At the beginning of a workshop at last week’s Good Deals social investment conference, the panel chair suggested that the panelist from Big Society Capital (BSC) needed to put a toilet on their head because everyone was crapping on them.
While, Caroline Mason, the social investment wholesale institution’s outgoing chief operating officer, wasn’t the person on the receiving end in that specific instance, she’s had to deal with plenty of tough questions since the organisation was launched by the prime minister in April 2012.
At the time, minister for civil society, Nick Hurd claiming it would make it easier for charities and social enterprises to access long-term capital but this has not been the experience on the ground. As a result, over the last 18 months there’s been a growing feeling within the social enterprise movement, well encapsulated by Robbie Davison and Helen Heap’s report Can Social Finance Meet Social Need? that social investment, in its current form, is not for us.
I meet Mason as she prepares to leave BSC to become chief executive of the Esmée Fairbairn Foundation, a role she describes as ‘a bit of a dream job, really’. Thoughtful, well informed and understated are not necessarily terms that would come to mind when describing most leading figures in UK social investment but Mason is one of a handful of honourable exceptions.
When asked whether, 18 months on from its launch, things going well at BSC, she gives a considered response: “I think that there are some things that are going well and there are some things that are not going in the way that it was expected.”
For Mason, what’s going well is that people are beginning understand that: “Finance isn’t the story, it’s a mechanism by which money flows from here to there and it should be as lean and as mean and as efficient as possible.”
Where once it was all excitable talk about complicated financial products: “Now people are talking much more about unsecured finance being made available, they’re talking about simple charity bonds. There’s still quite a way to go but I think that’s been a positive move in the last year to 18 months.”
When it comes to what’s not going so well, Mason explains that: “It’s taken longer [than expected] for BSC to really understand the underlying market. It’s in a difficult position where it’s a wholesaler that can’t engage directly with the underlying market – it has to go through intermediaries – so sorting out that and making sure that the way intermediaries are assessed is in the context of what the need is. I think that is now happening and it didn’t happen at first.”
It seems strange that need wasn’t a clear priority in the first place. I ask why: “I think it’s well recognised that a lot of the people within Big Society Capital did not come with an understanding of the market and the sector. That balance is now being addressed within Big Society Capital – more is being done in collaboration and more people are being brought in with some knowledge of the sector.”
Another problem, which may or may have been related to the first one, is that in the first year: “Not very many of the existing [social investment] intermediaries came to Big Society Capital [in the first year]. They were all the new ones. So, I think the combination of a new organisation with new intermediaries meant a lot of learning happened on the job.”
Supply vs. demand
The 2012 Big Lottery-backed report, Investment Readiness in the UK, the biggest survey conducted into the demand for social investment from social organisations identified that: “Organisations that are looking to raise finance are primarily interested in longer term finance of less than £100,000 to help them scale up their existing activities. This does not match the dominant type of capital on offer to this sector.”
Several other reports, including the BSC-backed report, The First Billion, have also drawn attention the fact that while social investors mostly offer relatively large secured investments, social organisations want relatively small unsecured investments. I ask Mason, how or whether she believes the social investment sector can close the gap between supply and demand.
Her response is that: “I would say that [the demand for investments of] £10,000-£100,000 is never going to be serviced by social investment alone. I just don’t think that’s going to happen and actually, I don’t think it should happen, because generally speaking these organisations are either growing or they are dealing with people who are very vulnerable.”
Mason believes that what is needed is the right mix of social investment and grant funding but admits that she’s not completely sure what that is: “[Robbie Davison + Helen Heap’s] report on builder finance is exactly the bit [of the market] that currently isn’t being served. How do we do that? I don’t know.”
After years of listening to bumptious, self-congratulatory social investment advocates declaring that grants are dead and that social organisations need to stop moaning and learn to live in the real world, it’s oddly refreshing to meet a leading figure in social investment who admits to not knowing the answer to anything – but it’s particularly surprising that Mason admits that whatever answer does emerge is likely to involve grants.
While there’s no reason to think Mason herself has ever thought otherwise, BSC as an organisation has spent 18 months being slapped in the face by reality after chief executive, Nick O’Donohoe’s 2011 pre-launch assertion – http://www.thirdsector.co.uk/news/Article/1090205/Interview-Nick-ODonohoe/ – that: “We’re not interested in grants or soft loans“ because “We are an investment institution.”
While in a sense he was right – part of BSC’s remit is to be operationally sustainable so it can’t make investments that are likely to lose money – there is a clear disconnect between that position and the needs of social organisations. O’Donohoe seems a bit keener on grants now.
Given that Social Enterprise UK’s 2013 State of Social Enterprise Survey, The People’s Business, revealed that the median turnover of a UK social enterprise is £187,000, I ask whether the underlying problem is that most social enterprises are just too small to take on investment.
Mason says it’s more complicated than that: “First and foremost it depends I think on the duration. I think investment can work but the length of time and the flexibility of that investment has to be congruent with the kind of organisation that it’s investing in. There’s no point in having a short term loan that will break the organisation that you’re investing in. So, is there a need for long-term, patient, flexible, unsecured lending? Yes. And do I think that organisations around that mark could use that kind of financing? I think they could. I think they’d need to use it alongside other forms of financing as well.”
