Market-Building Wholesalers: Funding Innovation
When Canada’s Misfit Ventures went to raise funding, it faced a difficult environment for first-time fund managers everywhere, but especially for Canada’s first LGBT-focused VC fund. Similarly, Scale Institute’s Catalytic Capital Lab, like other innovative finance creators, might have had a hard time raising capital for a new loan guarantee pool to support the country’s community nascent community loan providers.
Both found backing this year from funds with mandates to seed Canada’s impact economy. The so-called “wholesalers” are in turn funded by Canada’s Social Finance Fund.
The Social Finance Fund, or SFF, was launched in 2023 to jumpstart the country’s social finance market. The $755 million federally backed initiative, created under the Trudeau administration, has already committed more than $155 million across 34 investments.
The capital is deployed through three wholesalers — Boann Social Impact, Realize Capital Partners, and Cap Finance — each tasked with leveraging the federal funds to attract additional private investment into Canada’s social purpose sector. Each operates as a kind of fund of funds, channeling capital into impact fund managers that, in turn, back nonprofits, cooperatives, and social enterprises — or, social purpose organizations, as they are called in Canada.
“We really view our role as trying to develop and mature the Canadian impact investing market,” Realize’s Lars Boggild tells ImpactAlpha. “We’ve been able to use the scale and de-risking nature of the Social Finance Fund to try to attract net new institutional participation into the social finance market, which would be unlikely to occur otherwise.”
The wholesaler model, pioneered in the United Kingdom by Better Society Capital, is gaining momentum around the globe, especially as governments grapple with constrained financing and growing demand for social services. Countries from Japan to Portugal are adopting the model.
“As a first-time fund manager, one of the biggest challenges is building early credibility and momentum in a space where institutional capital has historically been slow to back underrepresented managers,” Mandy Potter of Misfit, which received funding from Realize and Boann, tells ImpactAlpha. “Support through the Social Finance Funds has been pivotal in addressing that barrier.”
Building local finance
Better Society, then called Big Society, was launched in 2012 under Conservative prime minister David Cameron as part of a broader initiative to tap capital held in dormant bank accounts and invest it for social good.
Sir Ronald Cohen and Nick O’Donohoe, who went on to run British International Investment before stepping down last year, were tasked with bringing to life a kind of “social investment wholesale bank.” Big Society was seeded with £400 million in dormant funds to help establish an impact investing market. Barclays, HSBC, Lloyds Banking Group and the Royal Bank of Scotland each kicked in £50 million to help capitalize the new institution.
“It was seen as very important not to be just an investor, but to be a wholesaler,” Better Society’s James Westhead told ImpactAlpha. “To invest through intermediaries as a way of growing the market, rather than becoming the market by investing directly into enterprises.”
He added, “We want to scale managers that have already emerged, and we also want to support existing scaled managers who want to move towards impact.”
By backing new mission-focused fund managers, community lenders and other intermediaries, says Westhead, Better Society looks to build confidence among other investors, help managers establish a track record of investment, and crowd in capital.
It was an early backer of the Key Fund, in a part of northern England hard hit by declining steel and coal industries. The fund has since gone on to attract additional investors; Key’s most recent Northern Impact Fund 2, a hybrid grant and loan fund for small businesses and community organizations, secured £8.45 million from banks, family offices and foundations.
Another emerging manager, Bethnal Green Ventures, ran one of Europe’s first ‘tech for good’ accelerators and has grown into a full scale impact tech fund.
Better Society also helped to stand up the Community Investment Enterprise Fund, run by Social Investment Scotland, a community lender that serves under-resourced micro and small businesses in England and Wales. Its support helped draw bigger backing from Loyd’s Bank to launch a new £62 million investment fund.
Indeed, for every pound Better Society has invested, it has brought in an average of three from outside investors. Better Society, which aims for an average 1% return across its portfolio, has over 12 years grown its initial £400 million in dormant funds to more than £1 billion in total investments. And it has attracted an additional £2.9 billion from investors.
The impact of this market-building is clear. In 2012, the amount of capital invested for social impact in the UK stood at about £800 million. That had grown to more than £10 billion by 2023, with increasing participation from institutional investors. Better Society, which was once the largest such investor, now represents less than 5% of the market. “We don’t want to be the biggest fish in the pond. We want a pond which is full of fish,” says Westhead.
The UK government recently passed a law that will allow dormant non-cash assets, such as insurance policies or pension funds, to be tapped alongside the dormant bank accounts, adding a fresh £1 billion or so to be distributed through Better Society and other social causes. (Money is set aside in a reclamation fund to accommodate non-dormant claims).
