Bridging the gap between profits and responsibility

Social- and sustainable-focused investing has become all the rage as an increasing number of private equity firms jump on the bandwagon. The idea of combining social and financial goals has become appealing to many, but this is only a fairly recent development. Bridges Ventures was one of the first in Europe to combine these two goals back when the firm was founded in 2002. At that time, the directors at Bridges, Michele Giddens and Philip Newborough, found themselves having to explain the concept of social investing and convince investors of its merit.

Now, however, the environment for social investing is changing dramatically. "There has been increased interest in the sector since we started and this is evident by the number of LPs and GPs signing up to the UN's Principles for Responsible Investment (PRI). Far more investors are also familiar with the idea and we're finding ourselves having to speak less about the social concept, and more about our track record," says Giddens. In fact, there are now 311 investment managers and 187 asset owners that are signatories to the UN's PRI.

Bridges' first £40m venture fund included a significant investment from the government, without which it might not have taken off. But its second vehicle, less reliant on government backing, held an oversubscribed final close of £75m in 2007, proof that the idea was, and is, catching on. Giddens expects that the fundraising for Bridges' next fund will be even less of a struggle, as "recent economic difficulties have brought issues of sustainability to the fore".

"There is now an increased urgency about the environment," explains Giddens, "and sustainability has become a much more important feature of our landscape, and an important part of the investment world.

"This urgency is evident not only from an environmental perspective, but a social one as well. There is a growing gap between the rich and the poor in the UK, and our firm aims to provide solutions to these sorts of social challenges where the government and philanthropy cannot reach."

Bridges' goal is to combine attractive financial returns with a social/environmental fund and in this way, differs greatly from charitable investment organisations such as The Private Equity Foundation and Impetus Trust, in which investors donate their time and money. This difference allows for more available capital into the market, as more investors are keen to deploy their funds into financially stable vehicles that can provide returns in addition to social achievements.

Attracting support

The private equity industry was indeed eager to support Bridges. The company's backers include private equity heavyweights Apax Partners, 3i and Doughty Hanson, which are a crucial part of Bridges' investment model. "We're enormously supported by the private equity sector. They sit on our boards and investment committees and have opened their teams as well as networks to us, advising us on things they learnt from their own experiences. We can provide a combination of capital and expertise as a result," comments Giddens. Founder of Apax Sir Ronald Cohen is the chairman of Bridges, while Philip Yea, former chief executive of 3i, sits on the company's advisory board and Nigel Doughty, founder of Doughty Hanson, is a non-executive director for the business.

The firm typically invests up to £10m in entrepreneurial businesses, from start-up to later stage, that are either located in the most deprived 25% of the country or have sustainable goals and are focused on the healthcare, education and environment sectors. Bridges then keeps its investors updated on not only the financials of each company, but on their social progress as well, using a "social impact scorecard" that is based on key performance indicators according to the type of business. "This doesn't only measure the output, but it also encourages entrepreneurs to run businesses in an even more sustainable fashion," adds Giddens.

Yet Giddens believes that there are a number of ways in which to combine social impact with returns. In November 2008, Bridges launched The Bridges Social Entrepreneurs Fund to address the funding gap often faced by fast growing social enterprises looking to scale. The vehicle has so far raised £8.5m for investment, but it differs from the firm's previous two venture funds. Investors here have the option to invest through a charitable trust or as a typical investor that expects a return. Giddens admits, though, that these returns are at a completely different level to those generated from its venture vehicles, as the target companies are ones that are not seeking to maximise profit, but rather to maximise their social goals.

In fact, Giddens points out that those returns from Bridges' second fund would "surprise some sceptics". She gives the example of SimplySwitch, an online and telephone-based price comparison and switching service, which Bridges exited in 2006, generating a whopping IRR of 165%. Bridges invested £345,000 in December 2002 and sold the company for £22m, proving that the concept of social investing can compare quite well financially to traditional private equity. "There is this idea that social investing does not provide good returns. This is not always the case. If you do it in a smart way, the social impact can result in an excellent financial return," insists Giddens.

But with the downturn hitting small-scale entrepreneurship and venture capital in general, Bridges Ventures has, like almost every venture investor, felt some of this brunt. "Our investments are fundamentally small. New investments have definitely declined during the past year, but this is now changing. We have a healthy pipeline and expect to close a deal in the coming months," she says. The firm has also remained active in its current portfolio, which includes companies like The Gym, a provider of low-cost health and fitness facilities that has recently opened its fourth location, and The Hoxton Hotel, a reasonably priced boutique establishment. The hotel, Giddens explains, was an investment that not many were interested in at first because of its location in east London, but it now has nearly full occupancy seven days per week.

It seems that Bridges has come up with an investment model that is not only lucrative, but also socially beneficial. As environmental and social issues become more pronounced, more private equity firms will have to get in the game, either directly or indirectly. Giddens is hopeful: "Social entrepreneurship is absolutely crucial and an essential part of the innovation that will solve some of the social issues in this country. We hope that social investment will eventually become a new asset class and we think that we are definitely moving in that direction."

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• UK / Ireland