PEI: Initially, the concept of social investing can’t have been an easy sell to potential LPs?
We started with the belief that you could use capital to have social impacts and achieve good financial returns – because if you don’t achieve good returns, you can’t scale. But that’s not necessarily obvious, at least until you have a track record; we were a new manager, with a new concept, investing in small businesses in the most deprived areas of the country. I guess many people thought setting out to have positive social and environmental outcomes would lead to poorer results.
The Treasury committed £20m to your first fund. How important was that?
The government money was really catalytic: it reduced some of the risk for private investors and enhanced the possible return, so that made it attractive financially to come into the fund. It was a fantastic deal for the Government: they look set to make a double-digit return and ended up bringing a further £260 million of investment into the most deprived areas of the country.
That said, we’ve raised four funds since, none of which have had Government backing. The first close of our latest fund came largely from existing institutional investors; they’ve been able to commit larger amounts as the funds have got bigger, but they’ve also gained confidence from our track record over time. I think they’ve been surprised and pleased by the returns. We believe that first fund will return a 15-20 percent IRR for private investors, and we hope we can do at least as well, maybe even a bit better, with our second growth fund. Not many 06/07 vintages will see returns like that.
How have you mitigated the impact of the economic downturn?
When you invest in inner-city areas, and back consumer champions that make products and services more affordable – that’s quite a protected area. These businesses have traded fantastically well. So I think there are three reasons why the portfolio has been quite resilient. One, we’re investing in relatively attractive areas. Two, we don’t use much leverage, so our returns are nice and stable across the cycle. And three, because we’re often doing roll-outs or roll-ups, it’s quite controllable – you can take your foot off the gas as necessary.
So do you feel you’ve proved your concept now?
The biggest thing we’ve learned is that if you do it right, good financial returns and social impacts can go hand in hand. In fact, by spotting areas of great social and environmental need, you have a good chance of finding good growth opportunities.
How do you deal with the management challenges involved in scaling your portfolio companies?
It starts with Bridges. We have a big team relative to our funds under management, because we have an intensive hands-on relationship with the businesses we back. We also have a disproportionate number of people from operating backgrounds. Our success is all about working with management teams to execute on their growth strategies.
How do you think the current economic climate will affect your dealflow?
I think we’ll see enormous growth in this sort of approach in the next few years. The scale of some of these social and environmental problems is so great that governments can’t deal with them alone via taxing and spending. And philanthropy clearly can’t either. So by innovating funds that can solve these problems and generate good financial returns, the private sector has a big part to play.