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Response to the Office of the Third Sector’s

consultation on

Social Investment Wholesale Bank: A

consultation on the functions and design

October 2009

For more information contact:

Hannah Terrey
Head of Policy and Public Affairs
03000 123 255

Charities Aid Foundation, 7th Floor, St Andrew’s House, 18­20 St Andrew Street London EC4A 3AY 

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Charities Aid Foundation (CAF) is a registered charity that works to make the most of money for 
charities  and  social  enterprises.  CAF  believes  that  access  to  capital  is  vital  for  a  healthy  and 
thriving charitable sector. 

Over  the  years,  CAF  has  been  instrumental  in  pioneering  and  incubating  funding  solutions; 
including Venturesome, a high‐risk investment fund and Charity Bank, which became independent 
in 2002. 

Venturesome provides capital to charities and social enterprises, operating in the space between 
providers of charitable grants and providers of bank loans at market rates.  Since launch in 2002, 
over £15 million has been offered to over 250 organisations. In addition to accumulating practical 
deal experience, Venturesome has endeavoured to have a central  role in building a robust social 
investment market (including chairing the Social Investment Market Group (SIMG)), adopting an 
open‐book  approach  to  share  knowledge  and  build  experience,  but  also  ready  to  operate  in 
competition so as to raise standards. 

For more information, visit: 
Venturesome contacts: 
Paul Cheng    E:  T: 03000 123 256 
Emilie Goodall  E:  T: 03000 123 258 
John Kingston   E:  T: 03000 123 224 

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 


Overview    p.4 
Response to Consultation Questions        p.5 
Appendix I (“Access to Capital”)            p.15 
Appendix II (“Social Investment Wholesale Banking”)    p.30 

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 


Charities Aid Foundation (CAF), and its social investment arm Venturesome, welcomes the
opportunity to respond to the Office of the Third Sector’s (OTS) consultation entitled “Social
Investment Wholesale Bank: A consultation on the functions and design”.

Before responding to the specific consultation questions, we set out below the key ideas and
principles that have guided our approach to this response:

1. Access to capital for charities and social enterprises is needed, indeed is vital to build their
capacity to achieve social impact. However, demand remains in its infancy, as does the
supply of social investment in general. Encouragingly, a social investment market is
emerging: see Appendix I (“Access to Capital”).

2. A wholesale function is necessary, and would be timely. Such a function (which must be
clearly separated from a retail function) should aim to be a market builder/catalyst using a
range of wholesale financing techniques: see Appendix II (“Social Investment Wholesale

3. Alongside the above, as the Consultation paper recognises, a range of other market
facilitation roles is required. The SIWB is necessary but not sufficient in itself to achieve
a robust market. It seems neither appropriate nor feasible to have one entity delivering and
nurturing the full range of market development roles required. Yet failure to develop any
one of the four pillars outlined in Appendix I as being necessary for a robust market risks
failing to achieve a robust market; and the SIWB, as wholesaler, also risks failing.

4. We believe that a coordinating body should play a central role in ensuring the ecology of
the market is nurtured and developed by recognising the importance of cross-cutting
issues and integrated solutions. This body should be different and separate from the
SIWB. Its task would be to oversee the social investment market in its entirety, i.e. (a)
building the demand side (through capacity building and investment readiness); (b)
developing intermediaries/brokers; and (c) encouraging mechanisms that meet the broad
financial needs of charities. Each of these functions must be delivered by a range of
organisations, in order to develop plurality and diversity in the market.

5. The key components of the wholesale function would centre on the provision of both
capital and liquidity to retail intermediaries, including the structuring of new products
through aggregation and the creation of new secondary markets for specific social
investment products. See Appendix II.

6. The SIWB should seek to achieve as far as possible the optimal mix of both social and
financial returns. Those organisations (both retail funders and frontline organisations) that
require legitimate, upfront investment must be distinguished from poorly-run, loss-making
enterprises. The business model of the SIWB must have clear social and financial
metrics. We do not believe that the SIWB can be a purely profit-maximising entity.

7. We believe that the SIWB should always act in the interests of the sector overall and,
therefore, independence and impartiality must be reflected in its governance. The SIWB
should be entirely independent of government and sector intermediaries with vested

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Response to Consultation Questions 

In response to the questions as set out in the consultation document:

1. Do you agree with the vision for a Social Investment Wholesale Bank set out in this

We believe that the vision set out in the Consultation paper reflects current needs, but in their
broadest sense only (i.e. from charities needing access to capital right through to commercial
funders looking for CSR-type investment options) (see Appendix I).

It is not, however, a coherent vision for a specific institution called the ‘SIWB’.

This is because the vision for the SIWB as set out does not clearly define the role of the SIWB,
and the distinction between wholesale and retail operations is not sufficiently unambiguous.
The SIWB must have a clear, defined and focused role.

We do not entirely agree with the diagram “Figure 1” on page 10 of the consultation paper
(reproduced below). For example, “Second-tier support organisations” are important but they
are not retail intermediaries in the sense of being retail funders. Generally speaking, “Grant-
makers, trusts and foundations, philanthropic resources and corporate responsibility
programmes etc” do not operate on the ‘wholesale’ level but on the ‘retail’ level (one exception
to this so far is the Finance Fund of the Esmée Fairbairn Foundation).

We believe that no one single institution can or should perform all the functions as set out in the
vision. The needs of the market are wide-ranging – they are likely to be met by a diversity of
delivery mechanisms operated by a diverse range of organisations.

Diagram as set in the consultation paper:

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Diagram as reworked by Venturesome:

2. Do you agree with the economic case as it is set out, and do you have further evidence,
case studies or detail in its favour or evidence to the contrary? To what extent does the
evidence suggest problems are short term (for example, linked to the immaturity of the
market or perceptions) or intractable?

Yes, there is an economic need for the SIWB (see Appendices I and II for our reasons for this

However, we will not know whether problems are ‘short-term’ or ‘intractable’ until the market
has developed further and an evidence base around what is and is not working is built up.
Strong anecdotal evidence from Venturesome’s and others’ experience of the market is that the
social sector is massively undercapitalised (i.e. weak balance sheets is the rule rather than the
exception in this market)1.

Venturesome’s experience with the market adoption of loan finance has been encouraging.
Seven years ago, loan finance to charities was virtually non-existent. Now, although there is
still much risk aversion to taking on debt, the idea of loan finance is by and large accepted. We
do believe that the better supply of capital should create better, more informed demand.

There is a need for consistent, in-depth market-level research about both the supply and
demand sides of the social investment market. Few market intermediaries have either the

See NCVO Funding Commission reports.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

inclination or resources to invest in such research. This might be a legitimate ancillary role for
the SIWB to undertake.

3. There are five potential functions for the Bank outlined in this consultation: a
champion for sustainable social investment; raising capital; investing and providing
capital; market-making; and advisory services. Are these an appropriate response to
best address the problems identified? If so, why? If not, why not and what are the

Our reaction to these five potential functions is:

• “a champion for sustainable social investment” – NO. The market does not need
a public relations cheer-leader – but there is a role for an objective, impartial,
critical, data-driven, research-based entity that facilitates market growth and
• “raising capital” – YES. Provided that this means helping market intermediaries
(retailers) to leverage in both philanthropic and private capital (rather than
competing with those retailers for funds).
• “investing and providing capital” – YES. But the examples given in the
consultation document confuse wholesaler/retailer models. KfW Bankengruppe
appears to act like a wholesaler. But Norfund seems to be a retail intermediary
(because it deals directly with frontline organisations).
• “market-making” – YES. This should be a key function of the SIWB. It must
focus, however, on supporting and working with retail intermediaries (and not
with the ultimate investees/frontline organisations directly).
• “advisory services” – NO. This is not the function of a wholesaler. Such services
should be provided by other market intermediaries (e.g. UnLtd Ventures, Social
Finance Ltd, CAN Breakthrough, Social Enterprise Coalition etc.)

4. Each potential function will have costs and benefits over time (both direct and indirect,
social and financial). What is your view about these costs and benefits, and what
evidence is there to back this up?

See answer (6) below.

It should be noted that the business model of the SIWB should recognise that some costs of
building a new market will require upfront investment which may not generate financial
returns. The SIWB cannot be purely profit-maximizing if it wishes to fill in the market gaps and
perform a market-building function.

A low risk provider of capital (i.e. one which guarantees its investors 100% capital protection)
should be careful not to displace existing (and successful) commercial activity in this space
(e.g. Triodos Bank). In addition, purely providing low risk capital (0%+) will only meet part of
the sector’s needs. There is a need for below commercial-rate capital – and this will require the
use of philanthropic/non-commercial money.

Implicit in Figure A below is the notion that purely commercial investors cannot achieve certain
social impacts because a trade-off must be incurred. At present, this trade-off is poorly
articulated for the most part. A wholesale function should engage with the full range of

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

potential and existing investors to explore the appetite and potential for funds and products in
this ‘trade-off’ space.

Figure A

The benefits will be found in a thriving and resilient third sector, enabled by access to new
money and more efficient use of existing money.

5. Should advisory services for front-line third sector organisations and social investment
intermediaries accompany the provision of capital or be provided separately?

Advisory services should be provided separately. This is not the function of a wholesaler. As
indicated previously, however, advisory services are a necessary part of the development of the

At a much later stage, perhaps when a more mature market has developed (say, 10 or more
years from now), the SIWB may evolve to provide high-level corporate finance expertise for
large-scale capital raisings. However, such a market is still many years away.

