Allowing CICs to borrow from private equity or social finance turns “not for profit care” into a fiction

How? Profit still flows out, only through debt instead of dividends.

Private equity is a form of capital investment aiming for value creation through active management, long-term commitment, and strategic interventions

Social finance aims to achieve measurable social or environmental outcomes alongside financial returns, distinguishing it from pure philanthropy or conventional investing

…“hard nosed economic feel while restating the importance of the social”. (Halpern, 2005, Social Capital, Polity Press)

“Investment in social relations with expected returns in the marketplace.”  (Nal Lin, Social Capital: A Theory of Social Structure and Action. Cambridge: Cambridge University Press)

Unlike philanthropy, which has a similar mission-motive, social finance secures its own sustainability by being profitable for investors. Capital providers lend to social enterprises, who in turn, by investing borrowed funds in socially beneficial initiatives, deliver investors measurable social returns in addition to traditional financial returns on their investment.

The premise

When a Children’s Social Care CIC in Wales takes loans from private equity or social finance, it re‑introduces profit extraction into a legal form that was designed to keep care insulated from profit‑seeking.

The CIC may not distribute profits directly, but private equity/social finance can still extract value through interest payments, fees, and control over the organisation’s financial decisions.

That undermines the core principle of “care not for profit.”

Why this breaches the spirit of “not‑for‑profit” care

1. Private equity’s/Social Finance business model is profit extraction

Even if a CIC cannot distribute dividends, a PE/SF enterprise can still make money by:

• Charging interest on loans
• Charging management or consultancy fees
• Structuring loans so they require refinancing at higher rates
• Using secured debt to gain leverage over the CIC’s operations

These mechanisms allow profit to flow out of the care system and into financial markets.

2. Debt becomes a profit‑extraction tool

A CIC may be legally barred from distributing profits, but it is not barred from paying:

• High interest
• Penalties
• Service fees
• “Financial restructuring” costs

All of these are legitimate ways for PE/SF firms to extract value. So, the CIC becomes a vehicle for debt servicing, not a protected community asset.

3. Financial pressure distorts care decisions

Once a CIC is indebted to private equity/social finance, its priorities shift:

• Cost‑cutting to meet debt obligations
• Pressure to expand or “scale” services to generate revenue
• Reduced staffing ratios
• Lower pay and training budgets
• Less stability for children

The organisation may still call itself not‑for‑profit, but its behaviour becomes indistinguishable from a profit‑driven provider.

4. Community benefit becomes secondary

CICs are meant to reinvest surpluses into community benefit. But if surpluses are diverted to debt repayment, then:

• Reinvestment shrinks
• Community benefit is diluted
• Financial stakeholders gain priority over children and workers

This is a structural breach of the “care not for profit” ethos.

5. PE loans create indirect ownership

Private equity/social finance can use debt as a form of control:

• Covenants can dictate staffing levels, expansion plans, or asset sales
• Failure to meet repayment terms can trigger actions to control finance or property
• The CIC becomes financially dependent on a profit‑driven actor

This is effectively privatisation through the back door, even if the CIC’s legal form remains “not‑for‑profit.”

The core contradiction

A CIC can legally say “we don’t distribute profits,” while simultaneously enabling private equity/social finance to extract profit through debt. This is a loophole that allows financialisation of children’s care under the banner of “community interest.”

It breaches the principle because:

• Profit extraction still happens
• Financial actors still shape care decisions
• Surpluses no longer stay in the care system
• Children’s social care becomes a financial assets rather than a social institution

The deeper issue: “not‑for‑profit” is about purpose, not just legal form

The idea of “care not for profit” is that:

• Care should be organised around relationships, stability, and community, not financial return
• Surpluses should be reinvested, not extracted
• Governance should be democratic, not financialised

Once private equity/social finance enters the picture, even through loans, the purpose shifts. The CIC becomes a financial instrument, not a community institution.

Allowing CICs to borrow from private equity/social finance turns “not‑for‑profit care” into a fiction—profit still flows out, only through debt instead of dividends.