In addition to Better Society, Canada’s Social Finance Fund was also inspired by the nearly 50-year old network of community development financial institutions, or CDFIs, in the US.
“We don’t have the same maturity of market infrastructure, particularly in community finance and community development investing, as exists in places like the US through the CDFI network,” says Boggild of Realize Capital. “It’s quite necessary for there to be an intervention like the Social Finance Fund to support the sort of leveling up in operational maturity and scale” of community lenders.
Local enterprises and co-ops — vital to local economies, especially Canada’s underserved populations — have long lacked the support and access to capital that a strong community finance ecosystem can provide. The wholesalers see them as a leverage point for building that ecosystem. “We have a positive bias towards co-ops and nonprofits because of their unlikelihood to have an exit and bounce from their communities, but also territorial aspects, rurality, underrepresented communities” Boggild says.
In July, Boann Capital channeled $617,000 of its SFF funds into a $50 million loan guarantee pool that, with the support of Scale Institute’s Catalytic Capital Lab, will provide catalytic capital to 30-40 community loan providers across Canada over the next two years. The guarantees will serve to de-risk the investments and attract more capital.
These community lenders are often considered higher-risk because of their smaller scale, making them a natural fit for the kind of de-risking capital the SFF was designed to deploy. The idea behind the loan guarantee, Boann’s Dana Granofsky tells ImpactAlpha, is to “de-risk and provide some confidence behind the community loan funds themselves to enable them to attract a wider pool of investors to place-based investing.”
Wholesaler Montreal-based Cap Finance is applying the same place-based approach in Quebec, focusing exclusively on strengthening the province’s social economy. Its first $28 million in commitments supports Indigenous housing finance, Black-led venture capital, gender-focused advisory, and cooperative development, including investments in the Aboriginal Savings Corporation of Canada and the Fonds Fiducie du Chantier de l’économie sociale.
Empowering emerging managers
Likewise, the limited scale and first-time status of emerging fund managers often keep them out of reach for larger institutional investors. The Social Finance Fund aims to change that by helping managers build the capacity and track record needed to compete for bigger pools of capital.
Toronto-based Realize Capital Partners, a joint venture between impact investment firm Rally Assets and early-stage VC Relay Ventures, has committed $67.7 million this year across 16 investments — many women-led or first-time funds. Portfolio managers include Indigenous-owned Flowing River Capital Partners and LGBT-led and -focused Misfit Ventures.
As a first-time fund manager and one of the earliest recipients of Realize’s Social Finance Fund investments, Misfit noted that the capital opened doors to new limited partners.
“This support has shaped our strategy by allowing us to be more intentional: we can invest in overlooked founders who are driving social impact, while also proving that Canada’s first LGBT-focused VC fund can deliver competitive returns.” Misfit’s Mandy Potter tells ImpactAlpha. It’s both a catalyst and a proof point that diversity in fund management strengthens the entire impact investing ecosystem.
The intermediary role between emerging managers and institutional capital is central to Realize’s strategy. “Very few [institutional investors] actually look at first-time fund managers, or in many cases, second-time fund managers, etc. And so we kind of serve as a conduit for that,” says Realize’s Lars Boggild.
Realize also launched Named Weave Community Capital Fund, Canada’s first fund that lends exclusively to community bond issuers. The fund targets a $30 million raise and aims to provide investors with exposure to loans provided to charities, nonprofits and cooperatives that are also issuing community bonds.
Public-private partnership
The political winds in Ottawa have shifted, but the Social Finance Fund, with more than $600 million still to be deployed, appears to have staying power. The new government of prime minister Mark Carney has signaled a focus on economic sovereignty and resilience — priorities that align with the fund’s long-term market-building agenda.
Carney, who served as Bank of England governor from 2013 to 2020, has brought a mandate to strengthen Canada’s domestic capital markets and channel investment into sectors that support inclusive and sustainable growth. As BoE governor and later as UN Special Envoy for Climate Action and a partner at Canadian asset manager Brookfield, Carney has long preached the need for sustainable, green finance.
A key part of the new government’s platform has been “a very explicit, almost mission-driven focus on delivering results for Canadians more tangibly, and with real thinking around economic resiliency and economic sovereignty,” says Boggild.
That kind of mandate bodes well for the wholesaler, market-building model — and emerging managers and intermediaries.
“Governments increasingly realize that they don’t have enough taxpayer pounds to solve the social issues that they’re facing, and are being more creative and innovative at partnering with private capital to work together on those social issues,” says Westhead of Better Society.
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