6. When raising capital, what combination of social and financial risks and returns would
be attractive to investors? What evidence is there that the Bank could attract investment
on these terms, from whom and through which investment products?

• See Appendix I – “Variety of investment mechanisms”

• See Appendix II – “Thinking about the risk/return spectrum” (Appendix C)

It must be appreciated that there are a range of investors across the whole spectrum of
risk/return. Each investor, depending on their risk profile, will be able to provide some products
(but not others). It is important that the right product is used to meet the appropriate financial

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

To date, investor appetite has been only tentatively explored by a small number of retail
funders. There is an opportunity for the SIWB to engage with the full spectrum of investors in
order to develop funds and products that meet a broad range of social/financial return

Some opportunities will be able to offer potentially high social returns – but this will be
counterbalanced by associated high financial risks. Above a certain threshold, the financial risks
will be so high that a grant will be the appropriate financial instrument to use. Generally, social
investors accept lower financial returns in order to achieve higher social impacts (see Figure A

7. When providing capital, what combination of social and financial risks and returns
would the Bank offer? What evidence is there that the Bank could make investments on
these terms, to whom and through which investment products?

The SIWB should explore financial structuring opportunities across the whole of the
risk/return spectrum (from -100% to perhaps just below market-rate) (see Figure B below for
the spectrum open to investors). The SIWB has the potential to attract both non-commercial
and commercial funding, structuring such funds in order to maximise the benefits for the
sector (see Appendix II).

Figure B

The SIWB cannot be a purely profit-maximising because (i) it will start crowding out
commercial players who are required to be profit-maximising (e.g. mainstream banks); (ii) it
will be unable to operate along certain parts of the risk/return spectrum; and (iii) it will be
unable to fully utilise synthetic financial instruments (e.g. subordinated debt structures) that
require a ‘base tranche’ of non-commercial money.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

The SIWB would be most effective if it can deploy a range of capital (with different return
expectations) so that it can perform a coordinating and aggregating role in the sector. This role
must appreciate that different retail intermediaries involved in different activities may have
differing capital needs at different stages of their life cycle, just as frontline organisations do.

The SIWB has an important role in aggregating fragmented pools of capital into something that
is ‘investable’ by larger, more commercially orientated investors. Also, the SIWB has a role to
showcase/innovate around social wholesale investment products in order to attract investment
and encourage other wholesalers (as in Appendix II). The SIWB should aim to crowd in other
investors, such as pension funds, trusts and foundations, rather than crowd them out.

High risk funds which expect to operate on the ‘negative return’ spectrum are unlikely to
leverage in commercial funding unless there is a very large, ‘first loss’ tranche provided by
grants. High risk funds are best funded by gift capital because the expected loss rate is
(generally speaking) too high to be absorbed by first loss tranches or diversified away.

8. Which combination of functions would be most effective and deliver best value for

As a general rule, the use of money in a leveraged way (e.g. underwriting, guarantees, first loss
tranches etc.) is more efficient than using money directly to fund services (see Appendix II –
case study Appendix A).

Furthermore, the principle of ‘additionality’ is a good guide to ensuring “best value for money”
by avoiding situations where the SIWB duplicates services/products that are already being
provided (or could be provided) by other players.

Of course, some things will legitimately require non-commercial funding (funding that does not
achieve 100% recycling and is provided at below market rates) because they cannot inherently
deliver positive financial returns. Such cases must be clearly distinguished from those things
that can deliver financial returns but fail to do so through lack of skills or through

9. Do you agree that eligibility should be based on potential social and environmental
impact, rather than defined by legal or organisational form? If so, would it be necessary
to ensure that the Bank ultimately supported a diverse range of enterprises, for example
small, black and minority ethnic-led and rural projects?

Yes, eligibility should be based on potential impact (not legal form).

This question seems to be based on an assumption that the SIWB might commingle wholesale
and retail functions. We emphasise that the SIWB should only fund retail intermediaries (not
the ultimate beneficiaries/frontline organisations).

To ensure that the SIWB supported “a diverse range of enterprises”, the SIWB would need to
think about how the retail intermediaries that it transacts with would in turn support ultimate
beneficiaries who are diverse.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

We note that there is an emerging belief that social enterprises, as viable and self-sustaining
organisations, offer a complete range of social solutions. In our experience, very few social
purpose entities, whether classified as social enterprises or not, have the potential to be fully
self-sustaining. Only a small minority have the potential to achieve the optimal mix of both
social and financial returns.

In some cases, this is because their business models are poorly conceived, or badly executed, or
both. For others, the nature of the needs the organisation aims to meet means that they will
legitimately require some element of grant funding. It is critical to distinguish between the
former from the latter cases when assessing funding requirements. This applies to both frontline
organisations and the retail funders themselves.

10. This consultation suggests that the mission of the Bank could be to create social and
environmental value through increasing investment for a social or environmental
purpose. How do you think the mission of the Bank should be defined?

The SIWB mission should be clearly defined as a wholesaler of capital, designed to increase
the availability of appropriate capital for social purpose organisations.

SIWB should see itself as a market-builder (not as a retail player at all). Otherwise, there is a
real danger that the SIWB will become unwieldy, unfocussed and disruptive of the emerging
ecology of the market. The risk of mission drift will be virtually unavoidable if the SIWB
confuses wholesale and retail functions.

Unfortunately, the language and examples in consultation paper seem to confuse the
wholesale/retail functions. There must be a clear separation between the two functions (e.g.
paragraph 82 states “to support demand for finance in the third sector” could be misleadingly
interpreted as the SIWB playing a retail agency role).

11. Do you agree that the SIWB would need to be flexible and adaptable to address evolving
issues as the market develops? How could it be ensured that the Bank would respond
appropriately to the evolving market?

Yes, flexibility is preferable to rigidity – provided that the SIWB operates in a defined
territory of activity (and does not morph into a retail intermediary).

12. How best could the Bank be structured and owned in order to deliver its functions and
meet its mission?

SIWB governance must reflect its independence and impartiality.

We believe that a wholesaler must be impartial – otherwise, it has the potential to powerfully
distort the market. Moreover, it is unlikely that any retail intermediary (current or future) can
run the SIWB without conflicts of interests. Impartiality must not only be effective – but also
be seen to be effective (otherwise, the reputational damage to the SIWB would destroy its
credibility in the market).

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

In particular, we believe that it is crucial that the SIWB has an independent board and is
entirely independent of both government and all sector intermediaries with vested interests.

This is because:

• Conflicts of interest must be avoided;

• There must be no possibility that the government has any claim or claw back2 on the
profits or assets of the SIWB.

The issue of how the SIWB’s independence can be protected is a difficult one that leads to no
easy answers. The key questions are:

• If the SIWB is independent, from whom is it independent?

• If the SIWB is capitalised with public money, then to whom does it report?
Parliament? MPs? The Treasury? A select committee?

13. Under what circumstances could an SIWB carry out activities itself, rather than being
limited to financing and offering support to others?

The SIWB must never carry out retail activities itself. That is the role of a retailer (not

Furthermore, such activities are best provided in any case in a dedicated way by specialist
organisations. The experience of credit unions in the United States may provide a useful
analogy. There, a number of US Community Development Credit Unions (CDCUs) have
developed separate businesses to provide advice services. Their experience suggests that
successful advisory models require time to develop their management and governance

The SIWB could perhaps fund other intermediaries to carry out retail functions such as
advisory services (i.e. outsource the advisory function to a third party). But the question
remains as to what meaningful criteria the SIWB would use to select such third parties, if its
mission is to increase the availability of appropriate capital to social purpose organisations.

14. Do you agree that the Bank should seek to report transparently against a triple bottom
line of social, environmental and financial value? What ideas do you have for how this
could be achieved?

This question implicitly confuses the wholesale/retail function.

Wholesalers, retail intermediaries and frontline organisations are all responsible for
monitoring and reporting on their triple bottom line – albeit with differing levels of intensity.
The onus should be on frontline organisations to provide evidence of their triple bottom line
to their retail funders, who in turn should provide evidence of their triple bottom line to their
wholesale funders. In particular, wholesale and retail funders should seek to demonstrate that

For reference, see the claw back provisions in Private Finance Initiative (PFI) arrangements.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

their investments build organisational and financial capacity, rather than directly attributing
project outcomes to their investments.

The SIWB should avoid crude or simplistic SROI metrics that unduly restrict the market. If
SIWB is a catalytic market-builder, then it will not be measured on its own triple bottom line,
but on its success in developing the social capital market. The SIWB can then elect to work
with those retail intermediaries which most effectively manage their triple bottom line.

This, of course, raises questions regarding what rational assessment criteria the SIWB would
use for assessing which retail intermediaries to support and why. This is likely to include
criteria around:

• robust/smart income and expenditure models

• recycling of a pre-defined proportion of capital that reasonably reflects the financial
mechanisms deployed and the financial needs they are meeting
• clear understanding of social returns they expect to see and how these will be tracked
(but without striving for attribution of frontline charities’ outcomes).

In any case, the SIWB must look at the effect on the overall market rather than assessing
each retail intermediary in isolation.

The SIWB will require skilled staff to carry out its functions. It will be an organisational
challenge to recruit and train such staff – and the investment required to implement this
should not be underestimated.

