Can Cook director, Robbie Davison, quotes Bob Dylan in his timely report, Does Social Finance Understand Social Need, published last week. The report gives a practitioner’s view of the current state of the market for specialist social finance (also known as impact investment and social investment).
2012 was a strange year for the social investment sector. On the one hand, there was the triumphant unveiling of Big Society Capital (BSC). At the launch event for Big Society Capital, the prime minister, David Cameron explained that: “While direct grants from government might be going down, the money available to charities and social enterprises is actually going up. We are moving from the old stop-start hand-to-mouth way the social sector was funded, towards something new, and, I believe, very exciting.“
On the other hand there was the growing atmosphere of discontent and anger within the social enterprise and voluntary sectors about the direction that this bigger, shinier social investment market appeared to be taking.
Davison explains part of the problem in the background section of his report: “The UK Voluntary and Community Sector (VCS) will lose around £911million in public funding a year by 2015-16. Cumulatively, the sector stands to lose £2.8billion over the spending review period (2011- 2016). Current estimates reckon that there will be a replacement investment of £500m and this investment will be almost entirely loans.“
Social investment organisations as a whole, and Big Society Capital in particular, have struggled to counter repeated attempts from government ministers, from the Prime Minister downwards, to imply that a bigger social investment market will directly ameliorate the effects of massive public sector cuts.
While these communications failures may be relatively easy to address, the key message of Davison’s report is that it’s the overall approach of the government-backed social investment sector, led by Big Society Capital, which is not fit for purpose.
For Davison, a social investment (or impact investment) market should be about: “Stepping back, then stepping in where there is societal market failure. Impact investment should be looking for solutions that overcome the deficiencies of the norm and take on the challenge of supporting services that wish to expand by providing solutions to societal need.“
He makes the distinction between ‘buyers’ – investors primarily looking for an opportunity to buy an investment that will generate a return – and ‘builders’ explaining that: “The term ‘builder’ refers to a process of investment that is knowledgeable in its understanding of the problems and is patient in the reclaim of any investment. As builders, investors acknowledge that building takes time and is an episodic process that will understandably feature peaks and troughs in performance. During troughs, builder investors work with the investee to design the appropriate programme of support to enable their enterprise to cope and, later, prosper.“
He adds: “Crucially, these types of investors are aware of the right time to dismantle their growth capital ‘scaffolding’ in order to demonstrate that they have helped build an enterprise that can stand on its own. In a market focused on tackling need, these lenders are the real change-makers. Right now, there is a chronic shortage of builder investors.“
From his perspective as an experienced social entrepreneur who has received social investment he explains: “Today, the narrative is one of ‘social investment’ which looks top-down from the point of the investor, wherein, the debate has shifted from a focus on market failure addressing unmet need, to a leap of faith in social investment/finance becoming a good thing per se.“
Despite the success of programmes such as Unltd’s Big Venture Challenge, in demonstrating a positive role for grants in de-risking private investment in social enterprises, there is a growing orthodoxy amongst some in the social investment sector that grants are bad because they ‘distort the market’ for investment.
This position appears to ignore the question of whether a market that fails to respond to social need is really best left undistorted but Davison’s report offers a pragmatic explanation for why grants are an important part of the social investment package: “For a multitude of reasons, larger organisations trading within the sector often have access to income streams that are out of reach to those smaller enterprises servicing the lives of the poor.“
He adds: “In the face of growing need, it is therefore appropriate for these particular enterprises to fight for the continued injection of grant as both necessary capital for start-up and growth.“
In his 2011 e-book, Betterness: Economics for Humans, the author and economist, Umair Haque, describes some of the problems of the global financial sector: “The role of the financial sector is to allocate the many kinds of capital, not to produce them. The producers of capital are fighting tooth and nail for a smaller and smaller share of the pie.“*
He continues: “Such an economy is unsustainable in the deepest sense of the word: the incentives to produce capital are drying up, and that is why little or nothing is being added back to the buckets. Today’s economy rewards people for merely allocating existing capital. That’s not a recipe for prosperity; it’s simply a game of musical chairs.“
The key point of investment is what happens as a result of that investment (the impact). That’s not just true for social enterprises and charities, and specialist social investment, it’s equally important in the world of conventional commercial business.
While Haque is not commenting specifically on the market for social investment, and clearly the UK’s social investment has the potential to develop into a positive alternative to the situation he describes, there’s a big danger that we could end up with a social investment market that simply transfers the failed, rent-seeking behaviour of commercial financial markets into the social sector.
If conventional financial markets have failed/are failing because they’ve become focused on rewarding those who slice and dice capital rather than produce it, the last thing we want is a social investment equivalent – delivering investment to the low-risk organisations best able to interact with investors, while failing to develop pragmatic and/or innovative models for investing in organisations tackling the greatest social needs.
The answer to these challenges is clearly not to reject idea of social investment. In a thoughtful post on the Third Sector website earlier this month, Social Enterprise UK‘s Nick Temple recognises that social investment: “is officially taking on Marmite status: you either believe it will revolutionise the social sector (and the investment industry) by leveraging billions of pounds, or you think it is the worst and most inappropriate thing since Rylan on The X Factor.”
He suggests that: “Among all the talk of investment-readiness (a leading contender for the most over-used term of the year) and investment returns, we should be thinking much more about investment relevance: how social finance fits into the current context and situation of the third sector and, in turn, its relevance to each individual organisation.“
In the recommendations at the end of his report, Davison calls for the creation of a Compact/Alliance of Big Society Capital, social investors and social enterprise practitioners. It’s a conversation worth starting as soon as possible.
*Words in bold are italicised in the original document but bolded here due to my convention of italicising all quotes.