The end of the beginning

The sun always shines on Big Society Capital & sometimes out of it” – so said Minister for Civil Society, Nick Hurd, addressing the sharp suited changemakers escaping the summer rain to hear the uplifting speeches (followed by fine wine and disruptively innovative canapés) at the 2nd birthday party for popular social investment wholesale finance institution, Big Society Capital (BSC), earlier this month.

It wasn’t an evening of contemplative humility. While BSC chief executive, Nick O’Donohoe, did draw attention to the challenges the organisation has faced getting money to ‘the frontline’ and acknowledged concerns in the social sectors about the cost of BSC’s money, the overall thrust of the presentations was celebratory.

It’s not necessarily wrong for BSC to celebrate their achievements and many of the new Social Investment Finance Intermediaries, supported in the last year, such as DERiC, seem good but clearly things aren’t going quite as well as some social investment enthusiasts once expected.

Whatever you do, don’t look at page 39

The key problem (possibly missed by those who haven’t yet made it to page 39 of their annual report) is that while BSC has made £149.1m in commitments to intermediaries, the total value of investments signed is £47.9 million and the total value of investments drawn down (by the end of 2013) is just £13.1million.

Nick O’Donohoe’s primary explanation for this situation, both at last week’s party and in this interview, is that: “a lot of what we do is making commitments to organisations to invest over say a four-year period so, if you take a £150million and divide by four, you would expect £35-£40million a year, based on just that level of investing, to go out. It has been less than that but not to the extent where we think there’s serious issues.”

£13.1 million does seem quite a lot less than £35million and while O’Donohoe may be right that it’s too early to say whether there are serious issues, ‘not getting the money’ out is an issue that could soon become serious.

The current level of BSC investment reaching frontline charities and social enterprises is less than the annual grant spend of a medium-sized grant funding organisation such as The Tudor Trust, which awarded grants worth £17,460,380 in 2012-13.

Over the same period, Big Lottery Fund awarded grants worth £778 million – meaning that Big Lottery currently gives out more grant money in the average week than BSC invests in a year.

Whether or not you think outgoing BSC chair, Sir Ronald Cohen, is right in principle to say that philanthropy ‘is in a sorry state’, social investment seems unlikely to replace it as a major source of finance for social activity anytime soon.

If those stats are sobering enough to keep attendees of the most lavishly corporately-sponsored social investment receptions walking in a straight line, the comparison between ‘social investment’ and ‘investment in social organisations’ is a full on detox.

The latest NCVO civil society almanac reports that the voluntary sector currently owes around £4billion in loans. So the entire ‘social investment market’, currently estimated at £202million, amounts to roughly 5% of the total market for investment in voluntary sector organisations, with BSC’s £13.1 worth of investments drawn down by frontline charities and social enterprises equal to 0.3%*.

What do you mean ‘we have to start from here’?

That doesn’t mean that BSC has failed (or is failing) but it does mean that the organisation’s mission ‘To promote and develop the social investment market place in the United Kingdom’ is a more complicated one than some advocates of social investment initially believed and, in the case of politicians and some umbrella leaders, led others to believe.

The ‘social investment market’ that BSC was set up to develop is something different to both grant income, and to high street banks providing mortgages to charities and social enterprises that can afford them (on the same terms they provide mortgages to other organisations that can afford them).

BSC is aiming to build a market for finance provide by investors who (unlike grant funders) do want the money back but, unlike high street banks, are motivated to invest by the social impact of the organisations they’re investing in. Unfortunately, there’s no automatic link between investors’ motivations and the relevance of intermediaries’ products to charities and social enterprises.

What two years of BSC tells us it that there aren’t currently very many charities and social enterprises in the UK who are already ready, willing and able to take on the money BSC-backed intermediaries are offering on the terms that those intermediaries are currently ready, willing and able to offer it to them.

The average annual turnover for a social enterprise is £187,000. The average UK social investment is £264,000 and most of these investments are secured loans. If you’re an average-sized charity or social enterprise that doesn’t own a building, social investment isn’t much use to you.

This is not a new revelation, either in general or on this blog, but it’s worth restating to make clear that the situation has neither changed nor been meaningfully addressed by anyone in the social investment market.

Help, how are we ever going to invest any money in all these tiny organisations and how can we stop them hating us?