15. Do you agree that the Bank would not distort competition to an extent contrary to the
common interest if it followed the guidelines set out in this consultation? What
mechanisms or safeguards could be put in place to ensure this, while still enabling the
Bank to effectively carry out its mission and functions?

The guidelines as set out in the consultation paper are confused and not sufficiently focussed.
Therefore, the guidelines (if followed) would probably distort competition.

In order for the SIWB to focus exclusively on its wholesale role, the SIWB must refrain from
competing with retail intermediaries (e.g. direct investing in frontline organisations or
individuals, advisory services etc.). Otherwise, the market will be distorted and adversely

16. How would you make a robust assessment of the necessary financial requirements over
time of a SIWB, and what evidence is there to back this up?

We do not believe that the SIWB can or should be a purely profit-maximising entity. This is
because a purely profit-maximising entity would be unable to operate on those parts of the
risk/return spectrum that require a trade-off between financial and social returns.

It is likely that the capital base of the SIWB would require at least two types of capital: (i)
capital that requires a financial return of some sort (but typically less than market rate) and

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

(ii) gift, patient or non-commercial capital that can be eroded over time in order to guarantee
or sit along side the first type of capital in order to ‘leverage’ it.

17. The Government recognises uncertainties around the capacity and willingness of the
third sector’s demand for finance. How could the risk of this undermining the success
of the Bank be mitigated?

It is important from the outset to be clear what the success metrics of the SIWB are.

This question once again appears to confuse the wholesale/retail function of the SIWB. The
risk of the SIWB’s success being undermined by the “capacity and willingness of the third
sector demand for finance” is a risk that should be the concern of all market players operating
at the wholesale, retail and front lines.

A more relevant issue is how the quality of retail funders/specialist lenders should be
assessed? What meaningful benchmarks should be used by the SIWB?

18. Do you agree with the principles for the design of an SIWB outlined in this

Our response to the principles are:

• “outcomes focused” – YES. But the real question here is “outcomes for whom?”
A key outcome for a wholesaler is that retail intermediaries are strengthened,
their quality and therefore impact increases, and that there are more retail
intermediaries because they have increased access to capital from an
organisation performing SIWB functions.
• “additionality” – YES. This is a fundamental principle with which we fully
• “sustainability” – YES/NO. It depends on what it meant by ‘sustainability’ and
for whom. Yes, if this means that triple bottom line outcomes are achieved for
frontline organisations. No, if this means that financial returns are paramount,
and that no trade-off can take place along the negative part of the risk/return
spectrum. SIWB is a market-builder, and this means it must be judged on its
impact on the development of the social investment market. It will also require
doing some activities that generate no financial return (and therefore erode
capital). It may also require that it is superseded by other wholesalers/supply
functions – i.e. it may not necessarily itself be sustainable.
• “independence” – YES. The SIWB must be entirely independent of government
and sector intermediaries with vested interests.
• “ambition” – YES. But scale and replicability by themselves have no value.
They are only valuable if what you are scaling up and replicating is useful and
effective in achieving the social, financial and environmental objectives that you
have set.
• “transparency and accountability” – YES. Provided that you are also effective.
Mere compliance with the principle of transparency and accountability is
necessary but not sufficient to achieve effectiveness.
• “flexibility” – YES. But be clear about the SIWB role (and be vigilant against
mission drift).

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

A briefing paper  


September 2009 

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Charities Aid Foundation (CAF) is a registered charity that works to make the most of money
for charities and social enterprises. CAF believes that access to capital is vital for a healthy and
thriving charitable sector.
Over the years CAF has been instrumental in pioneering and incubating funding solutions;
including Venturesome, a high-risk investment fund and Charity Bank, which became independent
in 2002.

Venturesome provides capital to charities and social enterprises, operating in the space between
providers of charitable grants and providers of bank loans at market rates. Since its launch by CAF
in 2002, £15 million has been offered to 250 organisations. In addition to accumulating practical
deal experience, Venturesome has endeavoured to have a central role in building a robust social
investment market, adopting an open-book approach to share knowledge and build experience, but
also ready to operate in competition so as to raise standards.

For more information, visit:

If you wish to receive information from Venturesome, please send your contact details to:

About the authors

Emilie Goodall joined Venturesome as Investment Manager in late 2007, having previously worked
as a Research Analyst at the charity New Philanthropy Capital (NPC).

John Kingston is the founder Director of Venturesome. After 15 years with 3i Group and 10 years
at Save the Children, he joined CAF in 2001 to explore the potential of a risk capital fund for
charities and other non-profit organisations. John is Chair of the Social Investment Market Group
(UK) and a trustee of a small charity and of a grant-making foundation.

© Venturesome 

The text in this document may be reproduced free of charge providing that it is reproduced accurately and not used in
a misleading context. The material must be acknowledged as Venturesome copyright and the title of the document

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

This paper is an update to Venturesome (2008) Financing Civil Society3, prompted by the Office of the
Third Sector’s consultation regarding a Social Investment Wholesale Bank. It was written as a discussion
paper, providing context for a CAF-hosted roundtable held in August 2009.

There was consensus at the roundtable regarding this paper’s proposed four key pillars to a robust
social investment market, and a positive discussion ensued as to how a social investment wholesaler
might contribute to building those four pillars. Some key questions emerging from that discussion are
included at the end of this paper.

We publish this paper as a contribution to the current thinking on social investment, and the role that a
Social Investment Wholesale Bank might play in supporting the existing ecology of this emerging and
still fragile market.


It is increasingly recognised that lack of access to capital is acting as a barrier to charities4 achieving their
social mission.5

There is limited quantitative research on the capital need of charities, but ample case studies of charities
struggling to manage working capital, deal with the unexpected and invest in innovation, growth and

This paper paints in broad brushstrokes a picture of the current situation and outlines the characteristics
of a ‘robust’ social investment market. By robust market, we mean a world in which informed charities
have access to appropriate capital, from a resilient capital supply, distributed using a variety of financial

We believe there are four critical pillars to a robust social investment market:
1) confident and informed demand from the voluntary and community sector (VCS)
2) efficient matching of supply and demand
3) variety of investment mechanisms
4) resilient supply of finance

Each of these are explored in turn in this paper, in each case, laying out the following elements:
- where we are now
- characteristics that would be evident in a robust market
- key barriers to progress towards that robust market
- some emerging ideas and solutions

We invite comment on the subsequent sections of this paper. The paper is by no means comprehensive
or exhaustive, and suffers from bias (reflecting as it does a social investor’s perspective). The purpose is
to provide a framework for discussion, debate and reflection.

3 Available at
4 In this paper ‘charities’ or ‘voluntary and community sector’ (VCS) is used as a catch-all term for the broad range of
social purpose organisations, as identified in Venturesome (2008) Financing Civil Society. See Figure 1, p.6.
5 NCVO Funding Commission initial findings, Office of the Third Sector (July 2009) A consultation on the functions and


CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

1) Confident and informed demand from the voluntary and community sector 

Current situation: an undercapitalised but inarticulate VCS?

The need for access to capital is increasingly recognised by sector commentators. Traditionally, sector
research has focused on income and expenditure patterns across the sector, with less attention paid to
charities’ balance sheets. The exception has been high level research undertaken first by the Commission
on Unclaimed Assets and more recently NCVO6 which highlights that the bulk of the sector has a
relatively low level of reserves.

However, the there is no strong or coherent voice clamouring for access to capital, other than a handful
of sector intermediaries7 and specialist lenders themselves. It is possible that the need for capital is
simply an as yet poorly defined subset of the wider funding issues facing the sector, 8 which are well

It could be that an open debate about the need for and access to capital has been obscured by the focus
on social investment/alternative forms of finance, particularly the provision of loans, as opposed to why
such a form might be needed and/or appropriate. In any event, the greatly increased supply of loans,
from specialist lenders such as Futurebuilders, has undoubtedly moved the debate forward. 9

But many, if not the majority, are not willing to take on loans – genuine aversion to debt finance is not
uncommon. The focus on loans, rather than a wider debate regarding access to capital, may not be
helpful; particularly during a credit crunch largely understood to have been caused by inappropriate

Characteristic of a robust market: a confident and financially literate VCS

Generally, the sector would benefit from recognition that all organisations need capital (as do
individuals), whether internally generated or externally accessible – not just for-profit models, or social
enterprises, or charities that trade.

For a robust market, we need a VCS that is:

ƒ confident10 in identifying its own financial needs
ƒ aware of different mechanisms (grants/loans/equity) available to support those needs, and the
associated risks
ƒ aware of different providers (from income to capital suppliers), and their motivations
ƒ confident in seeking appropriate capital from a variety of sources
ƒ for this, the sector would arguably benefit from stronger finance functions, i.e. financially confident
CEOs/Directors/trustees, and a greater pool of chief operating officer/finance director /treasurer-
types attracted to the sector

Many of the characteristics above would need to be mirrored in funders, both institutional (foundations,
government) and individual donors (particularly high net-worth individuals):
ƒ Funders able to distinguish between income and capital
ƒ Recognise different capital needs (fixed assets, working capital, rainy day reserves and

6 NCVO, Guidestar research shared at the recent 2009 Recession Summit (June 2009), taken from the NCVO Almanac
7 Namely, NCVO and ACEVO – which, admittedly, are representative bodies, but on this particular topic seem to be

taking a lead rather than being ‘pushed’ by members.

