A long time in social investment

It’s that time of year when social enterprise commentators (and everyone else) gets the chance to take a step and either review what happened last year or make some suggestions about what might happen next year.

Last December, responding to the publication of the RBS SE100 report 2012, I wrote that (based on the SE100’s self-selecting sample) larger social enterprises were weathering the economic storms better than smaller ones but that, on average, social enterprises were growing more slowly than previously and very few were making much profit once grants and donations were taken into account.

Based on this situation, I assessed the challenge facing those looking to develop a £1billion market for social investment in the UK based on social enterprises taking on repayable finance and repaying it through profits and offered three possible scenarios:

(a) we don’t see the development of £1billion+ social investment industry.

(b) we see a new set of social enterprises/social businesses/social ventures (delete as appropriate) emerging over the next five years that operate in a very different way to the ones we have now.

(c) we see lots of social investment being repaid based on either direct or indirect subsidy from grants and donations.

Development during 2013 suggest that all three of these scenarios will play out to some extent. This year’s RBS SE100 has changed significantly compared to last year’s and is not directly comparable but it’s interesting to note that, amongst those organisations who have provided financial data, income from trading activity is just 48% – meaning that, taken collectively, organisations who’ve provide financial information to the survey are not even doing enough trading activity to be regarded as social enterprises*, let alone repay investments through profits.

There’s no reason to assume that this relatively small, self-selecting survey reflects a broad shift from trading to grants within the social enterprise movement – and 2013’s Social Enterprise UK State of Social Enterprise Survey, The People’s Business, based on a bigger and more statistically meaningful sample, reports: “72% of respondents earning between 76% and 100% of their income through trade” – but it does reinforce a picture of a sector where grants (and, in some cases, donations) continue to play a significant role.

And while The People’s Business reflects suggests a social enterprise sector with a relatively high level of trading income, it also reports that “more than a third (39%) of social enterprises received grant funding” and that for the social enterprises it surveyed: “median turnover in this year’s survey dropping from £240,000 in 2011 to £187,000.

On that basis, it’s probably not too surprising that the social investment market described by leading figures in the industry is now quite different to the one they envisaged (publicly, at least) in 2012.

Having spent the year following its launch struggling to find intermediary organisations interested in struggling to invest its (relatively pricey) money in social enterprises who either couldn’t take it or didn’t want it, social investment wholesale finance institution, Big Society Capital(BSC), finally changed tack.

By August 2013, macho posturing about the end of grants had been decisively binned and chief executive, Nick O’Donohoe, had become an unambiguous cheerleader for subsidy stating: “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.”

While this shift from BSC was probably primarily motivated by the grim prospect of having £600million to spend and no clear about how to spend most of it, it may also have been a reaction to critiques from within the social sectors. Robbie Davison, of Liverpool-based social enterprise, Can Cook, started the year by publishing a report askind: ‘Does Social Finance Understand Social Need?‘ then worked with Helen Heap to publish a follow-up ‘Can Social Finance Meet Social Need?‘ in June.

In September, Angels in the Architecture, Dan Gregory’s report into the infrastructure needs of the UK social investment market highlighted the important but often ignored distinction between: “On one hand, those who interpret the focus of social investment to be about how social sector organisations can access finance. On the other hand, others interpret social investment to be about how finance can deliver social impact.

Apparent recognition of the need for social investment to offer something to both camps was reflected by the launch, in December, of Big Lottery Fund’s £150million Power to Change programme, which aims to support the development of ‘community-led enterprises’.

While there are clear signs that the social investment market is beginning to change itself to engage with social sector organisations that already exist, 2013 has also seen moves towards developing new types of social organisations. Not everyone’s a fan of the growing support for ‘for-profit’ social ventures and the attempts to explain their social mission through ‘trust engines’ but it’s an idea that BSC is understandably interested in. With the Office for Civil Society’s £10million Social Incubator Fund, providing grants to organisations and partnerships aiming to invest primarily in companies limited-by-shares – including social/private partnership Wayra Unltd – the government is putting cash (albeit, a relatively small amount) into promoting the ‘for-profit’ profit social venture model.

On the other hand,  government enthusiasm for ‘for-profit’ profit social ventures didn’t extend to giving them any specific consideration in plans for Social Investment Tax Relief (SITR), announced in December’s Autumn Statement (many companies limited-by-shares already qualify for existing relief aimed at mainstream businesses but some potentially social sectors such as ‘Operating or managing nursing homes or residential care homes’ are excluded).

