Like the Queen, social investment wholesale finance institution Big Society Capital (BSC) has at least two birthdays. So, while I wished them many happy returns in April, the celebrations have continued well into May.
The outward facing side of things is going pretty well with the Prime Minister, David Cameron, preparing to spend some of the next year telling his G8 colleagues about what, in political terms at least, seems like the proverbial silver bullet. And given that the rest of the meetings will mostly be about ongoing global economic crises and intractable civil wars, it’s hard to begrudge the PM a few hours of enthusiastic chat about social impact bonds (SIBs) to lighten the mood.
Whether or not you’re excited about the rise of SIBs (or if you’re reserving judgment), there’s broad agreement that BSC has some work to do in terms of fulfilling the wider mission outlined by Minister for Civil Society, Nick Hurd, last year. Speaking at the launch, Hurd said: “For many years, charities and social enterprises have been telling government how hard it is to access long-term capital. We have listened and within two years have delivered a new institution that will make it easier.“
It’s not going too well so far, at least in terms of getting finance to charities and social enterprises who can’t get investment from conventional sources. As BSC chief executive, Nick O’Donohoe, explained recently: “One product in very short supply but, we believe, in significant demand is unsecured loans for charities and social enterprises.“
He added that: “We already have visibility of proposals in our pipeline that would increase availability by such products. We are also working hard to understand the risk profile of this sort of lending and the link between pricing and demand.“
There’s no reason to doubt that BSC’s team are working hard on this but, despite the fact I’m neither a risk analyst nor a cartoonist, I’m not sure I’d need to spend too long doing the necessary research to produce a half-decent illustration of that risk profile in the form of a short comic strip.
Sam Collin, of intermediary umbrella body, Community Development Finance Association (CDFA), is responsible for this week’s (unfortunately very necessary) statement of the blindingly obvious pointing out that: “Both Big Society Capital and the newly formed Business Bank are keen to improve access to finance for social enterprises and SMEs. But both will only provide capital at commercial rates.“
She poses the question: “if CDFIs are becoming more “ruthless” in their lending decisions, will this limit the range of social enterprises that can access finance to start up or grow?“
Followed by the inevitable answer that: “They’re not going to take a punt on you because they think the positive impact you’ll have on the community is worth the risk.“
The whole premise of (small scale) social investment at ‘commercial rates’ is based on somebody somewhere having a rabbit in their hat that, once pulled out, will explain how relatively small social investment intermediaries will be able to make relatively small, relatively risky investments in small social enterprises without being subsidised to do so.
There isn’t currently any reliable data on how many social enterprises in the UK are viable trading businesses but we do know that, when considered collectively, entrants to the SE100 competition for fast growing social enterprises, receive £8 in grants for every £1 generated in profit.
In the absence of talking rabbits boasting outstanding financial acumen, both BSC and those social enterprise leaders who thought social investment at ‘commercial rates’ could work for small social enterprises are still as far away as they’ve ever been from even having a serious hypothesis to match their assertions, let alone a practical solution that would make their dreams a reality. It seems quite possible that guarantees might help to increase lending in situations where risk is uncertain but that doesn’t solve the problem of the many situations where investment could have a significant social impact but the risk is quite obviously high.
There’s a few different ways this debate could go. One is that, as suggested by Rodney Schwartz, the social investment industry focuses primarily on the goal of delivering successful social investments even if this involves ‘helping the least needy’.
Another is for the government to follow CDFA’s (implied) suggestion is that it should give their members grant subsidies to support the provision of risky investments in areas of high social need but – if government is going to give out grants to intermediaries to enable them to provide risky loans – wouldn’t it be better off cutting out the middle people and just funding risky social ventures with grants?
It seems unlikely that 2013-14 will see BSC make a decisive leap in any particular direction – it will continue to attempt to accommodate a wide range of different (and often conflicting) ideas about what social investment could be under its £600milllion banner. Either way, creating a social investment market that is (a) commercially sustainable and (b) socially useful remains as big a challenge as ever. The challenge for the social enterprise movement is to make sure that the process of trying leads to as much positive social change as possible.