8 Reflected in the fact that the NCVO Funding Commission has picked access to capital as one of its three focus areas.
9 Futurebuilders has stimulated demand, through a combination of scale/PR, the carrot of grant money alongside

loans, and the advice and support provided by the programme.

10 Conversations with NCVO Sustainable Funding Project indicate that confidence is currently a major barrier.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

ƒ Identify themselves as givers/shoppers/investors11, and adopting the funding tools commensurate

with their chosen role - either in-house, outsourced or in partnership
Key barrier: cultural tension
The importance of building up and maintaining reserves may well be recognised by charities, but
invariably is not prioritised. It is quite common for small- and medium-sized charities (the bulk of the
sector) to run on a ‘cash in, cash out’ basis. This is, in many ways, perfectly understandable: charities
exist to help their beneficiaries, and the priority of the charity is meeting the needs of those beneficiaries.
Money is a means to the end of helping beneficiaries – which is often translated into every penny
received should be spend on direct activities.

This view is the popular one. The general public can be sceptical of reserves12, in the same vein as they
are sceptical about administrative costs. As can be individual donors, as well as institutional donors,
including some foundations and sector commentators.13 These views influence charities. Not only is
there is little external pressure to prioritise capital, indeed charities may even be discouraged from
doing so by perceptions of ‘unreasonable’ levels of reserves.14

The issue runs deeper than donor perceptions. Research into finance in the arts world highlighted that
some arts organisations see a financial deficit as a badge of honour; ‘one measure of the excellence of the
artistic product is the size of the deficit’.15 This tension is not unique to the arts sector. It is not hard to
uncover through discussion with charities or the wider public the suspicion that financial strength, or
aiming for a surplus as opposed to break even, is somehow inconsistent or even incompatible with
social mission.

Grants and donations are the lifeblood of charities, and will remain critical to the future health of the
sector. They are the form of funding charities are most comfortable with. Yet grants and donations are a
finite resource, and therefore it is important to use grants where they are most needed.

There are a variety of reasons behind the sectors’ preference for grants, beyond familiarity, including:
ƒ The lack of recognition, mentioned previously, of a distinction between different types of money –
the basic income/capital distinction, the various forms of capital need, and how these are best met
(using different financial mechanisms).
ƒ The perception that grants and donations are ‘free money’. This ignores the fact that such money is
rarely free. Establishing the costs of raising funds, sector-wide, is very difficult, but in the UK most
charities find it costs between 15 and 25p to raise £1.16 Finally, the costs of reporting on the grant can
be high; one research report identified that the average cost of the reporting burden ran to 6% of the
original grant, over and above what the charity would spend on its own reporting.17
ƒ In some quarters, a sense of entitlement, along the lines that charities do good work and should
therefore be given the money.
ƒ Scepticism regarding the motives of suppliers of alternative forms of finance. Why do specialist
banks and lenders, and those who invest in such institutions, do so? Are they really interested in
supporting charities in their mission, or are they interested in getting their money back, or indeed
are they getting involved because they are aiming to make money?

11 As identified in Julia Unwin (2004) Grant-making tango

12 Most recently seen in the lack of support for charities claiming compensation for funds invested in Iceland.
13 For example, Charity Navigator in the US; see
14 An acceptable level of reserves is usually seen as being equal to three months worth of expenditure, with significantly

more or less giving rise to concern. This rarely takes into account the make up of the charity in question’s balance
sheet, however, or its activities and therefore its particular capital needs.
15 New and Alternative Financial Instruments, final report of Mission, Models, Money programme, available at
16 Charity Facts website,
17 NPC (2008) Turning the Tables in England

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Emerging players and ideas 
Generally speaking, there seem to be fewer initiatives in this particular ‘pillar’ area than in others. One
approach has been to argue that a steady stream of capital supply will unlock demand. Arguably supply
on its own is proving insufficient, and proactive demand-focused initiatives are required.

Below are some of the ideas underway for tackling some of the issues identified above.
ƒ The NCVO Sustainable Funding Project, which has been running for several years, takes alternative
finance to the sector through open access tools and training. The latest phase is focusing on training
intermediaries, across the UK.
ƒ Mission, Models, Money (MMM) New and Alternative Financial Instruments (NAFI) pilot has been
forging a path in the arts sector:
ƒ The downturn, funding permitting, may provide the opportunity to recruit those with financial
skills from other sectors. The Institute of Chartered Accounts for England and Wales has launched a
‘Talk Charity’ website, in recognition that members have or may have interests in supporting

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

2) Efficient matching of supply and demand
Current situation: inefficient meeting of supply and demand
The limited understanding of the need for capital is the first barrier. But once charities and funders have
identified capital needs, there are further barriers.

There is something of a disconnection between revenue funders and capital investors. The world of
social investment operates on the margins. This is reflected in the language; ‘alternative’ finance, as
opposed to ‘mainstream’ funding. It is often, wrongly, conflated with social enterprise - another
separate sphere of activity, which is seen and sees itself as distinct from ‘charity’.

On this theme, it is worth reiterating that capital is required across the spectrum of organisational forms
(indicated in Figure 1), and that that capital need can be met using a range of capital investment
mechanisms. In other words, ‘alternative finance’ is not just for trading organisations. It can be of use to
charities that rely exclusively on grant funding.

Figure 118

Social Socially Business Commercial

Charity with Charity with Social
purpose responsible generating enterprise
fundraised/ ‘on mission’ benefit
business business profits for
grant trading/ enterprise
income contracting

Grey area in which organisations are often

loosely referred to as social enterprises

Supply itself is fragmented. Suppliers of capital do not always recognise themselves as operating in the
same space or to the same ends; supply is more easily categorised by type of product offered rather than
by motivation or intent. This means that institutional and individual donors, as well as intermediaries,
do not always recognise where they could signpost demand, or when they may learn from one another
or co-invest. To return to an earlier point, indeed, some revenue (grant) funders are unknowingly or
unwittingly providing capital investment, while capital investors can end up subsidising revenue.19

Even if supply wasn’t so fragmented, the routes to market evident in commercial markets are few and
far between in the VCS. There are no real connecting mechanisms, beyond directory listings and ad hoc,
informal signposting between specialist lenders. These issues are symptomatic of a young and
immature market. The offer from suppliers in recent years has evolved, and swiftly. A clear product
offer (i.e. ‘loans at 6%’) has only relatively recently emerged (largely through big suppliers, namely
Futurebuilders). It has therefore been difficult for charities, and referring agencies, to establish who
provides what.

The result is that organisations which could benefit from the increasing supply of capital are not doing
so, whilst suppliers are distracted by inappropriate demand. There is anecdotal evidence of charities
‘shopping around’, an encouraging sign, except where it is ill informed and inappropriate, wasting time
and effort of both charities and suppliers.

Charities need timely access to capital, not lengthy application processes and opaque decision making.
Again, confidence in spotting need and identifying appropriate mechanisms should help speed up these

Taken from Venturesome (2008) Financing Civil Society


For a discussion on the commingling of revenue and investment, see Olverhoser (2004) Nonprofit Growth Capital:

Defining, Measuring and Managing Growth Capital in Nonprofit Enterprises. Part One: Building is not Buying

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

ƒ There are few clearly defined and universally understood terms in the world of capital investment.
The jargon of investors can be alienating for charities, while the jargon of the VCS can be alienating
for more commercially-minded investors. Individuals and institutions can find themselves talking
at cross-purposes through lack of agreed terminology.20
ƒ The lack of informed demand means suppliers spend time ‘educating’ charities in one-on-one
situations, which is inefficient. Business advisers, sector intermediaries and fundraising experts
need to be equipped with knowledge and tools to help charities find help.
ƒ Differing motives (i.e. commercial/philanthropic) on the part of suppliers can result in suspicion
and wariness. Also, intermediaries (Community Development Finance Institutions, specialist
lenders) compete for investment to distribute, as capital investment is in limited supply (we return
to this point later). These two factors can impede working together (learning from one another, co-
investment, syndication) and effective signposting.

Characteristics of robust market: Efficient meeting of supply and demand

ƒ Informed, confident and appropriate demand and supply is a prerequisite
ƒ Timely matching of demand and supply – financial difficulties become exacerbated when not met
when required
ƒ Transaction costs need to be kept as low as possible. This applies to administration, assessment,
monitoring and evaluation and ongoing fund management.
ƒ Transactions also need to be as simple as possible; the challenge is to ensure innovative mechanisms
are understandable and that suppliers of capital remain approachable.
ƒ Informed intermediaries (e.g. Capacitybuilders, local CVS’s) and business advisers of quality
ƒ Corporate finance-style advice available
ƒ Supply side actively promoting co-investment/layering/signposting
ƒ Virtual or actual connecting mechanisms, between suppliers but also to connect them direct to

Emerging players and ideas 
• NCVO’s Funding Central, a website of funding and investment opportunities which aims to go
beyond a directory listing, helping charities navigate different mechanisms and suppliers.
ƒ There is an opportunity to build on the Social Investment Market Group, chaired by Venturesome,
and develop an active forum for co-investment and syndication
ƒ NESTA has provided finance for advisors/investment readiness work – via UnLtd Advantage (see
below) – as part of its Methods Lab strand of work.
ƒ UnLtd is directly engaged in investment readiness work through its Ventures and Advantage
programmes, supporting social enterprises looking to scale.
ƒ Futurebuilders is piloting a consortia approach (i.e. pulling together suppliers/advisers) to support
charities interested in working together to win public sector contracts. www.futurebuilders-
ƒ Social Finance is working with a handful of charities in a corporate finance role, helping structure
and broker capital investment.
ƒ Several virtual connecting mechanisms are in various stages of development (and with varying
degrees of success):
- ClearlySo is an online marketplace for social enterprises and investors:
- Social Finance more recently launched a Social Investment Hub, a searchable directory
aimed at bringing together those providing funding and those looking for funding:

20Recent market research undertaken by Venturesome indicated that among three distinct groups – donors/investors,
intermediaries and charities – understanding of ‘social investment’ was limited, most starkly among charities

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

3) Variety of investment mechanisms 

Current situation: increasing but limited range of financial mechanisms in use

The sector is dominated by grant funding, both in terms of the amount of supply and the cultural
dominance of this form of funding, as discussed previously. On occasion, grants are used where an
alternative tool may be more appropriate/efficient.21 There is a finite supply of charitable money, and
insufficient to go round – a situation which will only worsen in the coming years. Therefore, the efficient
use of those funds becomes imperative, to ensure that grants are used where most appropriate.

