Venture philanthropy puts social objectives on an equal footing with private equity returns, writes Catherine Craig

When ploughing wealth back into society, individuals who have made their cash the hard way are among the most difficult to please.

Take Scottish entrepreneur and private equity boss Sir Tom Hunter. The founder of UK sports goods retailer JJB Sports launched his career selling trainers from the back of a van. He has an estimated personal fortune of £1.05bn (€1.5bn), £1bn of which he has pledged to give to charity in the next five years.

Hunter takes social investment seriously, according to David Giampaolo, founder of Pi Capital, a club of high net worth individuals and family offices run from London, of which Hunter is a member. He treats every donation he makes to a social cause as an investment, ensuring the recipients deliver on their promises.

Taking the concept of attaching goals to funds donated for social good, venture philanthropy encourages the use of venture capital techniques to foster a partnership between donors and the non-profit and charitable sectors they target. The movement's last boom was during the dotcom period when successful venture capitalists sought ways to use their cash and skills to redistribute their wealth.

But it was predated by more than a century by US industrialist and philanthropist John D Rockefeller. The founder of Standard Oil invented the conditional grant, which he said required the recipient to "root the institution in the affections of as many people as possible who, as contributors, become personally concerned and thereafter may be counted on to give to the institution their watchful interest and co-operation".

Fuelled by unprecedented financial gain, venture philanthropy has reached European buyout specialists. UK group Permira has formed such a partnership with CAN, a charity that invests cash and the expertise of its donor businesses in social enterprise. Permira has donated £2m to CAN's Breakthrough fund, alongside involvement in the businesses it backs from among its employees.

Adele Blakebrough, chief executive of the fund, said: "Permira wanted engaged giving - taking the same approach as the day job to the way they give - to see what problems they are addressing. We start from the premise that random giving does not focus skill - the message is ‘keep your business heads on'."

But other buyout veterans have taken this one step further. By turning on its head the philosophy that social enterprises can be improved by tough-love capitalism, Sir Ronald Cohen's Bridges Ventures ties its commercial success to the ability to put social objectives on an equal footing with private equity returns.

In 2000, Cohen, founder of Apax Partners and regarded as the father of UK venture capitalism, chaired the UK Government's Social Investment Task Force, which was formed to establish a way of channelling money back into British society.

One result was to earmark £20m from the Department of Trade and Industry to bring a US invention to the UK, which turned out to be the community development venture capital fund.

Cohen founded Bridges Ventures in the same year, with additional cornerstone backing from Nigel Doughty of buyout group Doughty Hanson, UK-listed 3i and Cohen's personal funds.
The Bridges model, which has turned into a combination of investment for a return in businesses based in the poorest 25% in the UK as well as investment in sustainable enterprise, took its inspiration from more than 60 US community development venture capital projects.

But during its seven-year life, Bridges has outstripped most of its smaller US counterparts, which raise funds of under $50m (€34m) on average. The UK fund closed its second fundraising this year at £75m with commitments coming from private investors, 8% from high net worth individuals. Bridges also has a strict reporting culture and asks investors for advice about investment.

Michele Giddens, a director of the fund, said: "What we do is not venture philanthropy. We believe we can achieve attractive returns and positive social impact at the same time. You could say our stringent responsible criteria make us smarter in some ways; our view is looking at the social and environmental dimensions of business that can come to cause losses to business if not evaluated and means we're more likely to spot risks others might miss."

The Bridges fund has yet to build a record but exits from the first fund have proved promising, with Croydon-based utility price comparison service SimplySwitch providing its best return when it was sold for £22m to the Daily Mail and General Trust, returning 22 times and a 165% internal rate of return.

Tom Seaman, fellow of All Souls College, Oxford, which began investing in private equity in the 1990s, said: "While it's great that Bridges has a social mission, we don't see it as an exception from our usual investment thesis. We believe Bridges has the potential to achieve top quartile returns of between 20% and 30% net internal rate of return. We think some things Bridges is doing could be explosive in value. The asset value of its real estate investments could boost the portfolio, rendering its operations almost secondary."

However, according to Jon Moulton, chief executive of Alchemy Partners and an investor in the Bridges fund, its diversification into real estate and self storage are a departure from its premise of investing in the most needy UK economic areas. Moulton said: "This is not meant pejoratively since anything that aims to make money and have a social impact on this scale will be a compromise."

But Bridges' model has kept such investments within a responsible framework.

The Office, its most significant real estate investment, is a modern office development that includes a converted 1930s building in Shoreditch, London, with energy-saving features, solar-powered hot water, organic waste recycling and green roof space. Designed to be affordable for young businesses, it is aimed at fostering entrepreneurship and a sustainable working life.

As far as investor networks are concerned, there remains a lack of destinations for cash with a social conscience in European private equity. Giampaolo said: "At present there aren't enough conduits in Europe for investors, particularly high-net-worth individuals, to back venture capital with a social objective."

Nevertheless, Giddens is upbeat about the Bridges model taking root. She said: "We expect to see other funds like ours emerge in Europe. We believe socially positive alternative assets will become an asset class, including venture capital, private equity, hedge funds and property."