When a potential hedge fund investor recently visited a mental health charity, he asked what the organization would need to help more people.
“Property” was the answer.
Cheyne Capital, a $6 billion hedge fund based in London, hopes to offer that with a new fund it is setting up to buy property that it will then rent to organizations that deliver services like affordable housing, aid for the elderly and care through the National Health Service.
The Cheyne Social Property Impact Fund, which was able to start investing on Thursday in Britain, aims to raise about 300 million pounds with target returns of 10 to 12 percent with leverage. It is expected to charge investors about a 1.5 percent management fee and a 10 percent performance fee after it hits a return rate of about 6 percent.
“There is a tremendous social need for this,” said Shamez Alibhai, who will head the investment team and who has worked in real estate for 13 years. He has been at Cheyne since 2006.
As recently as 2012, government grants for social housing were about £2.5 billion to £3 billion, Mr. Alibhai said. Those funds were reduced to nearly £500 million after the British government cut expenses in the financial crisis.
“That’s £2.5 billion of capital withdrawn from the system,” Mr. Alibhai said. “We hope to play our part replacing some of that.”
The fund aims to balance financial and social returns. It is part of a growing trend of investing with an eye to improving society as well, an effort that includes so-called social impact bonds.
Big Society Capital, a government-established finance group with a social mission, anchored the Cheyne fund with a seed commitment.
The group’s chief executive, Nick O’Donohoe, said Cheyne was an “interesting partner.”
“They have significant resources,” he said, “and the ability to attract substantially more capital” than a typical social impact organization.
Mr. O’Donohoe acknowledged that the group was skeptical when it was first approached by Cheyne. But, he said, “after spending a considerable amount of time with Shamez and the principals of the organization, we recognized that they were doing this for the right reasons, that they had a genuine interest in creating a social impact.”
Mr. Alibhai said the fund went to great lengths to ensure that it would be managed and measured for its social impact as well as its financial returns. A partner organization, New Philanthropy Capital, a charities research group, will sit on the investment committee to help evaluate potential investment opportunities. Along with financial statements, the fund will provide social audits, with metrics like which groups have been helped and whether rents are affordable and properties are well maintained.
Alongside financial covenants will be social covenants, to make sure that those in greatest need are gaining access to the properties first, for example, and that staff members have been properly trained.
“We want to ensure that the social responsibility element of the fund is embedded into the DNA of the fund,” Mr. Alibhai said.
Social impact investing is on the rise. In December 2013, Merrill Lynch and U.S. Trust raised $13.5 million from prominent clients like the billionaire investor and oil trader John Arnold for a social impact bond whose proceeds would finance a program to lower recidivism rates among former convicts in New York.
Groups like the Bridges Ventures in Britain, founded in 2002, have been involved in social impact investing for a long time, with funds aimed at sustainable growth, property and the social sector. More recently, the French insurer and investment manager AXA Groupstarted a social impact fund of funds with 150 million euros.
Such groups aim to fill the gaps where governments are increasingly falling short. Big Society Capital, the anchor investor, which is run separately from the government, was set up to build the social investment market in Britain so that charities and social enterprises could gain access to financing and in turn widen their impact. Financed in part by dormant English bank accounts, it has committed more than £165 million in investments to organizations that lend to charities and social enterprises.
As part of the due diligence for the Cheyne fund, Mr. Alibhai met with organizations — councils, municipal governments, housing organizations and the National Health Service — to determine whether demand existed for its offering. None turned him away for representing a hedge fund.
“We never came across organizations who said, ‘We don’t want to explore this further because of what or who you are,’ ” he said.
The fund is structured as a real estate investment trust, with similar tax benefits to those in the United States. Returns are predicated on affordable rents and the fund’s ability to generate attractive debt financing, Mr. Alibhai said.