Impact investing: private equity’s unsung hero

Impact investment is all about engineering social or environmental change, as well as generating financial return. It’s also known as social investing, or 3D investing, and a company’s positive impact is just as important to backers as its risk profile and potential return.

The landscape

To some, it may all sound a bit too good to be true. But impact investing is more than philanthropy from a monied few. It’s long been on the UK government’s agenda – as set out with Growing the Social Investment Market: A Vision and Strategy 2011.

In April 2012, Big Society Capital, the £20m government and private-backed social incubator, was launched “to help social entrepreneurs create innovative solutions to difficult social problems”. In 2014, the Social investment tax relief followed. And recently, Rob Wilson MP, Minister for Civil Society, released the government’s Social investments a force for social change 2016 strategy.

But what implications does this have within the UK private equity market? 

There are a number of social investors providing fast-growth UK companies with equity finance. In our latest instalment of the The Deal we spoke with Stefan van Maaren, Partner at impact investor ClearlySo. Stefan signposted apps that are a “powerful force for good” – apps, for instance, within the healthcare sector, or education space – as an opportunity with “room for growth”. 

ClearlySo is not alone. Other social investors include Nesta Impact Investments, which typically invests between £150k and £1m, Big Issue Invest, the social investment arm of The Big Issue, and Wayra UnLtd – the corporate social responsibility arm of Telefónica. Private equity firm Impact Ventures UK, managed by LGT Venture Philanthropy, typically invests between £300k and £5m, while the Social Entrepreneurs Fund has raised nearly £12m for investment in scalable social enterprises since 2008. 

So which fast-growth companies have benefitted from these equity egalitarians? In this article we explore a handful.

Third Space Learning

London-based Third Space Learning is an international community of teachers providing online, one-to-one maths tutoring to children that would otherwise struggle in a classroom situation. 

“We have worked incredibly hard…to validate what is an ambitious solution to a significant social and academic problem”, says founder and CEO Tom Hooper. 

Embodying the spirit of impact investing, Third Space Learning has completed subsequent equity rounds with Wayra UnLtd, ClearlySo, and most recently with Nesta Impact Investments. Founded back in 2012, the company now has a valuation of £4.4m after Nesta Impact Investment contributed to a £1.5m venture-stage equity fundraising in July. 

“By improving the access to quality maths tuition” enthused Isabel Newman, Nesta Impact investment manager, “Third Space Learning has the potential to improve the lives of thousands of young people”.

Brain in Hand

Exeter-based Brain in Hand has developed an app for people with autism and other neurological conditions. Founded by Andrew Stamp – whose son has autism – and Dr Tony Brown, a clinical psychologist, the app is designed to help those with autism manage day-to-day anxieties.

The app provides solutions to temper anxieties, and works together with a traffic light system that allows users to alert a mentor if they are feeling particularly vulnerable. 

Although David Fry, chief executive at Brain in Hand, has bemoaned a reticence on behalf of the NHS to adopt the app:

“We have had to elbow our way into the field of health care. It’s difficult to change the way the NHS works”

the app has been incorporated by four NHS trusts, including specialist mental health trust: the Tavistock and Portman, in London. 

Brain in Hand has completed 6 equity deals to date, amounting to almost £1.8m. ClearlySo is the company’s impact investor –  which contributed to a £200k fundraising alongside the Solent Growth Hub back in 2014. 

 Insane Logic

Insane Logic has created MyChoicePad, an app which uses symbols and signs to help improve the communication skills of young children with special needs.

The company was founded by social entrepreneur Zoë Peden and software developer Andrew Jackman. Peden says the company was a reaction, after finding it “bizarre that parents, schools and communication professionals  were relying on dated solutions given the opportunity, affordability and accessibility that mobile technology can offer after any individual – particularly someone living with speech or learning difficulties”. 

Insane Logic has completed 5 rounds of equity finance to date. The company’s impact investors include Big Issue Invest, and ClearlySO. 

ClearlySO

That’s right – while ClearlySO is an impact investor, it’s also a fast-growth company in its own right. And a fast-growth company that acts as an intermediary, bringing together funders, with innovative, socially responsible businesses. 

ClearlySo has raised 4 rounds of equity finance to date, most recently securing two subsequent investments from Big Society Capital. 

“Commercially-minded angels now see ClearlySO as an attractive investment which is also supporting and enabling dozens of socially impactful firms to raise capital and generate enormous social impact” says CEO Rodey Schwartz. 

The Body Shop co-founder Gordon Roddick, who has also backed ClearlySo, believes: the legendary persistence of Schwartz has brought together a group of people, money and ideas that can benefit us all”. 

What does the future hold for impact investment?

The future is bright for impact investment. The government’s Social investments a force for social change 2016 strategy, outlines a host of promising changes and pledges. These include, amongst others, £2m support toward crowdfunded social investment, promotion of the Social Angel Movement, and calls for reform on regulatory barriers to social investment through the Financial Conduct Authority. 

Impact investment is a culture, and one demanding increasing attention from funders. The proof is in the pudding with private equity success stories. We predict more of the same.