This paper highlights the exciting developments in the charity bond market and draws out the opportunities to grow this market even further.
Governments and corporations have successfully accessed the global debt markets for centuries, using private investment alongside other sources of capital to raise the sums required to finance both their operations and longer-term investment.Today we know that more than half of the demand for investment capital from charities and social enterprises in the UK is for unsecured lending . Increased access to debt financing from private investors and institutions could help to meet this demand.
Analogous to the burgeoning market for ‘Green Bonds’, in which global issuance totalled $11.4bn in 2013 and is forecast to grow to $40bn in 2014, debt securities issued by charities and social enterprises (‘charity bonds’) could potentially add a scalable source of capital to complement organisations’ existing sources of finance, including grant capital, voluntary donations, bank lending and retained earnings.
The first UK domestic charity bond issue was the £1.3m issue for Golden Lane Housing in 2003. Since then 18 charity bonds have been launched – yet almost half of these have come to market in the last two years. This growth in issuances has been matched by a number of important developments that make it easier for charities to issue a bond:
- The launch of the Investment and Contract Readiness Fund to reduce the barriers posed by the cost of retaining advisers to help navigate the bond issuance process.
- The growth of specialist capital raising advisory firms which have developed expertise in advising charities and social enterprises on their capital raising needs, including charity bonds.
- The launch of Retail Charity Bonds plc, a debt issuance platform designed to lower the cost to UK charities issuing publicly listed, retail denominated debt, via the London Stock Exchange’s Orderbook for Retail Bonds (‘ORB’), to retail and institutional investors.
- The creation of the Charity Bond Support Fund, designed to support the charity bond issuers to raise the capital they require whilst investor demand is still limited in the short term by the market’s stage of development.
Charity bonds have already shown their potential to cost efficiently link investors with charities and social enterprises seeking investment capital. Because of their simplicity, charity bonds have the potential to open up the social investment market to investors who would otherwise be unable to invest their capital in a way that supports charities and social enterprises in the UK.
The charity bond market has a long way to go before it can be regarded as an efficient and mature market, but its future as a scalable source of capital for charities is exciting. At Big Society Capital, we remain committed to supporting the development of the charity bond market and lowering the barriers to its growth.