The rise of European social investment

With the social investment market in the UK currently worth an estimated £202m, many countries are following suit, with social investment markets in Europe steadily on the rise.

Germany is one of these. However, according to a new report from the Centre for Social Investment at the University of Heidelberg, the number of "deals" in Germany is still very low – with the total market being estimated at just €24m (£20.5m). One of the report's authors, Thomas Scheuerle, believes the key reason the German market is slow to expand is because most of their social enterprises act in welfare markets.

This is not a problem in itself – the obstacle lies in the way those markets operate. The usual model is that the state or an insurer buys services based on paying for a set number of units according to need. For example, they'll pay for a set number of counselling sessions based on the demand for counselling in a local area. Within these models 'there's a previously defined service fee for a certain service' which covers the cost of the service but doesn't allow social enterprises to make a profit. This means there's no way that social enterprises can generate a return for investors by delivering the service more efficiently.

In spite of these structural complications the German government is attempting to stimulate investment in the market. For example, last year KfW, the state development bank, launched what it described as "a new instrument for financing the growth of social enterprises" supported by the federal family ministry.

The initiative sees KfW offering investments of up to €200,000 to social enterprises, to match investments from other finance partners. When the fund was launched last year, Dr Kristina Schröder, former federal minister for family affairs, senior citizens, women and youth, summarised the scheme: "We need social innovations to gear up for the future. With our new funding instrument, we will provide capital that social enterprises need to spread their ideas and reach as many people as possible."

This kind of political statement on social investment is one that UK social entrepreneurs will be very familiar with. The practical difficulty of securing such investments will be equally familiar. According to Thomas Scheuerle, since launching in January 2012 the fund has struggled to make enough investments.

As in the UK, the needs and expectations of German social investors and social enterprises are very different. Scheuerle explains the common difficulty: "For many investors [a €200,000 investment is] not worth the transaction costs of getting the whole thing going and, on the other hand, for the social enterprises, it's a huge amount of money."

This reflects the overall picture described in the University of Heidelberg's report. The authors conclude that: "Its potential does not lie so much in a broad application. Rather, impact investing could serve as a detector for the identification of highly innovative solution models for social problems developed by social enterprises, and by supporting them to increase and disseminate their impact."

One social investment organisation that does seem to be achieving some success in doing this is the Munich-based, Social Venture Fund. It specialises in social enterprises that have innovative and entrepreneurial-driven solutions for urgent social challenges – and makes relatively large investments in social ventures with high potential for growth.

Its investments so far include a €500,000 investment in Auticon – a business that trains people on the autistic spectrum to be software testers then deploys them as consultants. Social Venture Fund is poised to expand its activities across the EU, including in the UK having received a funding commitment from Big Society Capital.

While social investment in Germany seems to face many of the same problems as in the UK, albeit on a smaller scale, the success of Social Venture Fund suggests German social investors may have something new to offer to the UK market.

David Floyd is managing director of Social Spider CIC. He blogs at Beanbags and Bullsh!t and you can also find him on Twitter.

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