products to bridge the gap between the two. But approval for the lifting of the limit on investment has to come before the market can really take off.