BSC’s new three-year strategy, partly outlined by O’Donohoe at the birthday party and published on May 2nd is a potentially useful first step towards addressing that.

It outlines four key elements of their vision for the next three years (BSC’s bolding):

  • Improving access to finance for small and medium sized charities and social enterprises
  • Helping the most innovative approaches to tackling social problems grow and replicate
  • Building mass participation in social investment
  • Bringing far greater scale in the financing of social issues

While they’ve never been actively opposed to any of these things, the decision to highlight and focus on the the first and third of these aims (in particular) offers hopes of a gradual shift away from the current ‘build it and they will come‘.

‘Improving access’ – is really a euphemism for ‘help, how are we ever going to invest any money in all these tiny organisations and how can we stop them hating us?’

One way to tackle the problem is subsidy. The only significant piece of research into demand for social investment from charities and social enterprises, the Big Lottery-funded ‘Investment Readiness in the UK‘, reported that  43% were not interested in pursuing social investment at all but, of those who were interested, 49% were hoping to secure a ‘mixed-funding product’ – an investment that’s part-grant, part-loan.

On that basis, it’s good that BSC are suggesting: ‘blending our capital with grant capital to improve the supply of products for investments of less than £150,000‘* (and it’s also good that they’re ‘looking at additional regionally-focused funds, to build on our commitments in the North-East of England and Scotland‘).

The big gap in the strategy, though, is the lack of commitment to supporting new financial products that actually meet the needs of charities and social enterprises. Nick O’Donohoe’s point, (also made both at the birthday party and in this interview), that investments of less than £250,000 are ‘just not possible’ was a good starting point for understanding the challenge but it shouldn’t be the end of the discussion.

While there’s definitely an important (ongoing) role for subsidy in the social investment market, intermediaries can’t (or, at least, shouldn’t) be subsidised to give up on trying to find sustainable ways of meeting the needs of the majority of their customers. It isn’t impossible to lend less than £250,000 on a commercial basis. As an individual person with no assets, I have borrowed more than £10,000 but a lot less than £250,000 from a commercial lender and invested it in my social enterprise. It must be possible to develop working models for smallscale social investment.

One of the many good points in Dan Gregory’s recent blog on ‘How to make social investment more social – and financially viable’ is that: “Zopa, Kiva and crowdfunding models which enable disintermediation – cutting out the middle man – can take costs out of the system by introducing investors more directly to investees. No wonder our models can’t stack up if there’s layers of intermediaries to maintain – let’s try new models which reconnect investors with investees.

Whether or not that specific suggestion can work, there’s a desperate need for some properly funded R&D into new products that can meet needs – alongside some high risk investments into innovative intermediaries prepared challenge the idea that investments under £250,000 can’t work.

It would be really useful to know whether a fund making unsecured loans of up to £30,000 that just cut out most due diligence processes (beyond checking that an organisation is genuine) would necessarily lose more money than it costs to grant-fund existing intermediaries to run uneconomic due diligence processes under existing models. Is that ‘Action Research’ or a really risky investment? Maybe it’s a pilot project?

Here comes everybody

More hopeful (and so far more successful) that social investment through intermediaries, is social investment of relatively small amount of money by people rather than intermediaries. The section of the BSC strategy on ‘mass participation’ seems like a half decent starting point for positive action.

It mentions likely support for ‘retail platforms for charities and social enterprises wanting to issue their own bonds’, ‘looking at ways of accelerating the community share investment market’ while adding that: “Other ideas we want to explore include how we might support crowdfunding platforms that channel funding to social organisations.

BSC can and should support the development of platforms - and it will be interesting to hear more about what they’re going to do to ensure non-High Net Worth Individuals find out about and make use of Social Investment Tax Relief – but ultimately there’s only so much a relatively small national wholesale finance organisation can do to stimulate mass participation.

The big question in terms of mass participation is partly whether investing can be made easier but primarily whether there’s enough people who want to invest in charities and social enterprises. There are thousands but are there millions?

So, what happens now?

For BSC and the intermediary-based social investment market things will definitely get better than they are now. There are some charities and social enterprises who are ready and able to take on large investments or, based on the investment readiness support available, will reach that stage over the next year.

