Social enterprise and impact investment take off

Given that the first wave of viable social enterprises are emerging in China, the key question is where such start-up ventures can find capital. The report highlights the emerging universe of current and potential "impact investors" in China looking to have a social effect with their investments. These include domestic private foundations, which have grown to more than 1,500, after their establishment was liberalized in China in 2004. Government bodies, particularly at municipal level, also actively provide capital for social enterprise investments, realizing the potential for these new models to supplement social welfare provision. In 2012, for example, the Shanghai Bureau of Civil Affairs and a related government foundation provided 5 million yuan in support to establish the Shanghai Community Venture Philanthropy Fund. Major corporations similarly are looking at new models alongside traditional philanthropy in their community social responsibility. There has been the emergence of domestic dedicated private equity funds and venture capital firms seeking social as well as financial returns.

There has also been a proliferation in both the hardware and software of an effective enabling environment for social enterprises. In a number of go-ahead locations, social enterprise industrial parks have been established with local government support, responding to the national call for increased social innovation. Examples include Zhongshan and Shunde in Guangdong, Suzhou and Shanghai. The social innovation center in Shunde, for example, was developed using a government investment of 30 million yuan. Similarly, advisory firms with expertise in social enterprise and investment have emerged. These firms include market intelligence and due diligence providers such as Shanghai's Venture, as well as incubators such as Transist, Innovate99 and Youchange. A number of domestic and international organizations provide capacity building services in their own space, including the British Council, through its Skills for Social Entrepreneurs program.

Yet a number of key challenges remain before any kind of effective marketplace for social investments in China can operate. UBS constituted an international panel of active impact investors to offer their insights and advice on how China can accelerate its progress in this area. The panel identified key tools and policy levers that have been deployed in other markets globally. These included the establishment of incentive mechanisms to drive social innovation, such as "social impact bonds", preferential feed-in tariffs for green energy and layering of risk between public and private actors in investment arrangements. The panel also cited the creation of new legal frameworks for corporate forms for social enterprises, funding for government-sponsored pools of seed capital such as the Social Innovation Fund launched in the US in 2009. Also important were support for related academic research and knowledge-sharing platforms, as well deploying the convening power of government to bring different actors together to catalyze new partnerships and solutions.

Overall, most panelists felt that China is at a relatively early stage of development for social enterprise and social investment, but that China also has the demonstrated capacity to catch up quickly and indeed become a global leader in these areas. The key requirement is to promote broad acceptance of social enterprise and social investment models in addressing China's increasing social deficits. As Steven Ying, an impact investor active in China, argues: "For social entrepreneurs, they believe then they see. For most people, they have to see to believe. To strengthen the development of social enterprise in China, we have to bet on select social entrepreneurs and profile their successes. Their success stories would help people to see then believe."

The author is head of philanthropy and values-based investing, APAC for UBS.