Time to get the builders in?

There’s no shortage of challenges for leading figures in UK social investment and even the good news isn’t always quite as good as seems. For example, those investors and intermediaries who hope the social investment market will (at some point) be catapulted to relevance by a massive increase in the numbers of social ventures delivering public services will have been delighted by last week’s credulity-busting claims*, in research from Northampton University, that social ventures have been less likely to ‘cease operating’ over the past 30 years than PLCs listed in the FTSE100.

Unfortunately, even if you’re prepared to swallow the ideas that: (a) this is true and (b) this revelation will somehow make public sector commissioners more keen to give contracts to charities and social enterprises, the researchers also expect you to stomach the idea (see page 24) that the 100th biggest ‘Third Sector Organisation’ in the UK in terms of trading income is an organisation, Oasis Charitable Trust, that’s currently doing just £234,000 worth of business.

Given that, as we’ve been told, the model of social investment supported by wholesale finance institution, Big Society Capital, only works without subsidy for deals worth £250,000 or more, and (unless you’re a dot com start-up) you generally need to be doing a lot more than £234,000 worth of trading to take on a £250,000 investment, this would suggest there’s far fewer than 100 organisations in the UK currently in a position to take on unsubsidised social investment.

That’s fewer than 100 organisations that are literally big enough to take on these investments. That’s before you even begin to consider whether they’re actually profitable businesses that would be able to repay an investment. By the end of 2013, Big Society Capital’s cash had been drawn down by 57 frontline organisations with only £13.1million of a projected £600million pot spent in the process.

The situation can’t really be quite that bad (can it???). I’m pretty sure there are more than 100 charities and social enterprises in the UK with a trading income of more than £234,000 – I’d be amazed if there weren’t at least 500 – but there clearly aren’t so many more that University of Northampton’s finest were able to identify them. Even if my anecdote and gut feeling based optimism is correct, that’s still nowhere near 1% of all UK social ventures/third sector organisations/VCSEs/social sector organisations (delete according to taste).

Against this backdrop of staggering mismatches between what 99%+ of charities and social enterprises need, and what (the most prominent element of) the UK social investment is able to offer, Robbie Davison and Helen Heap’s work on developing the idea of ‘Builder Capital’ is particularly timely.

Davison, of Liverpool-based social enterprise, Can Cook, has been a long-term critic of ‘Social Finance’ in the UK and published ‘Does Social Finance Understand Social Need?‘ (the answer was ‘no’) in January 2013 before teaming up with Heap, then working for charity, Tomorrow’s People, to publish ‘Can Social Finance Meet Social Need?‘ in June 2013.

Once again, the answer was ‘no’ and in their new book, The Investable Social Entrepreneur, Davison and Heap, reiterate their critique of the current ‘social finance’ market: “Social Finance, as it is currently arranged, is mostly about not losing money – avoidance of risk in order to protect existing assets. It is nothing more than debt finance and debt finance alone will not address social need anytime soon; it’s the wrong type of short-term money trying to attach itself to problems that take a long time to solve.

They then outline their solution, a new form of social investment known as ‘Builder Capital’. Builder Capital basically involves a social investor putting between £250,000 and £2million into a social enterprise on the basis that they’ll receive no financial return at all for the first seven years. From then on, assuming the business succeeds, they receive a set percentage of the enterprise’s revenues every year until year 20 – resulting in anything from simple repayment of capital to a 5% annual return (depending on the percentage agreed).

The plus side of this approach is that it’s a model for social investment that genuinely offers social enterprises something that isn’t on offer from either grant funders or mainstream finance providers. Grant funders might offer social enterprises money that doesn’t need to be paid back but they’re unlikely to give them 7-years’ worth to spend on developing a business – rather than delivering a monitored set of outcomes. Mainstream finance providers (and most providers in the current social investment market) might offer a social enterprise a mortgage or other forms of loan finance but only if the enterprise can begin to repay the money immediately at commercial rates, which makes it very difficult to both build a sustainable enterprise and meet social needs not already met by mainstream business or the public sector in the process.

The obvious downside to Builder Capital is that it doesn’t currently exist, with an apparent lack of investors keen to put large amounts of money into social enterprises on the basis that they may get it back, eventually, over a 20-year period, being the biggest problem. Davison and Heap are clearly aware of this problem and are planning to do something about it. They’re running a series of events to discuss how to make Builder Capital a reality, starting with this one in London on July 10th. After these discussions, the plan is to establish a ‘Builder Capital Hub’ that will bring together investors, entrepreneurs, customers and beneficiaries with the ultimate aim of ‘developing and growing a market for Builder Capital that we estimate could soon reach a size of around £50million per year‘.

Given that the latest available figures (albeit, figures from a couple of years ago) tell us that the entire market for all social investments other than secured loans was worth £19.8million per year, this seems relatively ambitious but whether or not they achieve that target, Davison and Heap’s work on Builder Capital is an important step towards to making social investment more relevant to ambitious charities and social enterprises with the potential to grow into sustainable businesses meeting social needs.

