Place-Based Impact Investment – an opportunity for SMEs and OMBs?

In May 2021, the white paper, ‘Scaling Up Institutional Investment For Place-Based Impact’ (the “White Paper”) was published by The Good Economy, Impact Investing Institution and Pensions for Purpose. The White Paper outlined how a ‘place-based’ approach of investing (as already favoured by public and social investors), could be extended to institutional investors who currently invest in mainstream global capital markets. The focus of the research was on investments made by Local Government Pension Schemes (“LGPS”), which have assets with a combined value of £326 million, and how the funds could be used to develop explicit place-based strategies while creating positive financial returns.

What is Place-Based Impact Investment?

The White Paper defines Place-Based Impact Investment (“PBII”) as: “investments made with the intention to yield appropriate risk-adjusted financial returns as well as positive local impact, with a focus on addressing the needs of specific places to enhance local economic resilience, prosperity and sustainable development”.

In order do so, the White Paper identifies five sectors that can link together local and regional development strategies with sectors that currently fall within institutional investment strategies. These are:

• Affordable housing;
• Small and Medium Enterprise (SME) finance;
• Clean energy and efficiency;
• Infrastructure; and
• Regeneration

By recognising key sectors for PBII opportunities to exist, this provides an entry point for institutional investors to begin building the foundations for business models for PBII.

Why is investing with a place-based lens important?

Firstly, investments in five sector areas mentioned above provide stable, high long-term returns and have a low volatility compared to other asset classes. When you include a place-based lens to invest in these sectors, the aim would be to create an inclusive and sustainable development across the UK which would contribute to the reduction of place-based inequality.

Currently, the level of UK investment by LGPS is small compared to the amount invested in global capital markets. As of March 2020, UK investment in key sectors was £7.7 billion, which accounts for 2.4% of the total value of the UK LGPS. However, only £3.2 billion of this amount was invested within the UK, which only amounts to 1% of total value of assets under management held by LGPS. The White Paper suggested that if the LGPS redirected its current investments in the global markets and dedicated up to 5% of its assets under management to local investment, this could amount to £16 billion for PBII.

Despite this, few pension funds demonstrate an intentionality to invest using a place-based lens. Only half of LGPS made investments in key sectors, with only seven of those LGPS making allocations of 3% of their assets under management in those key sectors (as of March 2020). In addition to this, only one pension fund, the Greater Manchester Pension Fund, explicitly allocates funds towards local investment. The Greater Manchester Pension Fund has invested in the Greater Manchester area for 25 years, but has since extended their local investment goals to the North of England, in collaboration with the Merseyside and Northern Pool Funds

Investment for SME finance:

Infrastructure had the largest sized investments, but the White Paper found that SME finance provides the most opportunities for local or regional investment. Despite this, the White Paper also noted that SME finance had the smallest sized investments with a median value of £3.3 million for all UK investments.

SMEs account for 60% of the employment and half of the turnover in the private sector. However, there is a huge disparity when comparing the number of private sector businesses based upon location. For example, according to the 2021 statistics provided by the Department for Business, Energy & Industrial Strategy, London has 1 million private sector businesses compared to the North East of the UK with 154,000 private sector businesses[1]. If institutional investors collaborated with local governments with a place-based lens, this could mean that investments could align with local development plans and be tailored to the specific needs of that area. This would also support the levelling up agenda and create a more inclusive prosperity across the country, rather than localised in one area of the country.

Employee-owned business – an opportunity for SMEs?

A potential opportunity for impact investors for SME finance could be to transition SMEs into becoming ‘employee owned’. Whilst institutional investors may not favour financing SMEs in this way, this could be considered an impactful form of investment as it would keep businesses in their region and provide an inclusive and democratic space for employees. There are also Environmental, Social and Governance (ESG) benefits from investing in employee ownership, as employees would be more inclined to become more environmentally and socially responsible as their future would be tied to these principles to maintain a sustainable business practice. Additionally, it would protect local jobs rather than selling to a third party or a competitor that may remove jobs from that local area.

One of the potential barriers to financing SMEs into become employee-owned is the lack of awareness within the mainstream finance sector. In the White Paper, it was highlighted by local representatives that they do not necessarily have the skills to develop business cases or models for investment for commercial investors. However, financial institutions could potentially be good partners with employee-owned businesses, as businesses that transition to employee ownership have a good track record of sustained profitability and cash generation. Moreover, by investing in employee ownership, there are positive impacts for individuals, local communities and the local economy.

By looking at investments with a place-based focus, this could create bridges between London and the rest of the country, and ‘level up’ the rest of the country and reduce place-based inequality. SME finance presents the most opportunities for local communities in terms of development and economy, and perhaps institutional investors should look at new way of investing in them to produce long-term, sustainable and impactful effects.

We will be watching the progress of legislation around this area and will provide updates as it makes its way through the parliamentary process.

Contact us

If you require any assistance or further information with the information discussed in this article, please do not hesitate to contact Jon Davage, Partner at Bermans at jon.davage@bermans.co.uk or call 0161 827 4600.

[1]Page 10, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1019907/2021_Business_Population_Estimates_for_the_UK_and_regions_Statistical_Release.pdf