Blustering social investment sector poised for Big (Society) impact

“What’s been lacking, until now, is a comprehensive survey of the social investment market that goes beyond case study and anecdote to provide real data on the different players, their finances and their business models.” 

So says Nick O’Donohue, Chief Executive of Big Society Capital, in his introduction to Lighting the touchpaper – Growing the Market for Social Investment in England, a new report jointly published by The Young Foundation and The Boston Consulting Group. Social investment’s not a subject that been starved of research recently, aside from interventions from other organisations, it’s only nine months since the publication of a major report on social venture intermediaries (organisationds providing money and support to organisations seeking social investment)  co-authored by The Young Foundation but O’Donohue is right that the new report goes further than previous publications in providing evidence to complement the theory.

Big Society Capital commissioned the report because they’re poised to inject a significant amount of money into the social investment market and wanted to have some idea of what might happen as a result. Impressively the researchers identified a list of 87 organisations grouped under the banner ‘social investment and finance intermediaries’ (SIFIs) and managed to collect at least some relevant data from 78 of them.

The scale of the potential impact Big Social Capital might have is illustrated by the figures involved. The report notes: “Our survey found that total social investment stands at around £165m. Given the noise and excitement around the social investment market this is a surprisingly small number. For example, when fully capitalised, Big Society Capital alone could have an investment pot worth up to £600m or nearly four times the current total market size.”

The prompts recognition that: “As Big Society Capital is seeking to encourage diversified sources of capital in the market, it will need to work hard to avoid dominating the social investment space.

The reflects that, as a microcosm of the social enterprise sector as a whole, the UK’s market for actual social investment market has struggled and, so far, failed to keep pace with indefatigable growth of the UK’s social investment ‘noise and excitement’ industry. Additionally, once again functioning as a microcosm for the sector as a whole, the social investment market has, as yet, failed to deliver the risky, innovative investments described in the aspirational speeches delivered by sector leaders at social enterprise conferences.

The social investment market such as it is is dominated by four social banks: Charity Bank, Ecology Building Society, Triodos UK and Unity Trust Bank who deliver around 70% of total investment. While £165Million social investment in 2010 is a small enough figure in itself – compared to annual voluntary sector income of over £35billion according to NCVO’s most recent figures – 84% of that investment was secured lending. The authors explain: “When we consider that the social investment market is currently dominated by the social banks, this investment pattern is easy to understand. The social banks’ business model is similar to any high-street bank in that they aim to attract customer deposits and then invest these funds for a predictable return. Social banks are therefore interested in relatively low-risk, long-term investments which is strongly skewing today’s social investment market towards these safer asset classes.

The result is that: “The social investment market is therefore far from the vision of risk taking social investors with equity stakes in ambitious social enterprises. In fact, equity and quasi-equity investments together account for just 5% of the total market, less than £10 million in total. Secured lending, as the safest form of investing, is the least likely to stimulate innovation.

Unfortunately, the report reveals that those small social investment and finance intermediaries operating at the riskier end of the market are currently some distance from developing the sustainable business models that they spend so much time lecturing social entrepreneurs about. On average the gap between their earned income and their operating costs is an eye-popping 55% – which in many cases is filled by public money. As the authors note: “The vast majority of SIFIs are currently operating at a loss… This operating gap is usually made up by grants. Once portfolio losses are taken into account, the ‘sustainability gap’ for most SIFIs is even larger.

Before adding, ominously: “It is difficult to assess the extent that this represents a structural problem in the market rather than just a consequence of a large number of small players who have yet to achieve scale. However, it would be questionable practice to support social investment infrastructure through these kinds of subsidies in the long-run if this helped to inflate private returns.

The report identifies six actions “that together can unlock the full growth potential of social investment in England.

