This week, disability charity Scope announced a £20m bond issue, which is the first significant bond issue by an operational charity.
It’s unlikely to be the last. Geoff Burnand, co-founder of Investing for Good, a social investment organisation which worked with Scope to develop the bond, has already said he expects to see several other bond issues in short order, some of which may well be larger.
Ten or 12 more bond issues in the next few years looks like a very achievable target indeed. While it’s still very early to speculate, it looks very possible the charitable bond market will be worth hundreds of millions of pounds in the next decade.
Scope will use the money to hire new fundraisers and pay for more charity shops, which should easily produce a large enough surplus to cover the interest payments on the bond.
Bonds are an ideal method of funding new income-generating schemes such as this. Previously, charities have used loan finance, where usually the capital has to start being paid back immediately, or have just paid for it themselves – reducing the amount of money they can spend on beneficiaries.
The capital on a bond doesn’t have to be paid back for five years, giving Scope plenty of time to develop the finance to repay it.
Scope won’t have to pay much to raise the cash, either. It’s likely to be able to offer a very low interest rate on the bond, far lower than a conventional company issuing bonds for the first time, because the bond will appeal to what the Charity Commission calls “mixed motive” investors, who want a return on their capital but also a social good, and will take a below-market return to get it.
The bonds are also listed on an exchange, which means that they can be bought and sold relatively easily. This answers a typical criticism of other social finance products, which is that they lack liquidity.
We’ve already seen another bond issue in the same week, this time by a community interest company, working with Triodos Bank, who raised £600,000 and plans to raise another £1m.
Triodos say that private individuals who buy later tranches of this bond will attract community investment tax relief, which offers social investors a five per cent relief on income tax or capital gains tax.
In a stroke, this transforms a fairly marginal investment for a private investor into a fairly attractive one.
CITR has several limitations – it only applies to organisations paying tax, so it’s of no benefit to charitable investors, and it can’t be used for property acquisition – but it’s still very helpful.
The prospect of widespread use of CITR on third sector bonds could finally make this little-used tax relief into a valuable tool.
Social Impact Bonds
One thing to stress is that the two bond issues from last week are nothing like Social Impact Bonds.
SIB aren’t really bonds at all – they’re specialised payment-by-results contracts. They exist to fund much riskier propositions, which pay off on a much bigger scale, but over a much longer term.
Social impact bonds put the risk onto the investor. If a charity fails to deliver under an SIB, the investor will not get paid. With a regular bond, the investor is still likely to get some money even if the charity goes bust.
But with an SIB if the charity succeeds, the pay off for the investor is much greater.
SIBs and some other social finance products mirror the use of stocks and shares to provide “risk capital” for business.
Unfortunately, the sector can’t copy the way that the private sector acquires risk capital – effectively by selling a share of ownership in the company – and must develop its own tools, which will take time, and probably quite a lot of brainpower among social investment professionals.
Bonds, in contrast, are well-understood tools for raising quite large amounts of cash.
For this reason, it’s quite possible bond finance may take off in the sector in a big way, long before risk capital products hit the big time.