No research has been undertaken that decisively maps the availability of capital (how much, in what
forms, from where). Venturesome22, and more recently Social Finance23, have attempted to capture the
different forms of capital in use, based on observation.

The majority of capital funding available is for fixed assets. This applies to both capital grant funding
(from foundations, institutions, etc) and loan finance. Borrowing to buy a building, in the form of a
mortgage, has become more ‘normal’ among charities. This has principally come from clearing banks,
although there is anecdotal evidence to suggest reducing appetite from banks in recent times.

There is some evidence of banks providing secured lending for more general purposes, although this of
course relies on charities having assets (or directors being willing to provide personal guarantees) – and
we know charities are undercapitalised.

The handful of other mechanisms available – underwriting, unsecured loans, quasi-equity, equity – are
barely used. Furthermore, where they are used, they are available in the short- to medium-term (over
three to five years). The exception is long-term, secured loans (i.e. mortgages). Little genuinely patient
capital/soft loans are available, yet such finance would seem necessary in a sector in which success is
rarely achievable in the short-term (tackling poverty, improving education, etc).

Financial mechanisms in use have been adapted from commercial use and rarely take into account the
‘social return’ element of the investment. Social return is assessed in wildly different ways, by charities
themselves as well as by social investors. Investors take different approaches to assessing risk, return
(financial and social) and how their pricing reflects that. Few are transparent about their approach,
making it difficult for charities, among others, to assess who is providing what and why. Indeed, the
pricing of investment rarely links coherently to the expected social return of the investment, leading to

A framework capturing risk, financial return, social impact and pricing is not yet available to us. The
first step is for donors and investors to recognise their appetite for risk, and how far they are prepared
to go with their money in order to achieve the(ir) desired social impact.

All donors and investors, whatever their approach, have a particular risk appetite determined by a
number of factors, not least their expectation of financial/social return. Across their portfolio of
investments/grants, they will be aiming for a pre-agreed overall level of financial/social return.
Grantmakers, for example, take 100% risk on their grants – they will never see those funds again – but
this is accepted as it is being traded for social return. Social investors (such as community development
finance institutions), on the other hand, seek a financial return – usually the aim across the portfolio is to
at least recover the capital so that it can be recycled elsewhere - but may charge below-commercial
rates, and overall aim to break even as opposed to generate financial returns. Figure 2 reflects this idea.

21 Discussed, with examples, in Venturesome (2008) Financing Civil Society.

22 Venturesome (2008) Financing Civil Society. Previous publications have tracked the development of the market year on
23 Social Finance submission to NCVO Funding Commission, available at

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Figure 2

Figure 2 also sketches out how investors weigh up how to price the level of risk. The level of risk is
commensurate with the nature of the capital need, but for social investors, pricing will also factor in the
expected ‘social return’ – financial return is traded for social return.

Finally, and linked to the above point, few suppliers have demonstrated a robust and resilient income
and expenditure model themselves – aside from those operating at scale at the lower risk end of the
spectrum, and even there all is not well. Many are greatly threatened by the current economic climate of
low interest rates; most suppliers required subsidy of some kind, and/or made losses, even before the
recent downturn.

Characteristics of robust market: clarity 
ƒ Clarity regarding how the three dimensions of risk, financial and social return, and price work
ƒ Clarity regarding where donors/investors place themselves on this three dimensional spectrum.
ƒ This requires established asset classes, resulting in a genuine range of mechanisms that meets the
financial needs of charities (senior debt through to grant capital).

It is likely that the limited range of mechanisms in use reflects the small size and immaturity of the
market. But it also reflects:
ƒ Risk aversion, on both demand and supply sides
ƒ Funder motivation. For example, underwriting is barely used. There seem to be two reasons for this.
One, the benefits of underwriting are difficult to articulate. Over 100 underwriting investments have
been made by Venturesome, and in close to 90% of cases the funds go undrawn. The impact does
not come from drawing the funds, but in having a safety net which enabled the charity to proceed
where otherwise it might not have done. But pointing to what might not have happened otherwise
does not provide a particularly tangible success story – or, rather, it does not fit the paradigm
funder success story. Two, much supply is under pressure to ‘get the money out of the door’, as if
this were a measure of success. Linked to this are pricing difficulties; how to cover costs of
supplying underwriting, if the funds are not drawn, in this low interest rate climate.
ƒ Lack of quality advisers / corporate financiers in the sector. The bulk of strategic and financial
advice typically points charities to fundraising (raising grants), the mainstay of the sector.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

ƒ Legal structures within the sector limit investment (e.g. equity is not available to charities, asset lock
on community interest companies).

Clearly, a variety of investment mechanisms relies on a resilient supply of capital, which can be used in
innovative ways. This is covered in the next section.
Emerging players and ideas
ƒ Venturesome has divided its fund into a series of experimental funds, including:
- Development Fund, testing connections between providing development capital, the
capacity building that enables and ensuing social impact
- Innovation Fund, testing out new financial mechanisms
- Standby Fund, scaling low-risk investments (e.g. underwriting), as an offer to philanthropic
ƒ Social Finance is developing thinking around a Social Impact Bond, linking investment directly to
social outcomes, with investors and investees ‘rewards’ linked to success in delivering pre-agreed
outcomes. See
ƒ New Philanthropy Capital (NPC) has historically taken a broad church approach to methods of
measuring social impact (all were welcome), but is moving towards generating common tools for
use by the sector, and benchmarking. See
ƒ The CIC Regular recently closed its consultation, results pending, on lifting the dividend lock on
CICs, which has for some restricted access to capital. Elsewhere, the Charity Commission has been
working for some time on a new form of legal structure, the Charitable Incorporated Organisation,
partly intended to simplify reporting and regulation.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

4) Resilient supply of capital  

Current situation: no clear supply of capital

As discussed previously, the bulk of funds available to the sector take contract or grant form; whether
via public donations, high net worth giving, trusts and foundations or central or local government. The
size of capital supply available to the sector is unclear; it has been estimated at £1 billion but there is no
robust evidence to support this figure.

Estimates are hampered by the lack of transparency and lack of agreed definitions. One can observe,
however, that supply is dominated by government funds (of which ACF manages the bulk, c£415m24).
Very few philanthropists are engaged in social investment, indeed there are limited opportunities for
them to do so. There are even fewer opportunities for the general public to get involved – aside from
putting funds on deposit with specialist banks (e.g. Triodos, Unity Trust Bank, Charity Bank), in order
to see funds used to support charities via low-risk financial mechanisms.

There is gathering interest in mission-connected investment (investing endowment funds in social or

environmental opportunities, for market return) from foundations, but programme-related investment
(investing funds at below market return, to generate social return) is proving a bigger step.

As indicated previously, banks have become more active in this sector over the last ten years or so,
largely through the provision of mortgages. Government schemes, such as the Enterprise Finance
Guarantee Scheme, are ostensibly open to the sector but subject to the same decision criteria as banks
operated previously.25

If we look at how the sources of supply, above, are distributed, again the majority of supply is at the low
risk (secured lending) end. Figure 2 indicates the range of mechanisms in use, and for what capital need
they are most appropriate – the lightly shaded area indicates where supply is dominant, and the dark
shaded area where funds are in shorter supply.

Figure 326
Secured evidence of
loan commercial
finance available

Property/ Pre-funding of
Cash flow Growth
asset fundraising/
Patient needs capital
purchase income
Need for further supply
Equity Appropriate funding of capital and
(correlation) development of
financial instruments

24 Funds under management include Futurebuilders, Health Social Enterprise Investment Fund and
Leading to concerns that the lack of take up/accessibility may be translated (wrongly) as indicating that the sector
does not need working capital support.
26 Adapted from Venturesome (2008) Financing Civil Society

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Specialist banks are increasingly active (particularly over the last nine months) and strong, but the
majority operate at the relatively low risk end of the spectrum. The remainder (most) suppliers are
independent, small specialist lenders. Most suppliers are national, although there are a number of local
initiatives (for example, Key Fund Yorkshire).

