Norris Capital Investment - Case Study Example

Norris Capital Investment Table of Contents Table of Contents 2 Introduction: Social Investment 3 Present situation of social investment funds in theUK 3 Norris Capital Fund 5 Nature of the investment market 6 Asset allocation and alternatives 6 Debt market 6 Equity market 7 Quasi equity market 7 Grants 7 Commodities investments and derivatives 8 Foreign currency trading 8 Active and Passive Investment 8 Investment diversification 9 Recommendations 9 References 10 Introduction: Social Investment Social Investment can be defined as the supply of finance and non financial support with the objective of strengthening a company’s social, economic, environmental and cultural impact whilst potentially seeking a financial return on capital and financial sustainability and viability (JPA Europe Limited, 2010). The social investment deals with the supply of financial and nonfinancial contributions to a particular organization or company for a strong social, economic and environmental cause (Office of the First Minister and Deputy Minister, 2005). The individuals investing in social business are known as social business investors. There are three kinds of social investors 1) Philanthropist: They make huge amounts of investment to maximise social, cultural and environmental impact through their support. 2) Blended value investors: Their main aim is to make financial return on their investment in addition to making a cultural, social and environmental impact (UN-Habitat, 2009). 3) Socially responsible investors: They make investments to achieve commercial returns but limit the range of organizations they are investing in. Social investment does not involve the purchase and sale of securities and commodities (JPA Europe Limited, 2010). Present situation of social investment funds in the UK Social investment is a very popular concept in the UK. Clearly So and Investing for Good are two active organizations in the UK which believe in social business investment. The main aim of these kinds of organizations is to allocate their capital to charitable trusts and invest in endowment commercially (niDirect Government Services, 2013). The social investments companies acquire the funds based on certain characteristics which are as follows: 1) Risk appetite: Measuring the risk appetite of the fund is a crucial task for the social investors. For example, equity investment in a start-up organization will be more risky than investing in loan secured on a fixed asset. 2) Financial Instrument: There are different kinds of financial instruments, such as grants, equity, government bonds, secured loans etc. 3) Pricing: Targeting financial returns from each investment across a portfolio of investments. The social investors need to estimate the returns from each investment and across a portfolio of investments. 4) Development stage of the organization: The organizations support investment for the start up projects, early stage, growth capital and incubation has to be ascertained (JPA Europe Limited, 2010). Figure 1: Organization life cycle (Source: JPA Europe Limited, 2010) The chart shows the distribution of social investment funds across an organizational lifecycle. The organizations like Un Ltd and the Young Foundation is still in its early stage and has growing interest in supporting social innovation with seed capital and social venture capital. The organizations like Social Stock Exchange have attracted certain amount of funding from enterprises like Cafe Direct, Ethical Property Company, Traidcraft etc. Social Stock Exchange has been able to issue publicly traded instruments. Co-operatives UK and the Development Trusts and Association raise capital from individual investors which may be traded and redeemed over time. As per a survey conducted by the Ethical Investment Association 700000 people in the UK invest in ethical investment funds (JPA Europe Limited, 2010). There are now more than 90 UK ethical funds with almost £9 billion invested in them, which include Unit Trusts, open-ended investment companies and investment trusts. The banks of UK are trying to gain knowledge and expertise in the social business investment sector. Banks like NatWest and Barclay’s have departments offering social investment funds. UK is recognized as a global leader in social products and infrastructure bonds. The government in UK is actively promoting London as a global hub for social investment. The government plans to export the social venture products and services and bring more investment deals in UK (City of London Corporation, 2012). Norris Capital Fund A social investment fund introduced in the year 2008 currently holds £13.5 million of assets. Currently, it has 35 percent of its assets allocated in the equity market, 20 percent in the overseas equities, 20 percent in the UK government bonds, 15 percent in the UK corporate bonds and 10 percent in cash and short term instruments. The balance of the risk and return of the fund is appropriate as 35 percent of the fund is invested in the UK corporate and government funds which are secured funds with low risks and 55 percent of the fund is invested in the equity and overseas equity market which will give high returns. The main target of the fund is to attain an educational objective like child’s school or college