 

*The claims are true, as long as you’re prepared to accept that a PLCs merging with another company is the same as ceasing to exist. 50 companies from the 1984 FTSE are not in the 2014 because they’ve been acquired. Examples include popular pharmacy group, Boots, which is now part of Alliance Boots. Alliance Boots had a total turnover of £25.7Billion in 2013/14. Only 3 companies that were in the 1984 FTSE100 have gone bankrupt.

About these ads

10 Comments

Filed under Uncategorized

10 responses to “Time to get the builders in?

  1. On the question of survival, PLC vs social organisation, Adrian Ashton and I had similar responses for the Guardian. This comes from a development proposal for Crimea’s Tatars:

    “There is no requirement in capitalism for the direction in which profits will go. They can accumulate in the hands of a few people, and they can be made available to meet social needs. Using profit to meet social needs does not necessarily remove the profit motive because everyone involved in such an enterprise is likely to want it to be profitable so that they will continue to have a job and income. This has been the case many times in US companies, for example. A company may have an economic downturn and lose money instead of making profit. Employees often accept lower pay to keep their jobs and to keep the company going. Employees know very well that the company must once again make a profit – end up with more money than it requires to operate it each year – if they are to keep their jobs. Otherwise, it will consume more money than is needed to operate and finally cease to exist when all of its money is gone. Employees accepting lower pay is a way to help return the company to profitability. The employees all share the profit motive. The profit motive is not the exclusive domain of the few people who start a company. It is shared by everyone involved because each has his or her own self-interest in keeping the company going. ”

    It was in fact a “builders fund” from which the homeless would be ecouraged to become builders of their own and then other’s home. This was in the sense of a circular ecomomy, a means to create local weath flows among the economically inactive, by giving them access to the resources needed to help themselves. It was also a cost reduction argument for the would be investor. It would have cost $300 million for contractors to build homes for them, by this means the cost was projected at $40 million.

    The designer of this project was the same man who’d warned about the collapse of capitalism and the potential of worldwide uprisings. 11 years ago he was warning about the risk of inequality in Crimea. Above all, it was an argument for strategic self-interest, to prevent terrorism:

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

  2. I think Robbie & Helen’s work is significant and should be supported. I can’t be at the event in July! but would encourage others to go along and contribute their ideas and help.

    I like the thrust and impetus of the top 100 comparison research, but am afraid I share your concerns over the top 100 sample. Quite a few of our biggest members don’t feature at all, and 5 minutes with our membership officer would have added at least 30 different names, new (there’s plenty of spin-outs missing) and old (Nuffield Health, for one). That is before we get to the methodology as you discuss above. One to revisit, though, because it is the right sort of argument to be making, I think.

    • Beanbags admin

      Thanks, Nick. Yes, skimming through the top 100 I didn’t even see The Big Issue – although I’m sure I must have missed it,

      Agree, though, that longevity is an issue worth looking at and making arguments about – it’s a real shame the question of mergers is ignored in the narrative of the research and dealt with so absurdly in the Guardian article.

      Based on the research, I’m pretty convinced that relatively large social enterprises are considerably more likely to cease trading entirely (in the sense that the vast majority of people would understand it) over a 30-year period than the top 100 PLCs but it’s not my view the social enterprises are (inherently) more likely to go bust than private companies in general. The research has at least opened up that discussion.

      Agree completely on Builder Capital.

  3. It was a position paper, like the one described above whic began our own work. The paper examined the need to be prepared for the risk of increased national and global poverty as we enter an information economy sufficiently sophisticated by its nature as to exclude and/or displace an increasing number of workers around the world.

    it argued that people matter and would turn to violence if they had nothing to lose.

    From this came the concept of a business for social benefit, re-investing at least 50% of profit to stimulate the local economy.

    The best way I know to propagate new thinking is to share openly and for this reason, the idea was published free to use on the web in 1997.

    Our focus in the UK had been tackling poverty and what can be considered another position paper, reasoned for government support at a time when social enterprise meant foundation funded social investment:

    “Traditional capitalism is an insufficient economic model allowing monetary outcomes as the bottom line with little regard to social needs. Bottom line must be taken one step further by at least some companies, past profit, to people. How profits are used is equally as important as creation of profits. Where profits can be brought to bear by willing individuals and companies to social benefit, so much the better. Moreover, this activity must be recognized and supported at government policy level as a badly needed, essential, and entirely legitimate enterprise activity.”