I ask whether it would be possible to set up an intermediary that could do that kind of lending and be financially sustainable itself. Mason is hopeful but agrees that this intermediary doesn’t yet exist: “I’ve used the example about music: when I was growing up I used to tape the top 20 – nowadays you can create your virtual top 20 and you pay 79p a song. I keep thinking: can we not deconstruct this market in a way that people can identify things that they’re really interested in, and they’re not even having to invest £250 but they’re actually investing £5 into something? I really think there is something there that will take a very useful, entrepreneurial and a smart person who is very socially-minded to do that.”
Eejits in pinstripes
In a recent column for Pioneers Post, Liam Black echoed the views of many in the social enterprise sector when he wrote that social investment has been characterised by: “too many eejits from the City sniffing around in their pinstripes displaying an arrogant stupidity which makes me ache to slap their smug chops.”
I ask Mason whether social investment is being held back by cultural differences between the social and financial sectors – or whether each just disagrees with what the other’s saying.
Mason, who worked in mainstream finance herself before joining Investing for Good and then Charity Bank, says that: “Most people I meet from the financial sector personally get this in spades and want to get it. They want to think that you can actually invest money in a socially beneficial way.”
The difficulty, she believes, is that: “the machinery of finance and the thinking that goes behind that machinery is pointing one way and increasingly people are pointing another way: individually people get it but we’ve had thirty years of a certain type of thinking and being – group think almost – around profit maximisation and growth; now people are having to rethink that and that takes some time.”
While there may be something in this assessment, I suggest that the annoyance that Black and others in the social enterprise movement feel is more to do with the implied view from many social investors that most social entrepreneurs would have profitable businesses if they’d only let a kid from KPMG’s graduate programme teach them to create proper Excel spreadsheets.
Mason is diplomatically unsure about the extent of the problem: “I think if that does happen, it is unfortunate and all the sector can do is educate those people and show them that they do run very good businesses: [social organisations] may not understand investment structuring but similarly people from the finance and investment world don’t understand social change.”
She’s clear, though, that it would be a mistake for social investment to replicate failing practices from the world of mainstream finance: “I think that what has happened, not just in the social sector but generally, is that there’s been a disconnect between mainstream financial institutions and advisory firms [and] the real economy, whether it’s about hairdressers on the high street or [a social organisation] buying two minibuses. Again, it’s coming back to this mechanics of finance: if we can take what’s there and use the skills that already exist in the financial world to make [the social] sector stronger then that’s a good outcome – trying to impose things that don’t work within the sector, that’s the wrong outcome.”
I ask about the growing concern in the social enterprise movement that social investment – including money from Big Society Capital – is being invested (or will be) in private sector companies, with prominent examples being some of the organisations funded through the government’s Social Incubator Fund.
For Mason, this is about finding a way to tackle the problem that organisations that have share ownership structures can’t take equity investment: “The fact is that company-limited by shares is currently the mechanism by which you can get equity investment. It’s very difficult to get equity investment if you’re not a company limited by shares.”
Mason is supportive of Unltd’s work on Trust Engines, while being less keen on the label itself: “I call them trust mechanisms. I don’t like the word engine but trust mechanisms or something that can tie in equity, that can lock equity and mission, would be fantastic. I don’t think that’s a drift away from social investment, I think that’s people struggling with the fact that they can’t get equity investment into the existing legal forms that exist around social enterprise.”
When I suggest that it is a drift away from social ownership, Mason responds that: “If we can find a way to absolutely lock mission, together with equity then that is a huge prize worth winning. I don’t know what the answer is to that but I think that as this sector matures that is another key thing that has to happen – to ensure that you don’t get mission drift and money not locked in for social purpose.”
Floating the question
Mason displays the same spirit of good humoured pragmatism when discussing the Social Stock Exchange (SSE), the curiously-named social impact reports website for listed companies, launched by prime minister (a recurring curse in the world of social investment) at the G8 Social Impact Investment Conference in June 2013.
While this blog has noted that the SSE is clearly not a stock exchange and has dubious claims to be social, Mason is keen to point out the positive benefits of the project: “It’s about making private sector organisations more accountable. That is exactly what it’s there to do. It’s there to push the disclosure and accountability of publicly listed organisations, and to bring the kind of disclosure and exemplar practices from the social sector into the listed public sector.”
In response to my question about whether we could do with something that actually was a social stock exchange, she suggests ‘positive investment’ platform, Ethex, has a role to play: “Ethex has raise £1million now in the first nine months. That is a trading platform for unlisted social organisations. It’s very early days but there is a mechanism there and people are trading, and buying and selling shares on a secondary market there. I’m on the board [of Ethex] so I declare [an] interest. I think it’s a fantastic organisation.”
Mason acknowledges that the current options for social organisations looking to raise investment are insufficient: “There needs to be more places for organisations to go to raise money and there needs to be more marketing around these platforms. I can’t stand Wonga but their marketing and advertising campaign is second to none and that’s one of the reasons why it’s so successful because everybody’s heard of it, everybody knows how to access. It’s really simple. So can we create some sort of social investment platform like that?”
Given the big gaps between what social enterprises and charities need and what they’re getting, I suggest that there needs to be more opportunities for social sector organisations to make practical suggestions about what they want from the social investment market.
Mason agrees: “I think that’s actually very fair because if you think about when Social Investment Task Force [chaired by Sir Ronald Cohen, which ultimately led to the creation of Big Society Capital] happened, it happened before the crash and actually the world has changed since then: the concept of finance has changed, I think the concept of business is changing and need has changed.”
As Mason leaves BSC to view the changing landscape of UK social investment from a different perspective at Esmée Fairbairn, the team she leaves behind have a big job on their hands.