SITR will also exclude many other organisations regarded as social enterprises but does offer a special provision for investments companies limited-by-shares set-up to deliver Social Impact Bonds (SIBs). 2013 has seen growing attention devoted to SIBs – an approach to (usually) public sector payment-by-results which sees social (or private) investors put up the cash to fund some social services and receive a return (or not) based on the results achieved. The Cabinet Office now has its own Centre for Social Impact Bonds and prime minister, David Cameron, has been promoting SIBs to his colleagues in the G8.

This is an interesting overview of the future prospects for SIBs from the perspective of the US-branch of Social Finance, the intermediary organisation most closely associated with the development of SIBs in the UK. Elsewhere a backlash of sorts has begun with North West voluntary sector leader, Richard Caulfield blogging his fears that: “If anything I predict social impact bonds will lead us into the payment-by-results trap and eventually lead to gaming, cheating and lying to ensure the figures come in to trigger the payments required.

Caulfield’s concerns followed those expressed by incoming chief executive of the Paul Hamlyn Foundation, Martin Brookes in September when he told Civil Society that SIBs were: “‘incredibly expensive to put together’ and demand for them among investors is ‘very questionable’” and a July report from the Social Market Foundation which highlighted some of the challenges that could prevent wider application of the SIB model.

With the hype about SIBs (and angry responses to it) growing fast and the actual (pilot) activities themselves necessarily developing and being delivered far more slowly, a year of growing tetchiness about SIBs seems likely unless its supporters can begin to make their arguments with greater subtlety.

Overall, we’re set for another year of exciting and contested evolution in the social investment market. While the heady mixture of posturing, overblown rhetoric and other worldly absurdity that characterises much discussion around social investment won’t go away, the emergence of a broader, messier but more socially useful market (in the broadest sense of the word) now seems far more likely many of us feared when Big Society Capital launched in April 2012.

*Social Enterprise UK describes social enterprises as organisations that ‘earn more than half of our income through trading’ although it does allow an exception for organisations that are ‘working towards this’.



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4 responses to “A long time in social investment

  1. There’s a remarkable openness when it comes to engaging with Americans on the subject of social enterprise and social investment. Marc J Lane is an example, a lawyer who’s championed the Low Profit Limited Liability Corporation better known as the L3C.
    Fairly recently I introduced him to an article on the subject of investing in social enterprise without shares and he referred me to a conversation between himself and Muhammad Yunus on the same subject. It derives from our proposals to reduce the cost of state childcare by investing in transitioning children to foster care. To my knowledge, the first time such a strategy had been put forward in a social enterprise proposal,
    Frum his dialogue with Yunus, there’s an acceptance that the spectrum of social investor runs from one end with an expectation of returning only the original stake to the ‘hard nosed’ end which might describe the financial expectations of those buying into social impact bonds.
    Yunus’s revelation on how Danone shareholders were brought ‘on side’ was something I found particularly interesting.


    What we seem to have in the UK today, is a hegemony of relentless promotional articles painting social impact bonds as the sole option.

    On Huffington Post today US Professor Rosenman takes a critical view of social impact bonds and the creation of private wealth vs public value.

    “Do we really want to provide funding for critical public goods only when it puts money in our pockets, or do we want to preserve and even strengthen the idea that we together have a collective obligation to provide the tax revenues that pay for those services, advance the common good, and benefit ourselves and one another? Is seeking a financial return for ourselves more “American” than working together through government, nonprofits and philanthropy to serve the neediest among us, as well our own communities and the general public? ”



  2. scumboni

    Good article. Interesting about BSC’s inability to find enough intermediaries for its £600m; ICOF/Co-op & Community Finance (long term average non-performing loan rate <3%) put in what we thought was a strong bid, to enable it to lend the kind of money you need to enable social enterprise business buyouts. Didn't get a sniff.


    • As I’ve discovered scumboni, it’s something which goes with the territory of social innovation. We had much the same experience from ICOF in 2004 when we drew attention to the strategic imperative to tackle poverty. We were proposing the Bencom as the operational model for business investing at least 50% of profit in community development funds. As a guarantee company at the time, we were informed that only bona fide coops were being funded for community broadband projects. I guess BSC responded similarly to ICOF.



  3. Beanbags admin

    That’s interesting. Did you get any feedback? Sounds like exactly the sort of thing BSC should be doing.


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