June, 2014 Print
Simon Bond, Fund Manager, Threadneedle.
We have recently seen growing interest in social investment, which Big Society Capital, an independent financial body established by the UK government to develop social investment in the UK, defines as “the provision and use of capital to generate social as well as financial returns”. Traditionally, it was thought of as an equity investment. However, fixed income has several important advantages over equities:
- A wide range of entities including local authorities, mutuals, charities, not-for-profit organisations and development agencies do not issue public equity. But these entities can and do issue bonds to finance projects to fund their objectives.
- Unlike equities, bonds can be secured on identifiable assets, such as property or cash flow from specific operations. They can even target particular parts of a business and dictate specific uses of funds. Investors can therefore identify a particular social outcome.
- Diversified bond portfolios have an added advantage over more specialist investments such as loans or private equity vehicles in that they can provide daily liquidity through a more tradeable secondary market.
Meanwhile, issuing bonds gives social entities the ability to raise much needed finance given that banks are less willing to lend to them on the same favourable terms as before the global financial crisis. There are certainly a growing number of examples of the way in which the fixed income sector is helping to deliver positive social outcomes. Manchester University, for example, issued a bond last year, the proceeds of which will be used to construct a cancer research facility, as well as campus and lecture facilities.
Bonds provide increasing source of finance for housing associations
Social housing is certainly an area that has benefited significantly from the increased use of fixed income instruments to raise finance. More and more housing associations are indeed coming to the market. Radian, which provides affordable housing, care and support services through 21,000 affordable homes in the South East, for example, recently issued £300 million of bonds. Andrew Newberry, Radian’s finance director, was quoted as saying: “Our second issuance in the capital markets has secured our medium-term financial requirements by providing long-term funding to support our plans to deliver badly-needed affordable housing in the south of England.”
Last October, one of London’s largest housing associations, A2 Dominion, raised £150 million in record time by issuing a series of unsecured retail bonds. The funds will be used to expand A2 Dominion’s property portfolio, which includes homes in the social, student and market rent sectors, and a sales business of open market and shared ownership homes. The bonds from the association, which manages 34,000 homes across 82 local authorities in London and the south east, paid 4.75% and mature on 18 October 2022. A2 Dominion was rated AA- by Fitch. Institutional investors reportedly snapped up a third of the bond value, while a quarter was purchased by “ethical investors” and the remainder by the retail market.
The recent launch of a new service to allow charities to issue retail bonds and list them on the London Stock Exchange (LSE) highlights the growing potential of social investment and should speed the development of the market. The bonds on the LSE will be issued through a new vehicle called Retail Charity Bonds. The scheme has the backing of the government and will for the first time allow charities to issue bonds directly to ordinary investors. The latter will receive attractive interest rates in the knowledge that their savings are being used to deliver good outcomes. The bonds can even be placed in an ISA.
Threadneedle are pleased to be one of the patrons supporting this new initiative. We hope to see bonds issued on this platform which help to deliver both financial and social return and promote our mantra of bringing social investment into the mainstream. Issuance from this platform should be in a form that we could buy for the Social Bond fund, subject to the usual financial and social analysis.
Growth of social investment could encourage local authorities to return to the fixed income sector
Local authorities once commonly issued bonds to raise funds for public projects but for a variety of reasons no longer do so. However, many would like to return to the fixed income market place. The Greater London Authority became the first UK local authority to tap the capital markets in nearly two decades when it launched a £600 million bond in 2011 to help Transport for London finance the construction of Crossrail.
Since then, Leeds City Council has helped facilitate the issuance of “Sustainable Communities for Leeds” retail bonds to help fund the refurbishment of local council houses. Central government and regulators need to be aware of the advantages that could accrue, in terms of social outcomes and the wider economy, should local authorities facilitate bond issuance. Examples exist both in the US with municipal bonds and in France with regions such as Île-de-France, Pas de Calais and Provence-Alpes-Côte d’Azur issuing social bonds, which can be defined as bonds which use the proceeds of an issue to target a social outcome such as education, employment or healthcare.
There are also interesting developments on the international stage. The Inter-American Development Bank (IADB) is currently marketing what we regard as the first agency social bond issue, and we hope it may lead to the establishment of social bond issuance from other agencies in due course. We recognise the outcomes in the IADB issue are aligned with those that we target for the Social Bond Fund, and will consider it for the international portion of outcomes.
Indeed, the main problem currently facing social investment in the UK is that, whilst it would appear to have very attractive investment attributes that should ensure healthy demand from issuers and investors, the market has not as yet been developed. It is certainly possible to create a diversified bond portfolio with daily liquidity, which has the potential to deliver appropriate financial returns as well as positive social outcomes. Such portfolios can deliver healthy, corporate bond-level returns in the order of 3.5%. These portfolios could invest in bonds issued by, for example, charities, social enterprises and businesses delivering positive impact in specific areas: affordable housing and property; community services; employment and training; financial inclusion; health and social care; transport and communications; utilities and the environment.
Such strategies also have the potential to turn into a self-fulfilling prophecy, aligning the needs of issuers and investors. They can encourage the market for bond issuance among social organisations to develop and grow, whilst at the same time meeting the needs of investors by providing a high-quality fixed income component within their portfolio. Leadership is a crucial requirement from the asset management community to bring together investors and issuers, and to provide feedback on structures that meet investor requirements.
Social investment reflects the zeitgeist of the age
The appetite for an instrument that produces positive social outcomes certainly appears to be growing. Recently, for example, the Henry Jackson Initiative for Inclusive Capitalism held a conference at the Mansion House in London. The Prince of Wales, former US President Bill Clinton, International Monetary Fund chief Christine Lagarde, and Bank of England governor Mark Carney were among the speakers. The latter railed against “unchecked market fundamentalism” warning it can “devour the social capital essential for the long-term dynamism of capitalism itself. Prince Charles called for further changes to businesses, urging them to invest in young people and give to charity: “It would also go some way to helping those who are most vulnerable in our societies.” After all, he concluded, “it is perhaps worth bearing in mind that at the end of the day the primary purpose of capitalism should surely be to serve the wider, long-term interests and concerns of humanity.” We believe that social investment can provide a vehicle which can do just that, while investors can receive a healthy return from a diversified portfolio of bonds, and are subject to the same levels of scrutiny.