In some ways, the need for access to capital is a symptom of another cause, hinted at earlier in this paper
– namely, the revenue funding market. This paper is not the place to discuss this issue27 but it must be
recognised that some capital investment is effectively compensating for poor (income) donor practices.
Characteristics of robust market: diverse supply of capital 
ƒ No one dominant source of supply, but a diversity of supply from public, private and individual
ƒ As before, a sector in which funders/donors themselves recognise capital needs and understand
what type of donor they are (giver, project grant-maker, purchaser, investor) and adapt appropriate
tools/ways of working that reflect that intention
ƒ A diversity of supply therefore requires an up-skilling of current sources of supply, if they are to
adopt capital investment mechanisms themselves, and/or a variety of distribution routes, that are
transparent about risk/returns/pricing so that suppliers can select appropriate partners through
which to distribute funds
ƒ Referring back to Figure 2, a greater supply of capital that is at genuine risk (i.e. source of supply
that are able and willing to sustain losses), recognising that for the majority of charities it is not
possible to deliver both financial and social returns. Of particular concern is the increasing hype
around the potential for commercial investment into the sector (with the ultimate aim of extracting
funds from the sector for distribution to private/commercial investors).
ƒ This, of course, requires distributors (social investors, community development finance institutions)
that can demonstrate resilient (sustainable) income / expenditure models. Only a handful have
demonstrated a resilient income/expenditure model, without recourse to external (grant) subsidy,
and that was prior to the current low-interest rate climate which is extremely threatening to many

ƒ Not only is the financial climate threatening charities themselves, it threatens the resilience of retail
investors and indeed sources of supply. Continuing dominance of government funding in this space
is unlikely, while foundation endowments have typically dropped by 20-25%, squeezing income
available for distribution. This may offer an opportunity for alternative, recyclable mechanisms –
but not if it cannibalises existing sector (income) funding.
ƒ Among potential sources of supply that are socially motivated (foundations, philanthropists), there
is some scepticism re. the social benefits of social investment – why social investment is beneficial
for the investee/what connection it has to the outcomes delivered by the investee. Specialist lenders
have struggled to articulate their role and its value to the sector – more work is needed here.
ƒ There has been no coherent offer to philanthropists as to how to get involved in this area. This may
be compounded by the lack of tax incentives; donors receive relief on charitable donations, as do
investors in venture capital at the other end of the spectrum, so why are there no tax breaks for
those wishing to invest capital for a period of time to finance social investment?
ƒ The charitable world is arguably divided into (financially motivated) investors and
(philanthropically motivated) givers – this dichotomy is found within foundations, and within
individuals’ own behaviour. It is a bigger psychological/cultural leap than might at first appear, to
go from giving money away to investing it, not for commercial return, but so that it may be recycled
for social impact. Products are required that will entice investors in. The challenge is succinctly put
by Sasha Dichter of the Acumen Fund: ‘As a sector I think we could get a lot more sophisticated in
explaining that there’s a big space between a negative 100 percent financial return (for grants) and double

27 See Clara Miller (2005) The Looking-Glass World of Nonprofit Money: Managing in For-Profits’ Shadow for an excellent
overview of the difficulties.
Good Capital newsletter Issue 15, Acumen Fund Puts Its Money Where Its Mouth Is, Kevin Jones

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

digit returns for private equity. We need to define that middle ground if we expect to see significant influxes
of new capital.’

Emerging players and ideas
The financial crisis has catalysed a number of debates, if not concrete action, around finance and
whether it ought to be more socially-minded. A number of ideas and movements are gathering
ƒ Commission for Unclaimed Assets laid considerable ground for the potential for unclaimed assets
to capitalise a social investment bank. The debate has evolved since, culminating in the Cabinet
Office’s current consultation around the potential role a Social Investment Wholesale Bank might
play in supporting access to capital, and the potential sources of supply for such a bank.
ƒ Mission-connected investment is gaining ground in the UK, taking learning from the US. See
ƒ Venturesome and the Esmée Fairbairn Foundation collaborated on a programme-related investment
pilot. The Foundation has subsequently launched a Finance Fund. Venturesome is exploring other
potential partnerships with a view to unlocking charitable funds for capital investment.
ƒ Citylife bond issues; generating income for charities by unlocking philanthropic capital (from
communities of interest) that is then invested in registered social landlords, with the interest
distributed to charities:
ƒ Considerable momentum is gathering behind the concept (and practice) of community share issues,
the old idea of public subscription reinvented for current times, spearheaded particularly by the
Development Trusts Association and Cooperatives UK.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 


A number of key questions arose from the roundtable which go beyond the issues identified in this
paper. These are included here as additional points to reflect upon:

ƒ Social investment for whom? This paper uses ‘charities’ as short-hand for a broad spectrum of
organisations identified in Figure 1, but this spectrum is biased towards charitable institutions -
what of public sector organisations, individuals, or groups of individuals? Do they, equally, require
access to capital, and in what forms? Are the barriers the same for these groups? Equally, we should
note that access to capital is more of an issue for smaller entities than large, established

ƒ Capital from where? Sections 3 and 4 of the paper touch on the range of supply required, and the
potential sensitivities of commercially-motivated investors extracting capital from the sector. How
can we ensure that funds flowing to the sector are catalytic, i.e. help develop the sector, as opposed
to flowing out as quickly as they flowed in which risks weakening the existing ecology?

ƒ How do we capture social capital in this debate? This paper focuses exclusively on financial
capital; should social capital (the confidence and capacity built up within social networks) be
factored in to the debate? And how?

ƒ The importance of research – as Section 1 indicates, evidence of need and demand relies too heavily
on anecdote. Research into the understanding and needs of charities themselves in relation to
capital is overdue, perhaps particularly in relation to trustees’ perspectives.

ƒ Who pays for investment readiness support, and how do we ensure its quality? A mix of parties
pay currently; third parties, suppliers of capital themselves and charities themselves. This is linked
to the latter point as to who delivers investment readiness and the quality of the work (how do we
recruit skilled people into this field?), because whoever funds the work they will only be willing to
do so if confident of the quality.

ƒ The need to develop financial mechanisms that capture appropriate social returns. Building on
Section 3, third sector funding (income for day-to-day activities) increasingly specifies desired
outcomes as a condition of funding, whether in a formal or informal contract arrangement
(particularly with the increase in commissioning and contracting from government). Contract
funding is wholly appropriate in certain circumstances, but if all funding took this form there would
be little room for innovation. Suppliers of capital ought not to fall into the trap of seeking project
outcomes as the indicators of success for their funding; capital investment is directly linked to
building the capacity of organisations, and indirectly linked to the impact on beneficiaries. More
work is therefore required on capacity building monitoring and evaluation tools. CAF, via its
Advisory programme, has developed work in this area (among others). Venturesome’s
Development Fund is applying such capacity building measures to its investments.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Providing capital and liquidity to market intermediaries 
A briefing paper 

September 2009 

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Charities Aid Foundation (CAF) is a registered charity that works to make the most of money for 
charities  and  social  enterprises.  CAF  believes  that  access  to  capital  is  vital  for  a  healthy  and 
thriving charitable sector. 

Over  the  years,  CAF  has  been  instrumental  in  pioneering  and  incubating  funding  solutions; 
including Venturesome, a high‐risk investment fund and Charity Bank, which became independent 
in 2002. 

Venturesome provides capital to charities and social enterprises, operating in the space between 
providers of charitable grants and providers of bank loans at market rates.  Since launch in 2002, 
over £15 million has been offered to over 250 organisations. In addition to accumulating practical 
deal experience, Venturesome has endeavoured to have a central  role in building a robust social 
investment  market,  adopting  an  open‐book  approach  to  share  knowledge  and  build  experience, 
but also ready to operate in competition so as to raise standards. 

For more information, visit: 
If you wish to receive information from Venturesome, please send your contact details to: 
About the author 
Paul Cheng  previously  worked as  a corporate  finance lawyer with Slaughter and May in London 
and founded an NGO for lawyers in China, before joining Venturesome in 2006 as an Investment 
Manager. After completing his MBA from The Kellogg School of Management in the United States, 
Paul worked as a business strategist for Microsoft. 
© Venturesome 
The text in this document may be reproduced free of charge providing that it is reproduced accurately and not 
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CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

This paper discusses the meaning and practical implications of wholesale banking in the context
of the UK social investment market, prompted by the Office of the Third Sector’s consultation
regarding a Social Investment Wholesale Bank.

We publish this paper as a contribution to the current thinking on social investment, and the
role that a Social Investment Wholesale Bank might play in supporting the existing ecology of
this emerging and still fragile market.


Financial intermediaries, such as Venturesome, exist to provide investment into charities and
social enterprises. Such intermediaries perform a “retail” funding function because they invest
directly into frontline, social-purpose organisations through repayable financial instruments
such as loans, quasi-equity and equity.

Generally speaking, non-governmental funders rely for their own balance sheets either on
grants which are hard to raise (e.g. Venturesome, Fair Finance etc) or depositors who must be
repaid (e.g. Charity Bank, Triodos Bank etc). The consequence of this is that the supply side of
the market consists of relatively few social investments funds (because of the difficulty of
attracting gift capital), small funds that are unable to scale up, and funds that are risk averse.

One solution to this market failure is a social investment wholesale banking service which
aims to strengthen the financial capacity of these financial intermediaries. Such a service does
not necessarily need to be performed by any one institution (and this paper will argue that it is
preferable for a variety of players to deliver this function for the market).

We outline some practical ways in which such an investment banking service might transact on
a day-to-day basis with retail intermediaries – with a view to providing both capital and
liquidity to this nascent market. In the Appendices, we provide a step-by-step case study29 of
how a social investment wholesale bank might actually deploy its funds in a deal, in addition to
exploring some fundamental market concepts (such as the nature of capital, risk and return)30.

