Non-profits & social enterprises

What is social impact investment?

Simply put, social impact investment is finance provided to social sector organisations by investors that expect to both get their money back and create social impact. Depending on the arrangement, investors may also expect a financial return on their investment. It is not a grant or a donation.

It can be helpful to think of social impact investment on a spectrum, lying between the traditional ends of grant funding and investment capital. The spectrum below is not meant to illustrate any hard and fast barriers. It is simply a guide to help explain key concepts. Grants and donations are likely to be open to all types of non-profits and social enterprises and may be the best type of funding at certain times in an organisation’s lifespan. Different types of funding and finance may be combined to achieve objectives. A non-profit may set up a social enterprise as a subsidiary.

Graphic of Investment spectrum
Investment spectrum

Generally, the types of organisations suited to social impact investment range from revenue-generating non-profits through to socially responsible businesses. Non-profits have been traditionally funded through charitable donations and philanthropic or government grants. Alongside social enterprises, they may also generate revenue through their activities.

Social impact investing offers additional sources of capital for growth and innovation. But this type of funding (typically referred to as finance) comes with an expectation that social sector organisations demonstrate their impact and provide a return to the investor. This requirement to measure outcomes – to quantify social value as you would financial return – is a key component of social impact investing.

Read more about measuring outcomes.

Who are social impact investors?

Social impact investors can include:

  • wealthy individuals and families
  • philanthropic foundations, including public and private ancillary funds
  • financial institutions, including banks, credit unions and development finance institutions
  • superannuation funds
  • governments
  • corporations and private businesses
  • retail funds or trusts.

Early work to understand the motivations and objectives of social impact investors split them into two broad categories:

  • Impact first’ investors, who primarily aim to generate social impact and are often willing to accept below market returns.
  • Finance first’ investors, who seek investments that offer market returns while creating social value (Source: Monitor Institute, 2009).

This is a useful way to determine the investments different types of investors will consider. Typically, ‘impact first’ or philanthropic investors have been accustomed to providing grants with few strings and without a requirement to quantify the outcomes achieved with that funding. Social impact investing has started to change this mindset. Foundations are now seeking to accurately measure outcomes from grants so they can better understand the impact of their giving. With their focus on impact, these types of investors may be willing to accept lower returns for greater social impact. They may also be willing to accept less robust measurement frameworks.

‘Finance first’ investors are likely to view investment options through a typical financial risk/return lens. The social impact is important, but they are unlikely to consider a trade-off on return.

It is becoming clear that investor objectives are multi-faceted. Research shows that successful social impact investment funds assess the financial and social objectives of opportunities equally, with a financial focus throughout the life of the investment (Impact Investing 2.0, 2013). Some commentators have suggested that the split between ‘financial first’ and ‘impact first’ investors is no longer needed.

What kind of finance might be available?

Recognising a need to move away from grant dependence and encourage greater innovation, leaders in the field contend that social sector organisations need access to a diverse range of finance in the same way that commercial businesses do (Cohen, 2014 and Addis & Blackburn-Wright, 2014). This is particularly true if they are to grow and maximise their social impact. Social impact investment has the potential to offer social sector organisations access to a similar range of financing options as private enterprises.

Market participants are now thinking about alternative sources of finance, including:

  • Debt finance: a social sector organisation borrows money that it must repay, usually including some component of interest. Debt finance is the most common form of social impact investment in Australia, but there are concerns about the ability of social sector organisations to service debt. Some alternatives to traditional debt finance offered by mainstream lending institutions include patient finance, like long term loans, and debt finance with ‘soft terms’ (e.g. no or low interest loans). The financing of Goodstart childcare centres is a well-known example.
  • Equity finance: investors buy and hold shares in a social sector organisation that generates income and capital gains for those investors. This is less common in social impact investing because many social enterprises lack regular revenue streams. Additionally, some social sector organisations can find it hard to issue shares because of complexities around legal forms and investors can find it hard to exit investments. Patient finance, like equity investments that look for a return over 10 to 15 years, or equity capital with below market returns may be alternatives to traditional investment on commercial terms. A good example of equity finance is a recent deal structured by STREAT to double its capacity.
  • Social benefit bonds, where private investors fund a social sector organisation to deliver a service and the government only pays if predetermined social outcomes have been achieved. This results in private investors sharing financial risk with government in return for market returns on their investment. Social benefit bonds are a new financial instrument and can be thought of as a type of debt finance. Read more about NSW’s social benefit bonds.