These are:

1. Create more ‘investible’ business models
2. Improve financial skills and experience in the social sector
3. Develop a better understanding of risk and how to price it
4. Improve commissioning capabilities
5. Improve metrics and independent audit
6. Address the distortive effects of grants and ‘soft’ finance

None of these are bad ideas – in fact, the first five would be useful to undertake even if the social investment market did not exist – and the explantions are well formed. What’s missing from the report – amidst the assesment of the current state of social investment and the practical ways to help it function better – is the why? So far, aside from fairly conventional secured loans, the social investment sector has spent a reliatively large amount of money investing a relatively small amount of money – complete with excessively hubristic fanfare – while failing to provide clear evidence of its postive social impact (in comparison to other methods of funding).

Right now (or, at least, in the near future) the social investment sector has a fundamental need to prove – at least to everyone beyond the social enterprise lobby – that it’s not just a vehicle for heart-bleeding refugees from the City to ease their consciences mucking around with complicated financial instruments while social need goes unmet. The fact that Big Society Capital commissioned an evidence-based report is a good sign in itself. The likelihood that they will invest more than treble the funds in the current market without heavily influencing what happens seems small but, in a marketplace flooded with rhetoric and bluster, the right kind of influence from people who know what they’re doing is long overdue. Nick O’Donoghue has a tough job on his hands but this is best chance social invesment will ever have to live up to the hype.

 

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12 Comments

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12 responses to “Blustering social investment sector poised for Big (Society) impact

  1. David
    I didnt quite manage to respond to your email when you were doing research for the article, but in response…we think that voluntary organisations were borrowing £2.9bn in 07/08, mostly from the High Street banks. Nearly all of this is mortgage finance.

    This was a straight line extrapolation from some hard evidence we had for 01/02: in other words, it does not take into account a growing market where there is more acceptance of the concept.

    The figure might be substantially larger: looking at charity accounts for 07/08, creditors due after one year totalled £7.7bn. I reckon a fair proportion of this will be loans…

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  2. I was somewhat bemused when I read Stephen Rockman of Merism Capital describe what he sees as an ‘investible’ business model the B-Corporation as a CIC with brains.

    http://www.thehubble.net/2011/11/16/make-a-wave-not-all-social-entrepreneurs-are-tree-huggers/

    This was the model which delivered proof of concept for us in Russia. Investment made in research to source a development initiative and leverage $6m investment for a community bank. The bank became self sustaining in its second year and went on to seed 10,000 micro enterprises in Tomsk, a city of 600,000 population.

    Businesses created in this way typically support at least two families, the owner’s family and the family of one or more workers. Thus these businesses not only allow for self-support for the owner (usually women with children in the Tomsk experiment), but also create jobs for other people. Each business has an extended positive effect for the community by way of purchasing more products and services from other people. This “ripple effect” continues as more businesses are created, existing businesses sell more products or services, and the cycle continues until needs are met for most people in the community. .

    It was this model we introduced to the UK in 2004 seeking investment to replicate to seed social enterprise in the same way, with a ‘B Corp’ approach yielding 50% of profit to local social investment orgs, i.e CDFIs.

    I can offer many examples of soft finance distortion, where our own investment let alone any financier’s has been undermined by grant funded competition which is unwilling to collaborate. The behaviour of our British Council and USAID in Ukraine being an extreme example.

    When the hubristic fanfare of social investors meets the navel gazing self-examination of social enterprise we can only expect inertia.

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  3. Beanbags admin

    Thanks Karl. That, by my reckoning, is over 17 times as much investment from conventional high street banks as through social investment.

    I’d like to make clear that I’m not making these points to slag off people involved in social investment. All those that I’ve met are clever, well-meaning people and we’re lucky that they’re working in social enterprise and committed to positive social change.

    I’m making these points because it’s important to challenge rhetoric, from politicians and some social enterprise sector leaders, that social investment is a major factor in the current landscape of social provision in the UK. As yet, it isn’t, and it’s important that we need don’t allow long-term optimism about social investment to get in the way of tackling immediate questions of social need.

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