Bridging the appropriate capital gap for social enterprise

Social enterprise lies at the genesis of all socio-economic development, and before the birth of the ‘corporation’ and the ‘limited liability company’ that ushered in an age of shareholder primacy.

The social enterprise model takes us back to some of the founding principles of ‘social business’, including co-operativism and mutualism. These principles maintained balance in terms of respective contributions to equity and sustainability in the local economy, balancing between the needs of the community and the capacity of nature and its community to provide. Further, the value of a social enterprise is founded on social primacy; they are set up to address ‘wicked problems’ in society, and create access to opportunities for the most disadvantaged groups and individuals.

Despite their role in civil society and the economy, many social enterprises experience ongoing challenges around their development and growth. Amongst a number of challenges that arise from managing a double or triple bottom line, access to appropriate capital remains a gap for many social enterprises.

While social enterprise models attempt to tap into all the usual sources of capital, grants and donations are often a key mechanism to underpin social or environmental value creation. Other sources of capital like debt financing, loan guarantees and equity can be employed to drive commercial activity, or develop the asset base of a social enterprise, for example as offered through impact investments. However, it’s not always obvious for social enterprises to seek such avenues, or obvious to the suppliers of grants that these alternative forms of capital are appropriate or even possible.

Since the beginning of the impact investing movement in Australia and abroad, we have heard from investors that ‘the deals aren’t there’. But on the demand side, for example amongst social enterprises, we also hear that ‘there is not enough appropriate capital’.

The role of philanthropic trusts and foundations

The endowments of philanthropic trusts and foundations are one source of appropriate capital to drive impact. They are ideally placed to invest capital that contributes to solutions via impact investing and social enterprises are potential beneficiaries of this capital.

Progressive legislation and forward-thinking trusts and foundations in Australia and across the world are helping bridge this ‘appropriate funding gap’ and understand that traditional funding strategies alone will not provide for the development and growth of social enterprises and the outcomes they seek to create.

The formalisation and growth of the social enterprise market in Australia over the last 15 years has seen the emergence of a national peak (SENS) and some state-based peaks (e.g. SENVIC) bring the partnership of governance, corporates and philanthropy together for a more efficient and effective social enterprise market that can start to grow into its full potential.

Philanthropy has provided critical funding to building out this network of intermediaries, and those organisations helping to build a more effective and efficient market, like the certification program at Social Traders.

The next critical step is the continual development of existing intermediary platforms for ‘appropriate forms of social enterprise capital’ for philanthropy to tap into, such as White Box Finance, Social Enterprise Finance Australia and the lending platform called ‘Lend-for-Good’.

Given that many trusts and foundations already fund social enterprises, they are on the front foot when it comes to understanding social enterprise realities and challenges. With the right internal frameworks, processes and skills, the philanthropic sector in Australia holds huge potential to accelerate impact through new forms of capital, alongside granting strategies.

What’s next for social enterprise at the Social Enterprise World Form (SEWF)?

GoodWolf through its Endowments for Impact Series is aiming to help trusts and foundations align their investment capital with their purpose, representing a $50 billion-plus opportunity across Australia and New Zealand. While the investment spectrum is diverse and there are many ways to generate impact, investing in social enterprises should play an important part in this ‘total impact’ investment approach.

We have learned through this program that trusts and foundations typically hold too much liquidity and are overweight in public equities, and eschew the opportunity to create genuine and deep impact through unlisted, private, hybrid or venture-type funds where highly promising social entrepreneurs pitch in hope for the appropriate capital to scale their business.

A critical part of building a resilient future is how well we are able to leverage this capital for advancing positive social and environmental impacts. SEWF offers us a platform to have a conversation about transformational capital across key stakeholders, including philanthropy.

Social enterprises offer a proven avenue to positive social and environmental impact. We at GoodWolf look forward to turning our minds to the opportunity with local and international delegates. We look forward to seeing you there.