Charities and social enterprises will draw down more than £13.1 million of BSC’s money in 2014 and lots of social good will be done as a result. The danger, though, is that the plateau for a social investment market based on the kinds of investments currently on offer may not be very far away.

It’s not too late to build a social investment market that’s relevant to more charities and social enterprises but there’s lots of work to be done to found out what’s needed and how to provide it.

 

*The NCVO and social investment market figures are from different years, so it’s possible that BSC has increased the size of the overall market for investment in social organisations by 0.3%.

 

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11 Comments

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11 responses to “The end of the beginning

  1. Yes, small scale unsecured lending for business startups is feasible. It has been proven. 6 million dollars invested into a community microfinance bank achieved both high repayment and business survival rates as was related in an interview 10 years ago,

    ” One key factor is how the money is borrowed to begin with. The Tomsk project and proposed Crimea project require something called ‘loan circles.’ These are groups of about 5-7 people who all get their start-up loans together, after going through a training program to develop business plans, do market research, and so on. If ANY one person in the loan circle fails to repay his or her loan, no one in that circle can proceed to critically important second-round financing until that loan is paid. That in turn tends to make everyone very, very careful about what they’re getting into, because no one wants to have to repay someone else’s loan. Before anyone gets money, by the time the training is finished and business plans are done, everyone in the loan circle has seriously considered not only their own plan but everyone else’s as well. This way, it’s far more likely that a business will succeed, because it’s been so thoroughly screened and examined by other people who have one and only one possible means of access to loans to improve their own lives. Everyone has strong incentive from the start to be sure that all others in their loan circle succeeds. And if one doesn’t succeed, everyone else must cover the loan. Thus the high business survival rate and high loan-repayment rate.”

    http://www.iccrimea.org/scholarly/economicdev.html

    It was much the same approach described to the social enterprise community in the UK that same year, with local CDFIs taking the role that Finca had played in Russia,

  2. Another great article – cheers.
    We’re never going to get the grass roots involved unless we have a simpler way of measuring “results” that matter.
    SRI; SROI; social impact; CSR; GRI; Social Value etc. They are all over-complicated results that are too expensive and long-winded to be of any real use right here, right now.
    So why is there no simple single definition of “result” that can be commonly understood; commonly explained and commonly accepted?
    That’s what i can’t figure out.
    Keeping it complicated always makes me suspicious. It reminds me too much of the complicated financial instruments like the CDO’s, and the SDI’s.
    My solution is to give community groups the equivalent of what businesses use to manage and coordinate lots of people – customer relationship management software (or CRM as it’s known).
    Timebanking software would do the same job and enable community groups, charities and good causes to organise and create activities that make their community healthier, wealthier and happier, as well as measuring the input of each individual using time to account for that contribution.
    Let’s face it what gets measured get done. Keep it simple and it will get measured but over-complicate it and it won’t.
    Time contributed to community therefore becomes the key performance metric that funders use to allocate resources as well as to demonstrate social returns on capital employed.
    As time goes on, these community groups will begin to attract the interest of investors that want a simple and understandable way to articulate the good that they do with the resources in their custody.
    The net result is that community is incentivised to produce more community – payment by results in a different sense.

    • Beanbags admin

      Hi Mike,

      Thanks for your comment. Agree that the measurement side of social investment is one of the key challenges. You’re right about the problems with mechanisms but I also think there’s a lack of clarity about what (or who) measurement is for.

      One of the dangers of an increase in social impact measurement led by social investors is that – even if we can find effective mechanisms to measure outcomes or impact – it’s not necessarily desirable (or socially useful) for investors to be dictating what people and communities need.

      So there’s a challenge about how we decide, and who gets to decide, what we want to happen – coupled with the challenge of working out whether it’s happened or not.

  3. BSC were meant to be the Man City of the social investment world – what happened?

    As we approach the end of another Premiership year its maybe fitting to respond to the world of BSC and that of the social finance industry in general with one big football analogy….

    In Premiership terms BSC are Man City, the richest club, paying the largest salaries (have a look at their finances) that should be capable of ironing out problems quickly and fielding a team able to win every trophy. Yet here we are 3 years in and at best BSC are a mid-table team, maybe just averting the relegation fight, with the management team asking for 3 more years to get it right – it’s a 3 year spell no top premiership manager would get without some serious progress – progress that so far has no trophy in sight.