The purpose of this paper is to provide a framework for discussion, debate and reflection. It is
by no means exhaustive. We hope that these ideas trigger constructive debate.

See Appendix A
See Appendices B and C

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Banking for bankers 

In this paper, we use the phrase “Social Investment Wholesale Bank” (‘SIWB’) to denote a
generic institution which performs social investment wholesale banking functions.

However, it is important to note that the SIWB need not be a single institution – but perhaps
should more accurately be seen as a banking function which could be performed by a number of
players. Indeed, in the future, every major grant-making trust may have their own SIWB

The SIWB function can be effectively performed by any organisation which:

• Has a large balance sheet (£50m or more)

• Is willing to invest over long time horizons (5 to 10 years)
• Is motivated to act in the wider interests of the market.

In the same way that specialist lenders and intermediaries (such as Venturesome, Triodos,
Charity Bank etc) provide working capital and development capital to charities and social
enterprises, a SIWB could in turn provide similar investments directly into those same
intermediaries (e.g. gearing lenders’ balance sheets so that they can do more and reach more

US Calvert Foundation – a wholesaler and the market leader 

In technology circles, there is a saying “the future has arrived – it’s just not evenly distributed”.
In the world of social investment, the future vision of a brave new world in which an institution
performs market-level SIWB functions already exists. In the United States, the Calvert
Foundation has been successfully performing such a role for over 12 years.

Through its Calvert Community Investment Notes31 product, Calvert has succeeded in creating
a social investment platform which connects the retail investor with a range of social
investment funds. The Calvert Notes product (essentially a bond with a coupon of between 0%
and 3%) is available to individuals in 49 states (financial regulations in Pennsylvania preclude
the sale of the Notes there) through brokerage accounts and an online platform. Calvert has a
historical loss rate of less than 0.25%, and as a result, retail investors in Calvert Notes have
never lost principal or interest. To date, over $350m has been raised from over 5,000 investors.

With the money raised, the Calvert Foundation then acts as a wholesaler of capital. It allocates
capital (mainly through low interest debt) to 250 market intermediaries in the United States
such as Acumen Fund32 and RSF Social Finance33 (who in turn invest directly into frontline
beneficiaries around the world).

As a measure of how robust this product is, Calvert reported that since the financial crisis of
2007 investor appetite for their Notes product has significantly increased. Calvert closed 2008


CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

with $207m in assets, up 22% from 2007, and with more than $42m deposited into the Calvert
Notes (up 33% from the previous year).

How are new markets created? 

In order to achieve optimal market effectiveness in which SIWB functions thrive, we need a
variety of market players who are both able and willing to strike a balance between being
competitive and being collaborative. Being too competitive too early will stunt the overall
development of the market. On the other hand, being ‘too collaborative’ later on might perhaps
reduce individual market players to below their true potential.

Retail funders must collectively focus on both their own ‘slice of the pie’ and the overall ‘size
of the pie’. Single-minded focus on either one or the other consideration will lead either to
unhelpful market behaviour or the bankruptcy of the funder.

Wholesale funders, however, should be primarily concerned with the overall ‘size of the pie’. A
SIWB should see its public interest role as enabling flows of capital to support specific market
infrastructure. The diagram below illustrates this tension:


share  OPTIMUM




Total size of social 
investment market 

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

A wholesaler of capital 

“The [Social Investment Wholesale Bank] would support the long-term growth of a thriving
third sector by working with investors and lenders at the ‘retail’ level”34

It is important that a social investment banking function carried out by a government entity
operates at the wholesale level because this:

1. Minimises the danger that public money ‘crowds out’ private investment;
2. Builds on the expertise and hard-won experience of existing retail intermediaries,
thereby reducing (i) the risk to the public purse of repeating the mistakes of previous
social investors and (ii) the search costs of identifying and assessing social investment
3. Avoids the risk of opportunistic behaviour by a government-backed entity which might
be tempted to compete unfairly for the ‘best’ social investment deals.

Any organisation performing SIWB functions should respect the emerging ecology of the
existing market. The guiding principle should be “coordinate and cultivate” (not “command
and control”). In this way, the SIWB could provide helpful signals to the market which then
gently influences how others decide to allocate capital (both philanthropic and commercial).

Above all, a government-backed SIWB should not behave as either a regulator or an all-
powerful ‘central bank’.

Resilient supply of capital 

In the Venturesome “Access to Capital” paper35, a ‘resilient supply of capital’ was identified as
one of the four critical pillars to a robust social investment market. A number of key barriers to
progress were also drawn attention to.

A SIWB function could help to alleviate two of those barriers identified:

(1) “Dominance of government funding” – the SIWB could identify, select and invest in the
best, private sector specialist lenders (especially those that can demonstrate resilient
(sustainable) income/expenditure models).

(2) “Specialist lenders have struggled to articulate their role and its value to the sector” –
the SIWB could enable those specialist lenders with a proven track record to do more
and act with greater flexibility in the market. The SIWB could play a supporting role in
coordinating the patchwork of private funders.

Social Investment Wholesale Bank (July 2009), A consultation on the functions and design (Office of the Third
Venturesome (2009) Access to Capital (E Goodall and J Kingston)

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

How a SIWB function could help 

Social investment wholesale banking could help resolve the following situations which
currently trouble social investors and specialist lenders:

(1) Leveraging up funds 
See Appendix A for a detailed case study of how a SIWB could help a retail funder attract
mainstream banking facilities to gear up its fund with commercial debt. Of course, the SIWB
would need to have the skills to work closely with such funders/borrowers to ensure that they
have the necessary capital to achieve their missions without the burden of an inappropriate
amount of debt.

(2) Leveraging up deals 

Problem: A specialist lender wants to make a £500k loan into a charity – but the size of the
lender’s overall fund precludes single deals of that amount because it would increase the fund’s
idiosyncratic risk to an unacceptable level.

Solution: The SIWB could co-invest with the specialist lender on a pari passu basis (say, an
even split 50:50 or perhaps 75:25 in those cases where the SIWB feels that the specialist lender
should shoulder more risk). This solution does not violate the principle that the SIWB should
only act as a wholesaler of capital provided that the SIWB only acts in this supporting role at
the behest of the specialist lender. The SIWB should refrain as far as possible from imposing its
own terms on the deal (but, of course, may reserve the right to refuse to participate in the deal
in the first place). Again, the guiding principle is “coordinate and cultivate”, thereby respecting
the ecology of the market.
 (3) Refinancing loan portfolios 
Problem: A specialist lender has £3m of low risk loans to charities in its portfolio. It now
wishes to refocus its portfolio on a new customer segment, but does not have sufficient capital.

Solution: The SIWB could refinance the portfolio by purchasing the low risk loan book.

In the United States, the Community Reinvestment Fund36 (‘CRF’) has purchased more than
2,100 loans worth almost $1 billion from community development corporations and other
community development leaders whose portfolios are not large enough to attract institutional
investors directly. Since its inception, CRF has provided liquidity for loans that have generated
or retained more than 35,000 jobs, financed almost 600 women or minority-owned businesses,
and built more than 16,000 housing units.


CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

(4) Providing exit strategies for social investors

Problem: Potential social investors are frequently deterred from making equity investments
into social enterprises because there is no prospect of an ‘exit’.

Solution: The SIWB could offer to buy out equity investments in key sectors (e.g. social
enterprises engaged with environmental issues or delivering services to old people) in order to
provide such an exit – thereby encouraging more investors to enter those markets.

(5) Creating liquidity through secondary markets 

There is a role for the SIWB to create liquidity through setting up secondary markets in:

• Revenue Participation Agreements (“quasi-equity”)37

• Social Impact Bonds38
• Community shares39
• Community bonds40

A secondary market for these financial instruments would encourage their greater use and
proliferation. Currently, there are either no secondary markets for such instruments or there are
matched bargain mechanisms which offer very little liquidity.

(6) Creating new financing mechanisms 

An advanced function for a future SIWB would be its ability to create new financing structures
that unlock new capital from the private to the social sector. The SIWB could act as a financial
architect which can design new instruments which convert something that is socially valuable
into a format which will attract new investors who need such instruments for a potential

For example, in the United States, Wall Street Without Walls41 (a corporate finance advisory
working with nonprofits) assisted the Community Reinvestment Fund (a large community
development loan fund in Minneapolis) with the structure and process of getting a AAA/AA
rating from S&P on a $52m pool of economic development loans. This then allowed six new
insurance companies to enter the social investment market.

See: Venturesome (2008) A Venturesome case study in using Revenue Participation Agreements (P Cheng)
See: Social Finance (2009) Social Impact Bonds – Rethinking finance for social outcomes

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

(7) Extending investment time horizons – (very) patient capital

Many innovative areas of social finance are currently being incubated in pilot projects which
have yet to prove a sustainable revenue model. A common problem is that it may take five, ten
or more years to prove these models. Unfortunately, the vast majority of investors simply
cannot afford to extend their time horizons to such lengths. As a consequence, these projects
may end up being starved of capital.

