Role of Specialist Financial Intermediaries - Report

If social enterprises are to develop into viable and sustainable businesses that have social impact at their core, then they need access to a wider range of capital than just philanthropy or government funding, according to new research.

The research by Ingrid Burkett is called The Role of Specialist Financial Intermediaries in Australia and was commissioned by Social Traders and Foresters Community Finance.

The report explores the roles of specialist financial intermediaries and access to capital and investment in so called ‘underserved’ markets in Australia – people, groups and organisations who are currently excluded in significant ways from accessing and using mainstream financial services and products.

These intermediaries include Community Development Finance Institutions (CDFIs) and specialist investment-readiness intermediaries focussed on ensuring that underserved markets have the capacity and capability to take on and manage capital.

The report found that social enterprises need to be able to secure the ‘right’ capital for different parts of their business.

“Social investment is not an end in itself. Similarly there is little point in developing
a social finance market just for the sake of having capital available should social enterprises and other underserved markets need it,” the report said.

“ Social finance and social investment are means to an end – they represent one dimension of what is needed if we are to build a thriving and sustainable social enterprise sector.

The paper highlights what it describes as “the need for multidimensional responses and tailored intermediation, which involves building supply and demand capability at different lifecycle stages of social enterprises.”

“In the last 3-5 years, we have seen the emergence of a range of intermediaries as well as an increase in the supply of capital for social enterprise, via the establishment of the
three Social Enterprise Development & Investment Funds in Australia,” the report said.

“Foresters Community Finance (Foresters) and Social Traders have been engaged in the social enterprise and non-profit sector as intermediaries over many years – providing capacity building, start up funding, finance and investment. This report reaffirms the view of both our organisations on the priority need of building a pipeline of investment-ready social enterprises to access the capital that is now available from the SEDIF’s and other social investment sources.

“Financially excluded and underserved markets have fewer opportunities for growth and development, and therefore fewer pathways out of marginality and disadvantage.

“Debt and equity capital can be important parts of this picture, helping social enterprises to build their trading revenue and an asset base that can underpin their financial sustainability but also, perhaps more importantly, to ensure that they are able to achieve the outcomes and impacts that lie at the heart of their ventures.

“This does not mean that debt and equity are appropriate forms of capital for all social enterprises. However, where they are appropriate, these forms of capital can, alongside
grants and philanthropic capital, open important opportunities for social enterprises.

According to the report,it should also be recognised that currently grant capital still dominates the social enterprise sector in Australia. “As a result of the SEDIF initiative there are a growing number of debt capital options for social enterprise, however equity capital is still quite limited in this sector.”

“This is partly because of a lack of awareness and demand, but also because many social enterprise are not structured to be able to attract equity.

“Australia there are several key intermediaries in the social enterprise sector that have some
focus on finance, either in relation to assisting enterprises to become investment-ready, offering stepping-stone capital in the form of repayable grants, or in providing specialist /tailored finance into this sector,” the report said.

“To date the role of intermediaries in relation to the financing of underserved markets
has not been well understood, or has only been understood in terms of transactional functions,” report author, Ingrid Burkett said.

“Recent Federal and State Government initiatives to build the supply-side in relation to a number of underserved market areas has highlighted the need for greater investigation into how intermediaries actually work to bridge and channel this capital so that it achieves the social policy goals that underpin these initiatives.

“What this research has demonstrated is that success in relation to these goals will be based not only on how intermediaries structure transactions in these markets, but also how successfully they are able to enact transformation, and help develop real and lasting capabilities and opportunities from engaging with finance.

The report can be downloaded here.