    So to the form of BSC
    on the pitch….David points out that so far only £13.1m has reached the point of service delivery when you would expect £35-40m in the same season, a season when smaller teams (Tudor) have out performed them, a season when they lost and not replaced their main (social) playmaker Caroline Mason and have still to sign a proven goal scorer capable of reading the game and simply putting the ball in the proverbial social investment net – it’s a Spurs model, so much money to spend but finding out that its how you spend it that matters and therefore just not able to win enough games to keep the terraces happy.

    Meanwhile on the terraces…dissatisfaction is a plenty. I attended two BSC matches (briefing days) in the North recently and the terraces were full of what Roy Keane once called the “prawn sandwich brigade” namely intermediaries that wanted to be involved in the game but could hardly be called true supporters. The terraces on those two days had less than 25% social enterprises which means the true fans are now drifting away because the BSC type of footie is just not worth paying for – and lets remember that if you want to get involved with BSC it costs a lot for the privilege.

    Whats interesting is the other responses that are happening on the terraces.

    Crowdfunding that was meant to be of the terraces alone – a creative/fringe activity – is now being drawn into the main game debate. So little it happening out on the pitch that crownfunding is now being pushed as a potential big player, a game-changer, its like saying Sheffield United should be in the Premiership because they are a big club when in effect they have nothing more than a big ground able to take much in much more support if they ever get their act together. Crowdfunding was meant to stay on the terraces, to be the innovative icing on the cake for those in the crowd able to take a few with them on their funding journey. However because nothing else of real value is happening, it is now (wrongly) been vaunted as the route many social enterprises can take to get funds. Real supporters of social enterprise should be careful here.

    Last thing about those on the terraces.. the figure that is touted as the truth about the existing size and capacity of the current crowd is £187k (turnover) which would seem to indicate that the crowd is in a relatively strong position to stay watching/supporting the game. But and it is a BIG but, a friend and colleague of mine has carried out a significant piece of research into the size of the current Northern social enterprise market, only to find that the real turnover figure is nearer £50k which means those on the terraces are skint and all this talk of them being able take on loans of say 50k is now little more than an ongoing ruse. No wonder the crowds are getting smaller because they no longer have the money to get into the games or better still get hold of a season ticket.

    Lets end with a quote from the greatest football manager of them all – a man who completely understood his constituency (team and terraces) and could take everyone with him as he set about treating need – a need that was all about building a great football team and taking a whole city with him…

    A FOOTBALL TEAM IS LIKE A PIANO. YOU NEED EIGHT MEN TO CARRY IT AND THREE WHO CAN PLAY THE DAM THING – Bill Shankly.

    BSC and indeed social finance in general is full of people who can carry but play and I mean truly play, now that’s a different ball game altogether…. Lets see what happens next season?

    • Beanbags admin

      Hi Robbie,

      Thanks. Fantastic stuff. The £187k figure is the median turnover for social enterprises responding to the latest SEUK in 2013, a drop of 22% from the figure in the same survey in 2011. It’s as good a national average figure as we’ve got but my instinct is both that (a) that survey figure is likely to be slightly lower in 2015 and (b) there’s lots of social enterprises who won’t be on the survey radar so the real figure could be even lower. I’d be interested to see the research on the Northern market. Clearly though, the £187k social enterprise is just as disconnected as the £50k social enterprise from most of the current social investment market.

      Overall it’s not my position that BSC are doing badly on their own terms. They’ve made mistakes, particularly in terms of engagement (or lack of it) with the social sectors – and my views on the product side are clear above – but they’ve been following a ‘plan A’ backed by government, many umbrella bodies and most people involved in the existing social investment market.

      I’m not convinced there’s another team of people out there who would’ve done a significantly better job of channeling large investments into (mostly) large social enterprises over the past three years.

      The problem’s been the relevance of their offer to most organisations in the social sectors. To use your sporting analogy, it’s been a bit like someone chucking hundreds of £millions into the London Broncos rugby league team. Even if they won the Super League and Challenge Cup double two or three times in a row, they wouldn’t end up with a significant core support – and would still get smaller crowds than Leyton Orient – because not enough people in London want to watch rugby league.