How do I attract finance?

To attract finance and assure investors of their capacity to service debt or pay returns, social sector organisations need consistent income. Assets may also be beneficial. For example:

  • revenue generated by the sale of goods or services
  • regular or long term grants
  • secure, and preferably longer term, service contracts with government
  • their own real property portfolios
  • endowments.

Organisations seeking finance will benefit from strong skills in business and financial planning to engage with capital markets and help establish themselves for the long term. Organisations need to be able to demonstrate sustainable business models and develop attractive, investment-ready proposals in a language that investors can understand.
How best to raise capital for an enterprise or program and which investors to approach depends on the:

  • stage of development of the program or enterprise
  • legal structure of the organisation and risk appetite
  • purpose of the finance (e.g. for operations, infrastructure, etc.)
  • investor motivation and risk appetite
  • potential for investor returns.

We recommend seeking qualified legal and financial advice if you’re interested in social impact investment. You may also like to visit the Community Finance Portal to find potential sources of capital.

Where can I get advice and assistance?

Organisations interested in participating in a social benefit bond or other social impact investment should speak to their financial advisor or contact a social impact investment intermediary. Expert legal and tax advice may also be required.

Information packages

As a result of the strong demand for advice through the Expert Advice Exchange, the Office of Social Impact Investment has worked with some advisory firms to develop introductory advice packages for social sector organisations. These packages are designed to provide guidance in specific areas. However, they are for information only and may not be suitable in all circumstances. You should seek your own professional advice. The NSW Government accepts no liability for the contents of the packages or for any loss or damage arising from any use of or reliance placed on them.

Governance materials

Kemp Strang Lawyers, October 2015

A summary of general information on governance matters for not-for-profits.

How to change legal structure from an incorporated association in New South Wales to a company: Charities guide

Prolegis Lawyers, September 2015

A step-by-step guide for NSW charities to transfer their registration from an incorporated association to a company structure.

Introduction to intellectual property: The basic principles for your organisation

Corrs Chambers Westgarth, November 2015

A discussion of the fundamentals of intellectual property, including the nature, types and ownership of intellectual property.

Specialist Australian social impact investment intermediaries

A number of specialist intermediaries have emerged with the growth of social impact investment in Australia. Intermediaries can help social entrepreneurs and organisations to develop ideas and business cases, build investment readiness and capability, attract investment and may provide finance themselves. Intermediaries include:

There are also other intermediaries. For example, the Commonwealth Bank Australia and Westpac acted as intermediaries in Australia’s second social benefit bond, the Benevolent Society bond. The NSW Government does not endorse or recommend any of these organisations as intermediaries for social impact investments.

Other tools and resources

Justice Connect’s Not-for-profit law information hub is a comprehensive legal resource for community organisations.

Justice Connect’s social enterprise guide talks through the important factors to consider when starting a social enterprise. It focuses on the legal issues associated with choosing the right structure for your organisation.

NSW small business toolkit provides information and tools to help you start, run and grow your business in NSW.

Putting the pieces together: A business planning guide for social enterprises is a joint publication from Social Ventures Australia and Parramatta Council that provides step-by-step guidance to aspiring social entrepreneurs.

Social Traders’ The Builder, a comprehensive step-by-step guide on how to build a social enterprise.

Social enterprise case studies

Social enterprises are businesses that work towards a social, environmental, cultural or economic mission to generate community benefit. They generate most of their income from trade (not donations) and re-invest most of their profits to work towards their mission.
Social Traders

While commercial businesses exist to maximise profits for owners or shareholders, social enterprises exist for community benefit. They may be for-profit or non-profit organisations, but they seek both a financial and social return on investment.

The social enterprise sector is diverse and there is limited official data on its size and composition. In their joint Finding Australia’s Social Enterprise Sector project, Social Traders and the Queensland University of Technology estimated in 2010 that there are up to 20,000 social enterprises in Australia. These were spread across many sectors of the economy, including manufacturing, agriculture, information technology and media, food and beverage, arts, social services, retail and education.

The study also found social enterprises trade for a diverse range of missions, including:

  • filling service gaps faced by a particular community or group of people
  • creating opportunities for employment, training or participation
  • generating income to invest in charitable or community activities.

There are many different social enterprise business models, which vary according to their mission, ownership and management structures.

Case study compendiums

There is a range of existing resources that provide good descriptions of existing social enterprises in Australia: