Social investment and blended finance: can market logic fix the charity funding gap?

The debate in brief

Social investment means deploying capital with the expectation of both a social return and some degree of financial return. It ranges from loans and equity-like investments in social enterprises to blended finance structures that combine grant funding with repayable capital. The idea gained major policy traction in the UK from 2010 onwards, when Big Society Capital was established using dormant bank account assets to catalyse a social investment market. The promise was that private capital, guided by social purpose, could help plug the funding gaps left by austerity.

Fifteen years on, the UK social investment market has grown past £10 billion in assets under management. But the fundamental question remains: most registered charities operate on thin margins, depend on grant and donated income, and generate no trading surplus from which to service debt. For them, repayable finance is not a solution — it is a liability. The gap between the ambitions of social investment architects and the financial reality of the organisations they intended to help has defined this debate from the start.

Quick takeaways

The arguments

The case for social investment

The original case was straightforward: charities and social enterprises need capital, and the grant funding available is insufficient. If social-purpose organisations could access the same kind of investment capital available to commercial businesses — loans, equity, working capital facilities — they could grow, acquire assets, and become more financially sustainable. The role of social investment was to build a market that would channel private capital toward social outcomes.

Big Society Capital, established in 2012 with funds from dormant bank accounts, was the institutional expression of this ambition. It invested not directly in charities but through social investment finance intermediaries (SIFIs) — organisations like Social and Sustainable Capital, the Key Fund, Resonance, and Big Issue Invest — which in turn lent to frontline social enterprises and charities. The model drew explicitly on venture capital and private equity structures, adapted for social purpose.

The case has merit in specific contexts. Community organisations buying their building need a mortgage, not a grant. Social enterprises with reliable trading income — charity shops, care providers, recycling businesses — can service appropriately structured debt. Housing associations, which sit at the intersection of social purpose and commercial activity, are the largest single category of social investment in the UK. The social investment market has genuinely enabled acquisitions of community assets, expansion of trading social enterprises, and the growth of social housing stock that might not have happened through grant funding alone.

The Access Foundation for Social Investment, established in 2015 with approximately £100 million in combined funding — comprising around £60 million from government (from repayments of the Futurebuilders fund), £22.5 million in grants from the Big Lottery Fund, and £22.5 million in loan capital from Big Society Capital — added a further dimension by focusing specifically on charities and social enterprises that were not yet ready for commercial investment. Its blended finance programmes combined grant and loan capital, and its investment readiness programmes helped smaller organisations develop the financial literacy, governance, and business models needed to use repayable finance effectively.

The case against: a solution looking for a problem

The fundamental critique is structural, not technical. The vast majority of UK charities are not social enterprises. They do not trade. They do not generate revenue surpluses. They exist to provide services, build communities, advocate for change, or redistribute resources — activities that are funded by grants, donations, and contracts, not by market transactions. For these organisations, the concept of repayable finance is a category error.

NCVO has consistently highlighted this mismatch. Its data shows that only a minority of charities have the trading income, financial reserves, and organisational capacity to take on and service debt. For a charity running a domestic abuse refuge on short-term local authority contracts, or an advice service funded by grants that cover 80% of actual costs, the idea that a loan will solve their funding problem is not just unhelpful — it is potentially dangerous. Taking on debt when your income is uncertain and your margins are negative is a route to insolvency, not sustainability.

Social Enterprise UK has documented the experiences of social enterprises that took on social investment. While some have thrived, others found that the expectations of investors — reporting requirements, growth targets, repayment schedules — sat awkwardly with their social mission. The pressure to generate financial returns, even modest ones, can pull an organisation toward activities that are commercially viable rather than socially necessary.

NPC (New Philanthropy Capital) has been among the more nuanced voices, arguing that social investment has been oversold as a systemic solution but has genuine value in the right circumstances. Their analysis has consistently emphasised that the sector's primary need is for more and better grant funding, and that social investment should be understood as a complement to, not a replacement for, grants.

The blended finance compromise

Blended finance attempts to bridge the gap. By combining grant with repayable capital, it reduces the risk and cost for the borrowing organisation. A charity taking on a loan to buy its premises might receive a grant to cover the deposit, reducing the amount borrowed and the repayments required. The Access Foundation's programmes have used this approach extensively, and it has enabled organisations to access capital they could not have secured on purely commercial terms.

The critique of blended finance is that it still requires an organisation to service some level of repayment, and that the grant component is doing the heavy lifting. If the grant is what makes the deal viable, then the argument for repayable finance as a distinct funding mechanism weakens. The grant is the funding. The loan is an additional obligation attached to it.

The evidence

The UK social investment market has grown significantly in absolute terms. Better Society Capital's annual market sizing reports show growth from approximately £830 million in 2011 (the baseline year when Big Society Capital launched) to over £10 billion in assets under management by end of 2023. However, this headline figure is dominated by social housing, which accounts for the majority of social investment by value. Strip out housing, and the market serving community organisations, social enterprises, and charities directly is considerably smaller.

The Access Foundation's evaluation of its blended finance programmes found that the combination of grant and repayable capital could work for organisations at the smaller end, but that significant investment readiness support was needed — suggesting that the organisations were not naturally suited to this form of finance. Their Growth Fund, delivered through social investors including Key Fund, Social and Sustainable Capital, and others, provided over 600 blended finance investments between 2016 and 2022. Repayment rates were broadly positive, but the programme required substantial grant subsidy to function.

Research by NPC and others has found that the social investment market has been more effective at serving larger, more established organisations with trading income than at reaching the small, grant-dependent charities that were part of the original vision. A 2019 NPC report noted that social investment had "not yet achieved the scale or breadth of impact that its proponents hoped for" and that "the majority of charities remain unlikely to benefit."

NCVO's financial analysis of the charity sector consistently shows that the median charity operates at or close to break-even, with limited free reserves and high dependence on restricted funding. These are not the characteristics of organisations that can prudently take on debt, regardless of how concessionary the terms.

Current context

The social investment landscape in 2026 is more mature and more modest in its ambitions than the Big Society Capital era. Better Society Capital (Big Society Capital, rebranded in April 2024) continues to invest, but with greater emphasis on systems change and less on scaling a market for its own sake. The organisation has acknowledged that social investment is one tool among many and that grant funding remains essential for most of the sector.

The Dormant Assets Act 2022 expanded the range of financial products eligible for transfer to the reclaim fund, potentially releasing additional capital for social investment. However, the distribution of these funds — and the balance between social investment and grant-making — remains a live policy question. The sector has argued strongly that dormant assets should fund grants and infrastructure, not only repayable finance.

The Access Foundation continues its work on investment readiness and blended finance, but has been explicit that its programmes are designed for a subset of the sector, not the whole of it. The wider funding environment — shaped by local authority budget cuts, inflation, employer NIC increases, and the lingering effects of the pandemic — has made the case for unrestricted grant funding more urgent, not less.

There is growing recognition, including among social investment practitioners, that the original framing was too ambitious. The idea that a social investment market could substitute for adequate public funding or philanthropic giving has not been borne out. What remains is a useful, if limited, set of financial tools for organisations with the right characteristics to use them.

Last updated: April 2026

What this means for charities

Charities should assess any offer of social investment or blended finance against a simple question: do we have a reliable, sufficient income stream from which to make repayments, and what happens if that income is disrupted? If the answer is uncertain, repayable finance carries a risk that trustees must weigh carefully against their fiduciary duties.

For charities with trading income — charity shops, care services, venue hire, consultancy — social investment may be a legitimate route to acquiring assets, expanding operations, or managing cash flow. The terms matter: interest rates, repayment schedules, covenants, and what happens in the event of financial difficulty should all be scrutinised before signing.

For charities that are primarily grant-funded, the honest answer is that social investment is unlikely to be relevant to their core funding needs. The energy spent on investment readiness programmes and loan applications may be better directed toward fundraising, advocacy for full cost recovery, and building unrestricted reserves. This is not a failure of those charities. It is a recognition that their operating model does not generate the kind of surplus that repayable finance requires.

Boards should be wary of narratives that frame grant dependence as a problem to be solved by becoming more "businesslike." For many charities, grant funding is the appropriate funding model for the work they do. The question is whether there is enough of it, and whether it covers the true cost of delivery — not whether it can be replaced by debt.

Common questions

What was Big Society Capital?

Big Society Capital was established in 2012 as the world's first social investment wholesaler, capitalised with approximately £400 million from dormant bank accounts and a further £200 million from the four largest UK high street banks (Barclays, HSBC, Lloyds, and RBS), giving a total initial capitalisation of around £600 million. It invested through social investment finance intermediaries rather than directly into frontline organisations. In April 2024, it rebranded as Better Society Capital to reflect a broader focus beyond its original market-building mandate.

What is the difference between social investment and philanthropy?

Philanthropy is the giving of money without expectation of financial return — grants and donations. Social investment involves the deployment of capital with the expectation of both social impact and some financial return, even if that return is below market rate. The distinction matters because investment must be repaid, which means the recipient needs revenue to service that obligation. Philanthropy places no such requirement on the recipient.

Can charities legally take on debt?

Yes. There is no legal prohibition on charities borrowing money, and many do — particularly for property acquisition. However, charity trustees have a fiduciary duty to act in the charity's best interests and to manage financial risk prudently. Taking on debt that the charity cannot reliably service would be a breach of that duty. The Charity Commission expects trustees to understand and manage the risks associated with borrowing.

What happened to social impact bonds?

Social impact bonds, which combine social investment with outcomes-based commissioning, were a prominent part of the early social investment narrative. Over 100 were launched in the UK from 2010 onwards. The evidence on their effectiveness is mixed, and the pace of new launches has slowed significantly. They are addressed in detail in the related debate on payments by results and social impact bonds.

Is social investment just for social enterprises?

In practice, largely yes. Social enterprises — organisations that trade for a social purpose — are the primary market for social investment because they generate the trading income needed to service repayable finance. Some charities with significant trading arms also access social investment, particularly for property. But for the majority of registered charities that do not trade significantly, social investment is not a practical funding option.

What are dormant assets and why do they matter here?

Dormant assets are funds from financial products — bank accounts, insurance policies, pensions, investments — that have been inactive for a defined period and whose owners cannot be traced. Under the Dormant Assets Act 2022, these funds are transferred to a reclaim fund (currently Reclaim Fund Ltd) and then distributed for social purposes. Dormant assets provided the founding capital for Big Society Capital and remain a significant source of funding for social investment infrastructure. The sector debate is whether future dormant asset releases should prioritise social investment or be directed more toward grants and community wealth funds.

Key sources and further reading

• Better Society Capital — Formerly Big Society Capital. The UK's largest social investment wholesaler, publishing annual market reports on the size, composition, and performance of the UK social investment market. Their data on assets under management is the most widely cited measure of market growth.

• Access Foundation for Social Investment — Established in 2015 with government and National Lottery funding to improve access to social investment for charities and social enterprises. Publishes evaluations of its blended finance programmes and investment readiness support, providing some of the best evidence on how smaller organisations experience social investment.

• NPC (New Philanthropy Capital) — Independent think tank and consultancy focused on the charity sector. Has published extensively on the promise and limitations of social investment, consistently arguing for a realistic assessment of which organisations can benefit and which cannot.

• NCVO (National Council for Voluntary Organisations) — The sector's largest membership body and a primary source of data on charity finances. NCVO's annual Almanac and financial analysis provide the baseline data on charity income, expenditure, and reserves that contextualises the social investment debate.

• Social Enterprise UK — The national membership body for social enterprises. Publishes the State of Social Enterprise survey and other research documenting the experiences of trading social-purpose organisations, including their use of social investment.

• "Social Investment: Ten Years On" — Various reflections published by practitioners and researchers around the tenth anniversary of Big Society Capital, offering candid assessments of what the social investment market has and has not achieved.

• Dormant Assets Act 2022 — The legislation expanding the range of financial products eligible for transfer to the reclaim fund, with implications for the future funding of social investment and other social purposes. The Act's implementation is overseen by the Dormant Assets Expansion Board.

• Government Outcomes Lab — University of Oxford, Blavatnik School of Government. Although primarily focused on outcomes-based commissioning, the GOL's research intersects with social investment through its work on social impact bonds, providing rigorous evaluation of one of the market's most prominent products.