      While they’re clearly not there yet, even if BSC become demonstrably, ground-breakingly successful at providing cash to be invested in large charities and social enterprises at an average investment size of £250k+ they’ll still be really unpopular and social investment will remain a marginal activity. This isn’t inevitable and it’s not solely BSC’s responsibility to change things – we’ve all got a responsibility to give them some better suggestions – but the next couple of years are really important in terms of which way the social investment market goes.

      • David

        I have little doubt that BSC are doing the best they can with the mindset and skillset that they have – it is finance all the way and that aligns strongly with their output so far – I see no change whatsoever unless the Coalition deem something different prior to an election run – but on their own no chance. I base this on their performance so far, what I have observed and experienced when meeting with BSC staff and from the information I have gathered in talking to others. You have much more confidence than most
        I take your point about the next couple of years but by that time the need will be so dug in that any change or solution may well be meaningless. In the meantime we will still see intermediaries with very dodgy balance sheets paying themselves well and continuing to hold judgement over social enterprises who in operation out perform them. What a strange environment social enterprise has become full of under-performering fund holders telling others they must perform better – its almost criminal.

        On other but connected matters…Helen and I have written a book titled..
        The Investable Social Entrepreneur – want to send you a copy – please email me your postal address. Also the North West research is the most in-depth there is..again Helen carried this out and it has unearthed a lot of important messages. Keep July 10th free in your diary – we will be hosting another gathering in London that day to discuss the key information and the approach of the book – I will send details of the day with the book.

  4. There is another factor to bring into the discussion, which is the COST of loans. I have recently seen loans offered at 30% to 35% APR. Unless the social enterprise has pronominal growth, taking a loan at this rate is borrowing your way into bankruptcy.

    • Mike, This is an issue we adressed in the work I describe above, where the concept of a “community funding enterprise” was put forward. This is a business which invests “at least 50% of profit” in stimulating a local economy.

      “The limitation of a bank or credit union is making enough money in the process of lending money to sustain itself. This money is made by charging interest rates, which must be high for micro loans. It requires much more time, work and therefore cost to lend one million dollars among a thousand different people than lending the same amount to one person, for example. As a result, the interest rates for micro loans need to be high in order to cover the operating costs of making these loans. Even with high interest rates – up to 35% in the present case – it remains difficult to earn sufficient profits to be able to make loans across a wide region such as Crimea where potential borrowers are spread out in remote areas across the region. The cost of outreach, training and multiple visits in that process can exceed 35% interest ultimately earned on micro-loans to remote areas.

      “By combining a community-funding enterprise (CFE) with a micro-credit union, the limitations inherent in each one is greatly diminished. The CFE provides sufficient funding to ensure the operating costs of the credit union, reducing the risk that the credit union will have any need to use its capital to sustain itself. The credit union immediately makes available sufficient loan money to match the needs of the community, thereby eliminating the time needed for the CFE to generate the same amounts of money. Additionally, CFE profits over and above what is needed to help with the operating costs of the credit union can be put directly into the credit union. Over time, the amount of money used to originally fund the creation of the CFE is offset by CFE contributions to the credit union. The credit union is increased so that larger amounts of money become available either to make larger loans or to service more borrowers. Together, the CFE and credit union create an enterprise where the original funding not only remains but also increases with time. They complement and balance each other by addressing the economic goals both have in common and offsetting each other’s limitations. ”

      http://www.p-ced.com/1/node/32

      This was written more than a decade ago about a community now in the centre of an international conflict, warning about the strategic risk of not investing for peace:

      “It is not safe to say that the Crimea situation will not also get out of hand. There is, in fact, no reason to think such a thing, except that we might prefer to. It is much wiser to invest money now and prevent conflicts from escalating, as well as encourage and embrace peaceful and democratic efforts which, so far, hold sway.”

      In 2004, we made similar warnings about failing to address inequality in the UK.

    • Beanbags admin

      Yes, there’s a definitely a question over whether bringing really expensive money into the social investment market is much help to anyone.

      It potentially helps to promote the idea (amongst investors) that social enterprises lack business skills because the only people taking an interest in such bad deals are people who don’t have any business skills.

  5. Pingback: Adapting UK Social Investment Policy Initiatives for Australia | Emma Tomkinson

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