Today I had an intriguing discussion around whether impact investing (investing for social return as well as financial return) could ever become a mainstream financial product in the UK. I have no doubt that there is potentially a retail product to develop here – after all, the success of Fairtrade, and other conscience consuming products has demonstrated that people will pay more (or in this case accept lower financial returns) for a social return (or something that makes themselves feel good).

However, where I am sceptical of its broader importance is in two areas. Firstly in asset allocation of a traditional financial institution, that has a mandate to maximise the value of the funds it runs – there is no way that it can invest for social returns and achieve equivalent financial returns in my view. Secondly, for equity investment in these areas to be a real success, there has to be an exit strategy. For a lot of social projects, or social businesses, there is no viable exit. Instead there is only the intention of achieving more and more social objectives. Which is fine for the founders, but not for equity funders, especially if any profits are reinvested into the business, rather than into dividends or other forms of equity returns.

If you are running a social business, my view is that your objectives should be 1) make a sustainable business 2) achieve self sufficiency financially and 3) achieve your social objectives. It should not be an objective to deliver high levels of financial returns to your funders. The legal structures that most social enterprises have taken would suggest this is a common view – most structures would restrict equity investments, or equity returns (other than minimal dividends). Of course these can be circumvented by complex loan instruments that trigger at certain levels of profitability so it’s not a total constraint.

Where I would agree with the view that there is a need for impact investing to grow is that there is a real shortage of genuine early stage social enterprise funding. There are many grants available for pre-launch funding, and loans available for loan funding once the social business is established and can support loan funding. However, for the interim funding, when you would normally seek seed/angel funding, there is nothing really in that space. Bridges Ventures is endeavouring to do this, but I suspect the exits will be difficult, unless you take a more lax view on how central the social objective has to be (e.g. is Starbucks a social business because it sells Fairtrade coffee? I’d say not, but if I was an equity investor the temptation might be to loosen my criteria to broaden my investment pool).

We are seeking with Seven Men to build a pool of funds that can be used in this space, of seed funding, however to allocate that as grants or soft loans predominantly. But with the discipline of an equity investor, even without the financial returns. So is there scope for an impact investing financial product? Yes, absolutely. However, it won’t become the mainstream financial product as it means lower returns financially. In Seven Men we’ve intentionally split the generation of financial returns, and investing into social good, just to deal with the inherent conflict. Ironically, as an entity structured as a limited company, we are one social enterprise that actually could accept equity investment.