    A couple of weeks ago, we learned of an exclusive conference on the subject of Inclusive Capitalism, whose delegates represented some $30 trillion of assets. The City of London Mayor who, hosted the conference asked “Who will challenge traditional thinking, if we only have people like us in our teams? ” So I told her where her thinking had come from.

    http://www.businesszone.co.uk/blogs/jeff-mowatt/social-business-people-centered-economic-development/inclusive-capitalism-open-let

  4. Social Investment Scotland recently announce the creation of a new Social Growth Fund, providing £16m of investment over the next three years. At least £10m of this fund will be in the form of risk/patient capital. The minimum application value is £100,000 (so below the £250,000 minimum as suggested in the original article) and the product offers interest capitalisation (or roll up) for at least three years. Although this is perhaps less generous than the interest free/payment free period as suggested with the builder capital product, we believe it does go some way to address a gap in the Scottish social investment marketplace. Most interestingly however, in the context of this discussion and in terms of an endorsement of this type of model is that since the fund opened for applications just about six weeks ago, applications with a value of at least £6m have been received- with more coming in on a daily basis. I’ve always believed that the availability of capital will drive the ambition and impact of social enterprises in Scotland and so far it looks like this is being reflected in reality.

    • Beanbags admin

      Hi Alastair,

      Thanks for your comment. Great to hear that the Social Growth Fund is getting such a good response and it will be interesting to see what happens as investments begin to be made.

      The £250k figure is Nick O’Donohoe’s (broad) estimate for the lowest value deals that most Social Investment Finance Intermediaries (SIFIs) taking investment from Big Society Capital (BSC) will be able to do on a commercial basis.

      It’s definitely not Nick O’Donohoe’s position that SIFIs taking BSC investments won’t or shouldn’t try to find ways to do smaller deals – just that in his view (and the view of most other social investment leaders I talk to) these deals will always ultimately be subsidised in some way.

    • Alastair, you may be interested in the case made by us in the international development context:

      “Project funding should be placed as a social-benefit fund under oversight of an independent board of directors, particularly including representatives from grassroots level Ukraine citizens action groups, networks, and human rights leaders.

      This program provides for near-term social relief for Ukraine’s neediest citizens, most particularly children who normally have least possible influence and no public voice. Over a few years time, the net cost financially is zero. Every component is designed to become financially solvent, through mechanisms of cost-savings and shared revenue with other components. One component, Internet, provides essential communications infrastructure as well as a cash surplus to be used to offset any lingering costs of other components such as childcare, and otherwise goes to a permanent social benefit fund under oversight of the aforementioned independent, citizens-based non-government board of directors.

      Any number of other social enterprises can be created. Furthermore, any number of existing for-profit enterprises are entirely free to contribute any percentage of profits they wish to increase the proposed initial $1.5 billion social investment fund. If for example the total fund comes to $3 billion, that amount would generate at least $300 million per year in a hryvnia deposit accounts at any one of several major Ukrainian banks, to provide ongoing funding to continue to create and expand social enterprises.

      This strategy places adequate funding for social benefit under control and management independent of government and the very obvious vicissitudes and conflicts inherent therein. ”

      That ‘oversight’ is not what we’ve seen so far in England.

  5. Robbie and I are pleased to be able to contribute to the debate about how to make social investment more relevant to social enterprise and hope that our work will help to take us at least one step forward towards that goal.

    The example that you quote from the book: no financial return at all for the first 7 years, then a set percentage of the enterprise’s revenues paid to the investor each year until year 20 is just one scenario that we show to illustrate how the model might look and work in practice.

    As you point out, Builder Capital does not yet exist and so we have not been able to provide actual examples based on real money invested (although the scenarios are based on actual revenues delivered by an existing social enterprise over a 20 year period). While we are clear that Builder Capital investors must be willing to accept only social returns for a number of years before the enterprise is in a position to start making repayments of capital and provide financial returns, the actual length of time for the social return only and total investment periods will be dependent on the circumstances and requirements of the social enterprise and investor and so will be different in each case.

    To be quite clear, this is most definitely long-term (or ultra-patient) risk capital and everyone involved needs to be aware of that, and comfortable with it, right from the outset if the Builder Capital concept is to work.

    In truth, we don’t yet know whether there are investors out there who are prepared to invest on these terms because they have not yet had any firm proposals put to them which would enable them to do so. However, we do know that we have been pleasantly surprised by the positive responses we have received when we have been talking about the concept of Builder Capital with potential investors and their advisors. We look forward to developing these ideas to the point at which they can be tested in the market.

    We hope that the events that we are holding will encourage anyone interested in providing Builder Capital to come forward so that we can gauge likely levels of supply and start the process of understanding what does and does not work in terms of duration of investment and return expectations of investors.

    For those interested in more detail, further information on Builder Capital can be found here:

    http://www.seebohmhill.co.uk/blog-and-publications/helens-blog/31-builder-capital-%E2%80%93-a-new-approach-to-funding-social-enterprise

  6. Pingback: Guess who’s back, back again…that’s right, it’s Have I Got Social Enterprise News For You! | SSE

  7. Pingback: Retail social impact investing – bring it! | Emma Tomkinson

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s