The Money Question: From the Missing Middle to the Finance Bill 2012

If I had to pick one conversation that will determine the future of CICs, it’s the money conversation.

Let me start with a number that should worry everyone in the social enterprise sector. The Young report recently found that 96% of social enterprise investment is £5,000 or less. Think about that. Ninety-six per cent. The amount of capital flowing into social enterprises above that threshold is virtually invisible. That gap between small-scale grant funding and serious investment is what I’ve started calling the missing middle.

The JP Morgan report on impact investing, published last year, painted a very different picture of what could be possible. It argued that impact investments should be defined as a separate asset class, with its own set of risk-management skills, organisational structures, industry associations, standardised metrics and ratings. JP Morgan is not a fringe player talking about a fringe activity. They’re one of the largest financial institutions in the world, saying that impact investing could be “one of the most powerful changes within the asset management industry in the years to come.”

And yet, here in the UK, with the most clearly defined legal structure for impact investment in the world, we’re still not seeing the capital flow. Why?

Part of the answer is that the infrastructure to connect CICs with investors simply doesn’t exist yet. The missing middle isn’t just a funding gap — it’s an information gap, a confidence gap, a structural gap. Investors don’t understand CICs well enough to invest in them. CICs aren’t prepared well enough to receive investment. The intermediary organisations that should be bridging that gap haven’t been funded to do it.

But there are reasons for optimism. The Finance Bill 2012 contains provisions that could genuinely change the game. The extension of the Financial Promotions Order exemption to include CICs and community benefit societies would remove one of the most significant regulatory barriers to CIC investment. The new seed enterprise investment scheme could provide tax relief for individuals investing in early-stage CICs. And the signals coming from the Treasury — mentioning CICs alongside co-ops and Ben Comms in their statements on feed-in tariff exemptions — suggest that policymakers are finally waking up to the potential.

Corporate investment into CICs is going to happen, and when it does, it could be revolutionary. There are thousands of companies in the UK with corporate social responsibility budgets looking for meaningful ways to deploy capital. A CIC bond, a CIC share issue, a CIC social impact contract — these are products that could channel corporate money into community benefit at a scale we haven’t seen before.

The CIC movement now has a collective turnover of over £500 million, generated by nearly 6,000 organisations. That’s not pocket change. That’s a market. And markets attract capital when the conditions are right.

I said in 2009 that investment is a process, not an event. We’re still in the early stages of that process. But the architecture is being put in place. The Finance Bill, the Allia partnership, the growing body of data on CIC performance, the increasing interest from institutional investors — all of these are building toward something.

The missing middle won’t stay missing forever. The question is whether we can accelerate the process, or whether we’ll have to wait for the market to catch up with the potential that’s already there.

I know which I’d prefer.