EC hopes to authorise new social fund structure by end 2012
The European Commission is working on structuring a new type of Social Entrepreneurship fund, and hopes to have regulation in place by the end of 2012 to encourage investor support.
The move is the latest in a process prompted by the 2011 Single Market Act, which prioritises 12 ideas for the development of a European single market. One of them is supportfor “social business”, defined as undertakings with the primary objective of achieving positive social impact, rather than financial gain.
In July last year, the EC started to consult on the viability and desirability of a bespoke social investment vehicle, to be branded the European Social Entrepreneurship Fund (EuSEF). In December, the Commission released a draft Regulation for the structure.
A report from legal firm Dechert LLP saysthe EC has got behind the structuring because it feelssocial investment can help bridge the divide between mainstream business and charitable activity. Itcancombine commercial and philanthropic principles while yielding a financial return, and bring together public and private initiatives, complementing State services and policy goals.
The initial proposal for the EuSEF was aimed at retail investors, but following the consultation there have been several modifications and the structure is now likely to be aimed more at professional or high net worth investors with a minimum €100,000 stake, whichmight shrink the pool of potential supporters.
The EuSEF designation will also only be available to funds with less than €500m under management. It combines aspects of philanthropic and for-profit sectors, including the achievement of social, ethical or environmental outcomes as a corporate aim, reinvestment of profits and limited or no profit distributions.
Since there is no existing coherent view as to what constitutes a social business, the EC wants to create a brand to operate uniformly across all jurisdictions in a “trusted, safe and legally stable marketing environment” with independent regulation and oversight, standardised disclosure on social impact and returns, and a common approach to ratings.
Social investment often sparks investor interest, but cross border fundraising is complex and expensive, anddifficult precisely because funds fall between not-for-profit and for-profit models. Most are not listed, with UCITS funds limited to 10% investment in non-listed shares and NURS funds to 20%. Both these require liquidity levels that social investment funds find hard to achieve.
The 2011 consultation acknowledged that social business funds typically have lower liquidity, less frequent valuations, more flexible reporting, limits on redemption, more distant investment horizons and alternative remuneration structures. They may need to diversify across a range of businesses, offsetting “slow-burn” social investments against highly liquid transferable assets.