An innovative SIWB could explore using its large balance sheet to hold assets for ten years or
more in order to give a sufficiently long ‘runway’ for the most promising areas of social

For example, these might include:

• Community Land Trusts

• Social Impact Bonds
• New ways of seed funding ‘next generation’ public services
• New financial instruments for purchasing and managing conservation areas.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Appendix A 
SIWB case study42 

An example of how a Social Investment Wholesale Bank might work with a retail 
funder to leverage in private capital43 

1.0 Introduction

Acme Microcredit44 (‘AM’) is a micro-credit lender managing a portfolio of personal and

business loans to low income individuals and small businesses in run-down communities. Over
the last few years, the portfolio has demonstrated a healthy average return of around 12% per
annum, but with a total portfolio size of £4m this return is still too small to cover all of AM’s
operating costs. AM is, therefore, dependent on a permanent amount of annual grant funding.

AM does, however, have a good operating track record – over the last 5 years, bad debts have
successsfully been kept at less than 5% of the portfolio.

Up to now, AM has been funded entirely through local authority support, together with
individual donations and grants from charitable foundations. It needs to refresh these every
year, which can be burdensome and makes long-term planning difficult.

Given the relative stability of its loan book and its track record, AM discusses with the SIWB
the potentially transformative idea of scaling up its operations by using SIWB funding as a
catalyst to bring in extra funding from private sector banks. This would enable AM to expand
beyond its traditional donor base, accessing commercial funding, which would put it on a more
sustainable long-term basis.

AM agrees with the SIWB a proposal whereby AM seeks a £10m loan from a group of
commercial banks, which will help it more than triple the scale of its lending. At this size, the
return on the portfolio would be sufficient to cover all of AM’s operating costs plus generate a
surplus that could be used to build reserves. AM could, therefore, become self-sustaining.

In exchange for a fee, the SIWB agrees to provide a credit guarantee to the private sector banks,
putting up cash collateral to to cover the first 20% of any losses incurred in the portfolio. Since
historic bad debts have only been running at 5% of the portfolio, the SIWB has effectively
offered to cover 4x any expected losses. This ought to make providing the remaining
unguaranteed portion of the loan a relatively safer proposition for a commercial bank, enabling
a significantly greater amount of funding to be available for AM. Based on this guarantee from
the SIWB, the commercial banks are prepared to fund the £10m.

This case study is for illustrative purposes only, and makes no reference (either express or implied) to any actual
organisation or investment.
We are grateful to Mark Cheng of Chelwood Capital LLP for his advice in the preparation of this case study.
This is a fictional company. Any resemblance to actual companies is entirely coincidental.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

So, in this example, by putting up say £2m of capital to underwrite the first 20% of AM’s
portfolio, the SIWB has enabled AM to bring in a further £8m of commercial funding from
banks on top, leveraging the value of its contribution four times over. Moreover, it has enabled
AM to transition from a precarious donor-funded model to a sustainable, long-term
commercially-funded model on a much wider scale.

Diagram of structure

Social Investment Wholesale Bank (e.g. a mainstream clearing
(or SIWB function) bank)

£2m First Loss
Guarantee £10m
£2m Collateral in Facility
Custodial Account


Personal & Business Loans

• Economies of Scale - Acme Microcredit’s principal constraint is access to capital.

Capital is critical to growing the business in order to achieve a profitable breakeven as
quickly as possible. Given that the costs of the business are predominantly fixed (wages,
office rent), higher revenues from an increased loan book immediately flows through
into higher operating profit.

• Efficient capital management – AM is no longer restricted to only being able to make

loans when it has secured the funding from donors, or to be tied to the local authority
budgeting schedule. It now has a reliable, long-term source of funding that it can
drawdown upon when needed, and only to the extent needed.

• Administrative simplicity - this is administratively an easier system to handle as it

reduces the need for AM to be continuously negotiating with the local authorities and/or
grant funders for capital and then worrying about having to immediately invest that
capital when available. In this system, capital is immediately put to good use as soon as
it becomes available. The structure enables the social mission to be delivered with
greater independence from the fund-raising activity.

• Facilitate charitable capacity funding – Grant funding can also now be focused more
efficiently on capacity building of the organisation, rather than programme delivery
which can be funded by the private sector. This enables AM to build infrastructure and
resources for the long term.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

• Ability to grow the business organically – as AM continues to prove its track record and
keep losses down, the commercial banks funding AM should become more comfortable
to permit a higher ratio of loan size relative to the guarantee support provided by the
SIWB. The proposal, therefore, enables AM to fund growth of the loan book (subject to
continued solid performance) without needing to seek additional funders.

• Accessing new sources of commercial funding – the proposal brings in private sector
involvement and opens up a new source of funding for the organisation. It also
introduces traditional pure commerical players into the social investment sector,
increasing private sector knowledge and understanding and bringing a much greater
flow of private capital into the sector.

2.0 What are the benefits for the SIWB of providing capital in this way?

• Enhanced Return on Investment & significantly increased capital available to the sector

• More efficient use of capital – initial capital is continually recycled and leveraged up

• Less administrative burden – no need for repeated drawdown applications during year

• Brings in private sector funding for high social impact projects

• Enables the private sector to become familiar with community development projects and
to develop greater knowledge and understanding of the sector, leading to further private
sector involvement opportunities and bringing more overall capital to the sector.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Appendix B 
What is ‘capital’ anyway? 

The word ‘capital’ frequently causes confusion (and is generally misunderstood) in the
voluntary and community sector. For many charities, ‘capital’ is synonymous with the purchase
of tangible fixed assets such as buildings and equipment (because it is confused with ‘capital
assets’). However, that is not the meaning used by social investors. Generally speaking, social
investment draws a distinction between project funding which focuses on income and
expenditure patterns (“buying social impact”), and capital funding which focuses on an
organisation’s balance sheet (“investing in the organisation”).

However, as the need for access to capital is increasingly recognised by sector commentators, a
more philosophical question arises as to what exactly is capital?

Firstly, ‘capital’ is not, and cannot be, just accumulated assets - it refers to the potential value
that those assets hold to deploy new production or create new value. For example, a house can
be seen as a collection of bricks. But, through legal title protected by a legal system, a house
can also release money by acting as collateral.

Capital should not be confused with money - which is only one of the forms in which capital
travels. Money is just a medium of exchange. Money is not capital itself because value cannot
consist of mere metal or paper. In other words, money facilitates transactions, but it is not itself
the creator of additional means of production.

Much of the confusion surrounding the abstract notion of 'capital' dissipates as soon as you stop
thinking of ‘capital’ as a synonym for ‘money saved and invested’. Capital can be fixed into
many forms - money is merely one of them.

Capital is also a dormant value. To unlock capital, we must go beyond just looking at assets as
they currently are - to thinking about them as they could be. Therefore, unlocking capital
requires a conversion process - a way to fix an asset's economic potential into a form that can be
used to initiate additional production. A useful analogy is to imagine a lake. What is the lake’s
potential? You could use the lake for fishing and boating. But if you understood the
significance of the lake’s elevation, you could also use the water to create hydroelectric energy.

Examples of unlocking economic capital include:

1. Land + legal title = enables the creation of mortgages

2. Cash + collateral account = financial leverage

3. Cash + underwriting agreement = financial leverage

4. Cash + shareholders’ agreement = structuring of risk and reward

The key is always to find a way to convert and fix the potential value of an asset into a form
that can do additional work.

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

Appendix C 

Thinking about the risk/return spectrum 

In order to create new financial products for the sector, it is useful to see donors and
grantmakers as ‘investors’ along a spectrum of risk/return starting from -100% to (say) a market
rate return of +8%.

‘Giving away money’ is another way of saying “I’m happy with a -100% rate of return”. So
grantmakers are one type of investor with a specific risk profile. However, there are many other
types of investors who are comfortable with a range of risks and commensurate rewards (e.g. I
may be happy to buy a ‘charity bond’ which is capital protected, but gives the interest/coupon
to someone else). In the United States, products such as the Calvert Community Investment
Notes have proved popular.

Looked at in this way, it can be seen that charities have been predominately focussing on just
one type of investor – situated at the “-100%” end of the spectrum. In future, a social
investment banking function could cater to the full range of investors along the whole
continuum of risk/return (up to, but not including, market-rate returns) – thereby, unlocking
new capital into the sector.

- 100% 0% + 8%
Grant‐makers  Forgo interest Market‐rate return 
(capital grants) 

Likely spectrum of activity for SIWB functions 

However, most people find it difficult to think about this risk/return spectrum because it not
does come naturally to the way we have been conditioned to think. There is a mindset problem.

The following comments from Sasha Dichter45 of the Acumen Fund neatly articulate the

“One of the biggest challenges for anyone in our space is asking people to combine an
investing mindset with their philanthropic thinking.

Not a lot of organizations are asking people to go to that middle space and consider, ‘What is
the ‘right’ return on capital for a social investment?’ ‘What’s the ‘right’ level of impact per
dollar spent?’

“Acumen Fund Puts Its Money Where Its Mouth Is” by Kevin Jones

CAF Venturesome: Social Investment Wholesale Bank: A consultation on the functions and design 

As a sector I think we could get a lot more sophisticated in explaining that there’s a big space
between a negative 100 percent financial return (for grants) and double digit returns for
private equity. We need to define that middle ground if we expect to see significant influxes of
new capital.

The big opportunity we have if we want to see real innovation to tackle global poverty is to get
more comfortable making bets on people and organizations, not just programs - the way the
venture industry bets heavily on people and networks to bring the best ideas forward.”

© Venturesome 
The text in this document may be reproduced free of charge providing that it is reproduced accurately and not 
used in a misleading context. The material must be acknowledged as Venturesome copyright and the title of the 
document specified.