“Most social investment requires subsidy, and subsidy should not be a dirty word. The enterprises we invest in typically lack scale, carry levels of risk that are disproportionate to the financial return, provide goods or services in markets or to clients where the margins are too thin, rarely provide any visibility on exits and often have capped returns to shareholders.”
The above quote is typical of the arguments we’ve all heard over and over again from traditional subsidised social investors. What a relief that the old world of subsidy and excuses has been swept away with the arrival of groundbreaking social investment wholesale finance institution, Big Society Capital(BSC). As BSC’s chief executive, Nick O’Donohoe rightly pointed out in 2011: “We’re not interested in grants or soft loans” because “We are an investment institution.”
If only the people rehashing these tired old arguments about subsidy would listen sensible people like him. Who is the quote from anyway? Oh, hang on… Are you sure it’s the same guy? It seems that UK social investment has reached the point where even those delivering the rhetoric have finally been assailed by reality.
It’s just over a year since another Nick, minister for civil society, Nick Hurd, greeting the launch of BSC with the statement that: “This is a time when we need to be doing more to back our social entrepreneurs. 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.”
While some of BSC’s investments so far may ultimately result in long-term capital reaching some organisations, they’re largely irrelevant to the needs of most existing UK social enterprises. The recently published State of Social Enterprise Survey 2013, The People’s Business, looked at social enterprises’ approach to finance and reported that amongst those seeking investment: “The median amount sought by all social enterprises was £58,000, lower than the 2011 median of £100,000.”
In terms of type of finance sought: “the most common type of finance applied for – by a considerable margin – was grant funding, with 89% of respondents applying.”
The survey also report that: “The median turnover of social enterprises has decreased since the 2011 survey, from £240,000 in 2011 to £187,000.”
Faced with these kinds of figures, it’s not surprising that Nick O’Donohoe is having a bit of a rethink. Of the three lessons he says he’s learned since the launch of BSC, the lesson that ‘subsidy should not be a dirty word’ is the one that provides most indication of a shift in policy. Along with the other post-launch two lessons: ‘The creation of Big Society Capital is not the answer’ and ‘Definition is important’, the fact these issues are now being reflected on in public suggests that O’Donohoe is increasingly aware of the danger that BSC might disappear into the growing chasm between ‘Impact investing’ and the financial needs of social enterprises in the UK.
As O’Donohoe says as part of his argument on definition: “at Big Society Capital we are supporting community development, providing access to new funding for charities through loans and Social Impact Bonds, and trying to provide equity and other risk capital to social entrepreneurs to develop profit with purpose companies.”
And he rightly points out that: “All of these are very different types of investment that require different ratios of grants and commercial capital, have very different risk profiles and appeal to very different groups of investors. Yet they are all grouped under the title ‘Social Investment’.”
O’Donohoe believes this problem can and should be tackled through clearer definition of ‘what should count as a social enterprise‘ and clearer segmentation of the ‘social impact investment market‘. Neither of those ideas are necessarily bad ones but it’s equally important for the both BSC and the government to be clearer and more realistic about what that the social impact investment market is actually for.
The government has a vision for social investment which positions social enterprises on a pipeline that begins with start-up grants and business support, progresses through growth support backed by the Social Incubator Fund and investment readiness support provide by the Investment and Contract Readiness Fund and ends with significant investment from BSC-backed intermediaries such as the Social Venture Fund, which enables those social enterprises to compete for big contracts to deliver public services.
Unfortunately, this pipeline only exists in totality when viewed through the prism of government policy by politicians and civil servants. Many social entrepreneurs and social enterprises are keen to engage with sections of the pipeline that are of practical use to them but that doesn’t mean they have any intention of reaching the end point (of being a ‘scaled-up’ participant in the market place for public services). Even those that do want to scale up are often not interested in doing so on the terms specified by the state. Without a strong element of subsidy in the market, it has no clear value to social entrepreneurs at all.
The UK government’s social enterprise pipeline is neither a direct response to the finance needs of UK social enterprises nor a clear attempt to build the market for what, elsewhere in the world, is commonly referred to as ‘impact investing’ – investment in businesses which meet unmet social needs using profitable models (and in many cases are ‘for-profit’ businesses) and the infrastructure that enables such organisations, and markets for their products and services, to develop and grow.
As this report from the Omidyar Network makes clear, even support for an impact investment market in profitable social businesses is likely to need some subsidy – particularly of the investment processes and the infrastructure organisations that support new social businesses to emerge.
While there are dishonorable exceptional situations where they fail to do so (and huge room for improvement in many areas), on the whole in the UK, the combination of the state, civil society and the market do, between them, meet the basic social needs of citizens. That means that the challenges the UK social investment market is looking to address are mostly very different to those being tackled by impact investment.
In the UK, the function of social investment is to support participation in either existing markets or markets that the state is creating. The big questions that Nick O’Donohoe and his team are currently struggling to provide a clear answer to are: ‘Which types of organisations are they supporting to participate in which markets, how and (most crucially of all) why?’
O’Donohoe’s three post-launch lessons learned identify some of the key practical barriers to answering those questions but ultimately he (in consultation with other interested parties) needs to take a clear policy decision that could form the basis for removing them.
Is UK social investment as envisioned by BSC:
- primarily about supporting charities and social enterprises to become sustainable businesses – because these organisations are a good thing and if there’s more of them, and they’re bigger, society will better?
- about supporting the development of a more diverse market in public service provision with a greater role for charities and social enterprises – because this will lead to better and/or cheaper public service provision? or
- about supporting the development of a UK version of impact investment that promotes social innovation across all sectors (including the private sector) – because this is the best way to create an economy that’s more responsive to social need?
While these options clearly overlap, if BSC going to avoid being the government’s fall guy for the fact that charities and social enterprises haven’t got the social investment market that they want and need, it needs to pick of them.