fees. The students and youth in UK are facing challenges. Most of the youth between 16 to 24 years old in UK are not employed, educated or trained and almost five million homes in UK do not have a proper standard of living. The fund will make investments in ventures that address social concerns like 1) Educational attainment and employability of the youth 2) Health and well being of children and the youth (Nesta, 2012). Nature of the investment market The company should allocate and diversify the fund into various segments because the volatility and returns of the different market segments are different. The equity sector has been outperforming others segments like debt, mutual funds and depositaries etc. The management needs to identify and analyze the trends of different sectors in the market and invest in the profitable sectors (Government of UK, 2013). For example the company can invest in the real estate sector which has been performing well since the last few years. The equity market can be risky at times too. During recession, the stock market had not been performing very well and investors investing entirely in the equity markets had incurred huge losses. However, one cannot forget that investments in the equity sector are very advantageous due to its liquidity and accessibility (Neu and Matz, 2006). The management of the company should take into consideration that the Norris Capital should not be invested in low volumes otherwise they will be difficult to sell. Allocation of Norris Capital in the debt market would ensure fixed income and stability. Asset allocation and alternatives Debt market The debt market of UK consists of various financial debt instruments, like convertible, Eurobonds, exchangeable bonds and medium term programmes (London Stock Exchange, 2007). These kinds of bonds provide investors like lower risks, dependable income and an opportunity to diversify their portfolios. The debt market is much secured and the rate of return is also high. Bond market is relatively stable than the equity market and has an inverse relation to the stock market. They are usually considered a safer investment option due to their low volatile nature. Although, there are certain kinds of risks involved in the bond investment which includes default in bond issues and the reduction in risk rates. Equity market The equity market is very volatile and gives high return. Equity in the form of shares represents the risk sharing portion of the company. The company has made a right decision in allocating most of the funds portion in the equity market (London Stock Exchange, 2007). The equity market of UK has been yielding profits even amidst recession (Smith.2013). A majority portion of the fund can be allocated in this sector because of its high returns and outcomes (Schell, 1999). The management of the company can decide to allocate 45 to 50 percent of the fund in the most profitable sector. Quasi equity market The Quasi equity shareholders do not get to pay shareholders dividend or pay from profits. The quasi equity and the loan structure are almost similar. The success and failure of the fund depends on the revenues generated by the organization. If the organization grows at an anticipated rate then the shareholders will be paid back the investment amount at the pre decided return. However, if the organization does not perform well then the shareholder’s will not make any repayments to the organization (ACEVO, 2010). This is a very stable market in the UK. The fund can be allocated in this sector as it offers high return within a very short period of time. This sector can be a very good alternative and managers can allocate at least 20 to 25 percent of the Norris Capital fund in this sector. Grants They are often used for growth capital purposes and pose little financial risk. The grant laws are usually constricting and are difficult to get for educational purposes. They come with lengthy documentation norms and cost a lot of money (ACEVO, 2010). It can also be considered as a preferable alternative for investment (Social Investment Task Force, 2001). Commodities investments and derivatives Basic raw materials like gold, silver, lead, copper etc are traded in the commodities market. Investment in these kinds of commodities can allow the investors to obtain higher amounts of gains. This type of investment is different from the investment of equities and bonds etc. The commodities have high volatility of prices and this is because of their seasonality. In the year 2012, gold investors made a considerable amount of gain. During recession or periods of crisis, one of the most profitable commodities is gold. Investment in the gold sector can prove to be extremely beneficial during an economic slowdown etc. Foreign currency trading The foreign currency trading can also be an alternative investment opportunity. It is based on a certain assumption that currencies of some countries will fall and rise against the value of other country’s currency. Sometimes, the benefits of unexpected currency rate changes can arise due to economic, political and social events. These are extremely liquid investments and investing in these markets can be extremely risky. Active and Passive Investment Active Investment implies that the investor is using instrumental tools, analysis and assumption