Social enterprise finance market Analysis and recommendations for delivery options Social Europe EUROPEAN COMMISSION Directorate-General for Employment, Social Affairs and Inclusion Directorate E — Skills Unit E1 — Job Creation E-mail: [email protected] European Commission B-1049 Brussels Social enterprise finance market Analysis and recommendations for delivery options European Commission Directorate-General for Employment Social Affairs and Inclusion Directorate E - Skills Social enterprise finance market. Analysis and recommendations for delivery options This analysis aims to identify market failures and gaps in social enterprise finance in Europe, and recommend delivery options for future EU-level financial instruments. The findings will assist the European Commission in designing the investment strategy for EU-level financial instruments for social enterprise finance, and will notably feed into the preparatory work on the InvestEU Fund. Barbara Scheck and Wolfgang Spiess-Knafl at the European Center for Social Finance have been contracted by the European Commission to prepare this analysis. This publication is an outcome of an assignment financed entirely by the European Union Programme for Employment and Social Innovation "EaSI" (2014-2020). For further information, please consult: http://ec.europa.eu/social/easi Legal notice Manuscript completed in November 2019 The information contained in this publication does not necessarily reflect the official position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of the following information. Luxembourg: Publications Office of the European Union, 2020 PDF ISBN 978-92-76-14068-9 doi: 10.2767/238479 KE-02-19-962-EN-N © European Union, 2020 Reuse is authorised provided the source is acknowledged. The reuse policy of European Commission documents is regulated by Decision 2011/833/EU (OJ L 330, 14.12.2011, p. 39). For any use or reproduction of photos or other material that is not under the EU copyright, permission must be sought directly from the copyright holders. Citation: "European Commission, Directorate-General for Employment, Social Affairs and Inclusion (2019): Social Enterprise Finance Market Analysis and Recommendations for Delivery Options. Authors: Wolfgang Spiess-Knafl and Barbara Scheck" 4 Social enterprise finance market. Analysis and recommendations for delivery options Contents 1 FINANCING OF SOCIAL ENTERPRISES ...................................................................... 6 1.1 Introduction ................................................................................................. 6 1.2 Regional and country-based overview ............................................................. 7 1.3 General trends ............................................................................................. 7 1.4 Technology-driven developments .................................................................... 9 2 INSTITUTIONAL MAPPING ..................................................................................... 11 2.1 Social venture capital funds ......................................................................... 11 2.2 Banks ........................................................................................................ 15 2.3 Crowdfunding platforms............................................................................... 15 2.4 Business Angels .......................................................................................... 16 2.5 Incubators, accelerators, match-makers and investment-readiness programs .... 17 2.6 Payment-by-results schemes ....................................................................... 18 3 IMPERFECTIONS .................................................................................................. 19 3.1 Investment sizes for equity investments ........................................................ 19 3.2 Lack of intermediaries and low capital absorption capacity ............................... 19 3.3 Debt reliance .............................................................................................. 20 3.4 Economics of matching supply and demand ................................................... 20 3.5 Asset misallocation ..................................................................................... 20 3.6 Low confidence in investment returns ............................................................ 21 4 MARKET GAP ANALYSIS ........................................................................................ 22 5 DELIVERY OPTIONS ............................................................................................. 26 5.1 Introduction ............................................................................................... 26 5.2 Grants ....................................................................................................... 26 5.3 Equity ....................................................................................................... 27 5.4 Debt ......................................................................................................... 27 6 CONCLUSION ...................................................................................................... 29 LITERATURE ............................................................................................................... 30 APPENDIX .................................................................................................................. 32 Use of commercial capital ..................................................................................... 32 Average investment sizes ..................................................................................... 33 Split between debt and equity capital ..................................................................... 34 Country-specific analysis....................................................................................... 35 Risk of underestimating ........................................................................................ 35 5 Social enterprise finance market. Analysis and recommendations for delivery options 1 FINANCING OF SOCIAL ENTERPRISES 1.1 Introduction In the aftermath of the 2008 financial crisis, social enterprises have played an increasingly important role in Europe. The last ten years have consolidated a nascent eco-system, with actors acquiring experience and developing the market. In the next ten years, social enterprises are expected to continue playing an important role in supporting sustainable economic growth and social inclusion. Social enterprises display surprising features: banks often consider them too risky, while venture capital funds might consider their business models to be below preferred risk-return-profiles. The financing needs might be too large for microfinance, but too low for most other institutional investors. These features show the need for a dedicated social finance market. Indeed, this social finance market is emerging, and the emergence can be illustrated with the semantic evolution in this field. Changing vocabularies are an indicator of an emerging market where certain procedures, traditions and terms related to social impact need to be established. As such, social enterprises are interchangeably described as impact enterprises, purpose enterprises or social businesses among many other terms. The same applies to the financing of those social enterprises. For this study, we will use the term social finance to describe the financing of social enterprises. Other terms being used are impact finance, impact investing or sustainable finance. One common denominator seems to be shared values. Although the industry has experienced significant inflow of capital, so far there are few signs of mission drift, unrealistic promises or fraudulent behaviour. This analytical report will look into current developments. The first chapter will discuss regional differences and general observations. There are some general trends such as a certain hybridization of the financial structures as well as technology-driven developments. This analysis will discuss better data availability, blockchain technology and disintermediation. The second chapter will present an institutional mapping of the social finance market. Social enterprises currently have different options for their financing needs encompassing a wide range of instruments. It will focus on growth and expansion capital that is usually funded by debt, equity, mezzanine capital or hybrid capital. The institutions involved are social venture capital funds, banks, crowdfunding platforms, business angels and incubators, accelerators, market-makers and investment-readiness programs. The third chapter will discuss the imperfections of the market. These imperfections concern the sustainability of funds, the economics of matching supply and demand, a lack of intermediaries, asset misallocation, the still limited capital absorption capacity, impact dilution, low confidence in investment returns and a certain reliance on debt funding. The fourth chapter will analyse the market gaps based on a country-specific calculation of demand and supply side volumes. The last chapter will suggest delivery options to reduce the imperfections discussed above. We realize that there are imperfections for certain financial instruments while others are more easily accessible for social enterprises. Therefore, financial