New financing institutions have emerged in the last 15 years. Participants include commercial banks focused on the social sector, social exchanges, venture philanthropy funds, specialized investment funds and also specialized consultants focused on the social sector.12 in this context, one can speak of a social capital market.
Each actor in the social capital market takes on a role that corresponds to a certain risk-return profile. Banks provide capital for low-risk projects because they need to keep default rates low in the interest of their savers. Venture philanthropy funds finance innovative and high-risk concepts, while social exchanges are an attractive source of financing, especially for social enterprises with a proven concept. Table 12 lists the institutions in the social capital market with their equivalents in the traditional capital market and some market participants.
These institutions are in direct contact with social enterprises. In addition, there are other developments and trends that can be identified in relation to social financial services. For example, there are consultants who exclusively advise the capital providers.
Commercial banks focused on the social sector
There are banks that specialize in loan financing for the social sector. These banks specifically solicit savings in order to subsequently invest the money in projects with a social, ecological or cultural focus.3 these savings deposits are also known by the english term "linked deposits".
This specialization results in analysis capacities that are important for lending and monitoring. The success of this approach can also be seen by looking at the balance sheet totals of commercial banks with a focus on the social sector. In germany, the leading banks are GLS-bank and umweltbank. As of december 2011, GLS bank had total assets of €2.262 billion. And 116.500 customers.4 umweltbank had total assets of €1.763 billion at the end of december 2010. And 86.116 customers.5 in mid-2010, noa bank, which is also active in this area, had to cease operations after the banking supervisory authority prohibited the new acceptance of customer funds due to an insufficient equity base. Within just a few months, noa bank was able to lend almost €300 million. Gain in savings.67
In the area of banking services, there are further developments. A large area are microfinance institutions that offer banking services and especially microloans to individuals in developing countries. Microfinance institutions have been in the public eye since muhammad yunus, founder of grameen bank, was awarded the nobel peace prize, and a distinct ecosystem of intermediaries has also formed around these institutions. Two of the largest microfinance institutions are now listed on stock exchanges.313
Social investment advisors
One of the major challenges in the social capital market is the link between supply and demand. Reasons include a lack of financing expertise among social enterprises, non-standardized performance metrics and a lack of market infrastructure.8 increasingly, there are intermediaries that take over this function, helping to reduce search costs and also transaction costs through specialization and economies of scale. These intermediaries can be called "social investment advisors".9
This group tries to bring together social enterprises on the demand side and social investors on the supply side, and also to accompany the transaction process.10 in some cases, payment is made in shares of the company and is referred to as "sweat equity". A recent development in this area is the creation of a social investment bank in the U.K. Called big society capital, which is £400 million. Capital from dormant accounts and £50m each. From four major british banks. This institution then assumes the tasks of a classic investment bank, which also consist of bringing together supply and demand and also creating markets for investment instruments.11
Big society capital
Another pillar of a functioning social capital market is likely to be social stock exchanges in the future. The first social stock exchanges in south africa under the name SA social stock exchange and in brazil under the name social and environment stock exchange were rather donation platforms, where selected projects were presented. Currently developing analogous to traditional securities exchanges sog. Social stock exchanges, on which shares of social enterprises can be traded.12 to this end, a market for trading the debt instruments of social enterprises is also emerging. These social exchanges are an attractive financing option, especially for social enterprises with a proven business model and high capital requirements.13
These social exchanges are emerging in mauritius, london, berlin and singapore.1415 A key issue in this context is the valuation of shares in a social enterprise and whether investors would be more likely to pay a premium or a discount. There are no figures available yet that could allow an assessment based on relative valuations.322 this situation is likely to change as soon as the first social enterprises are listed on stock exchanges.
There is also the question of how social enterprises can preserve their social purpose. Social enterprise assets and networks are often built with the help of donations, philanthropic grants, or the support of venture philanthropy funds. These tangible and intangible assets represent a significant value that could probably even be increased outside the social objective. In addition, there is an opportunity for social enterprises to move away from the original target audience and focus on the social groups that promise more return at less cost.323 against this background, the question arises as to which mechanisms could be used to protect the social objective. One possibility is to change the company's articles of association to strengthen and anchor the social objective.324 another option is to set up a foundation that holds a blocking minority in the company and can influence key strategic decisions by participating in the supervisory board.325 in addition to a foundation as an anchor investor, it is also conceivable that socially responsible investors take a share and thus support the social objective in the sense of friendly investors.
Venture philanthropy fund
Similar to venture capital firms, venture philanthropy funds finance young innovative companies and apply the principles of venture capital to the social sector. The core characteristics of venture philanthropy are high engagement, tailored funding, multi-year support, non-financial support, organizational capacity building, and performance measurement.16 another characteristic of venture philanthropy funds is the multi-stage selection process. In addition, some funds also rely more on collaboration between social enterprises in their portfolio. Collaborations in the social sector are not yet widespread, despite the possibility of reducing costs.17
The essence is that – instead of a scattergun approach to distribution – there is a focus on a few select organizations that are judged to be efficient and effective and are identified through a multi-stage selection process. These organizations are provided with the necessary resources over a longer period of time. The organization is supported not only financially, but also with management consulting and contacts.18
HEISTER (2010) classifies venture philanthropy funds based on the social and financial return they seek as well as the social and financial risk they are willing to bear. Table 13 shows the possible classification on a spectrum between traditional grantmaking foundations and venture capital funds. The return and the risk can be divided into a private and a social component. Social risk refers to the probability that the desired social goal will not be achieved.19
Some venture philanthropy funds also operate with a financial or social side condition known as a "hurdle rate". Under a financial constraint, the social return on investment can be maximized if a minimum financial return is achieved. A social constraint specifies that the investment will go to structurally weak regions, for example, and that the financial return can be maximized under this constraint.
On one side of the spectrum, there is the grantmaking foundation, which focuses exclusively on the social return on investment. This approach is shared by a grantmaking foundation and a donor-advised venture philanthropy fund, although they differ substantially in terms of access to investment as described above. HEISTER (2010) divides venture philanthropy funds into donation venture philanthropy funds and social venture capital funds, the difference between which lies in the expected private rate of return. Social venture capital funds expect a positive return and for this reason have to accept deductions in the expected social return.330 on the other side of the spectrum, then, are venture capital funds, whose only relevant criterion is a high private rate of return. Social return does not play a role in this context.2021
Social investment funds
Social investment funds pool the capital of investors and invest these funds in specific segments.2223 they differ from venture philanthropy funds in that the investment managers are less involved in the operations of the portfolio companies and see themselves in more of a passive role. Some of these funds also invest exclusively in microfinance institutions. The volumes are quite considerable.335
There are two different mechanisms for how these philanthropic platforms can work.24 one way is to present organizations to which donations can be made. In this case, we speak of donation platforms.
The second possibility is the concept of so-called. "Crowdfundings". In this case, an appropriate concept is presented and the investors receive a return in return. This quid pro quo can then be the organization's products or shares in the organization.25
From the social enterprise's point of view, a large investor base may involve greater initial outlay, but there is unlikely to be any reduction in entrepreneurial flexibility due to fewer investor co-determination rights. It is debatable, however, as proper governance structures with appropriate investor voice also bring benefits to the social enterprise. The volumes are so far still relatively small and it is questionable whether the volumes will increase in the coming years. The reasons lie in the lack of an incentive structure for capital providers and the necessary mass. In addition, although crowdfunding is a popular concept for profit-oriented start-ups, the big success models are still missing.