tools for determination of the investments that shall be made in the future. This is an aggressive approach in which the investor gets a chance to yield profits that is indicated higher than the market index or benchmark. In Passive Investment, the investor does not select a specific security but gains more profit in investing in general market index. Active investing has the potential of high return but passive investment allows scope for diversification. There is a high risk attached to active investment because of the high management fees. An average investor may yield high amounts of profits if he invested through the passive investment approach instead of the active investment approach. The passive investment approach relies on efficient and accurate market analysis and hypothesis. Passive investment approach may be adopted to maximize profits. Investment diversification The portfolio should be widely dispersed into other segments. The risk is reduced by allocating the assets to multiple investments (Israelsen, 2010). One of the major benefits of diversification may imply that the portfolio may achieve same rate of return but there would be less fluctuation. Various types of investments include bond, equity, debt, real estate, derivatives and commodities. Diversification in portfolio would be beneficial in both emerging and developed markets (NCVO, 2013). Recommendations There are no tax reliefs for social investment funds in UK unlike the venture capital funds. The fund manager should diversify its portfolio with riskier investments. This investment portfolio should be balanced with long term and short term securities. A vast diversification should be taken into consideration to reduce the risk factor and secure stable and constant returns. The fund manager can follow the below mentioned suggested investment pattern: Equity 25 percent Quasi equity 5 percent UK corporate and government bonds 30 percent Commodities 10 percent Grants 5 percent Cash 5 percent Short term instruments 20 Total 100 percent The above diversification would be perfect for Norris Capital fund to protect it from the volatility of the markets. The diversification of the portfolio in the equity markets would enable the fund to obtain higher returns (Schell, 1999). The diversification of portfolio in UK corporate and UK government bonds would ensure stability and security with a low interest rate. The diversification in short term instruments would allow the fund manager of Norris Capital fund to borrow the funds for the company at a high interest rate and also maintaining the cash inflow. The diversification in quasi equity and grants would enable the fund manager to receive profits in within a stipulated time frame provided the company is yielding profits. References ACEVO, 2010. Making your big plans happen. London: ACEVO. City of London Corporation, 2012. A brief handbook on social investment [pdf] Available at: < http://www.cityoflondon.gov.uk/business/supporting-local-communities/Documents/a-brief-handbook-on-social-investment.pdf> [Accessed 18 March 2013]. Government of UK, 2013. Report shows UK leading the way in social investment [online] Available at: < https://www.gov.uk/government/news/report-shows-uk-leading-the-way-in-social-investment> [Accessed 18 March 2013]. Israelsen, C. L., 2010. 7twelve: A diversified investment portfolio with a plan. New Jersey: John Wiley & Sons. JPA Europe Limited, 2010. Social enterprise and the social investment market in the UK an initial overview [pdf] Available at: < http://evpa.eu.com/wp-content/uploads/2010/10/Social-Enterprise-and-the-Social-Investment-Market-in-the-UK-An-Initial-Overview.pdf> [Accessed 18 March 2013]. London Stock Exchange, 2007. A guide to capital markets [pdf] Available at: < http://www.londonstockexchange.com/companies-and-advisors/listing/markets/guide-to-capital-markets.pdf> [Accessed 18 March 2013]. NCVO, 2013. Social investment [pdf] Available at: < http://www.ncvo-vol.org.uk/advice-support/funding-finance/financial-management/investment/social-investment> [Accessed 18 March 2013]. Nesta, 2012. Nesta launches a £25 m impact investment fund [online] Available at: < http://www.nesta.org.uk/press_releases/assets/features/nesta_launches_25m_impact_investment_fund> [Accessed 18 March 2013]. Neu, P. and Matz, L., 2006. Liquidity risk measurement and management: A practitioners guide to global best practices. New Jersey: John Wiley & Sons. niDirect Government Services, 2013. The social investment fund [online] Available at: < http://www.nidirect.gov.uk/the-social-investment-fund > [Accessed 18 March 2013]. Office of the First Minister and Deputy Minister, 2005. Social investment fund [online] Available at: < http://www.ofmdfmni.gov.uk/social-investment-fund> [Accessed 18 March 2013]. Schell, J. M., 1999. Private equity funds: business structure and operations. NewYork: Law Journal Press. Smith, J., 2013. Equity markets stay strong despite economic uncertainty. BBC News, [online] 1 June. Available at: < http://www.bbc.co.uk/news/business-20918118> [Accessed 18 March 2013]. Social Investment Task Force, 2001. Social investment ten years on [pdf] Available at: < http://www.socialinvestmenttaskforce.org/downloads/SITF_10_year_review.pdf> [Accessed 18 March 2013]. UN-Habitat, 2009. Social investment funds. Nairobi: UN-Habitat. Read More