There’s no shortage of challenges for leading figures in UK social investment and even the good news isn’t always quite as good as seems. For example, those investors and intermediaries who hope the social investment market will (at some point) be catapulted to relevance by a massive increase in the numbers of social ventures delivering public services will have been delighted by last week’s credulity-busting claims*, in research from Northampton University, that social ventures have been less likely to ‘cease operating’ over the past 30 years than PLCs listed in the FTSE100.
Unfortunately, even if you’re prepared to swallow the ideas that: (a) this is true and (b) this revelation will somehow make public sector commissioners more keen to give contracts to charities and social enterprises, the researchers also expect you to stomach the idea (see page 24) that the 100th biggest ‘Third Sector Organisation’ in the UK in terms of trading income is an organisation, Oasis Charitable Trust, that’s currently doing just £234,000 worth of business.
Given that, as we’ve been told, the model of social investment supported by wholesale finance institution, Big Society Capital, only works without subsidy for deals worth £250,000 or more, and (unless you’re a dot com start-up) you generally need to be doing a lot more than £234,000 worth of trading to take on a £250,000 investment, this would suggest there’s far fewer than 100 organisations in the UK currently in a position to take on unsubsidised social investment.
That’s fewer than 100 organisations that are literally big enough to take on these investments. That’s before you even begin to consider whether they’re actually profitable businesses that would be able to repay an investment. By the end of 2013, Big Society Capital’s cash had been drawn down by 57 frontline organisations with only £13.1million of a projected £600million pot spent in the process.
The situation can’t really be quite that bad (can it???). I’m pretty sure there are more than 100 charities and social enterprises in the UK with a trading income of more than £234,000 – I’d be amazed if there weren’t at least 500 – but there clearly aren’t so many more that University of Northampton’s finest were able to identify them. Even if my anecdote and gut feeling based optimism is correct, that’s still nowhere near 1% of all UK social ventures/third sector organisations/VCSEs/social sector organisations (delete according to taste).
Against this backdrop of staggering mismatches between what 99%+ of charities and social enterprises need, and what (the most prominent element of) the UK social investment is able to offer, Robbie Davison and Helen Heap’s work on developing the idea of ‘Builder Capital’ is particularly timely.
Davison, of Liverpool-based social enterprise, Can Cook, has been a long-term critic of ‘Social Finance’ in the UK and published ‘Does Social Finance Understand Social Need?‘ (the answer was ‘no’) in January 2013 before teaming up with Heap, then working for charity, Tomorrow’s People, to publish ‘Can Social Finance Meet Social Need?‘ in June 2013.
Once again, the answer was ‘no’ and in their new book, The Investable Social Entrepreneur, Davison and Heap, reiterate their critique of the current ‘social finance’ market: “Social Finance, as it is currently arranged, is mostly about not losing money – avoidance of risk in order to protect existing assets. It is nothing more than debt finance and debt finance alone will not address social need anytime soon; it’s the wrong type of short-term money trying to attach itself to problems that take a long time to solve.”
They then outline their solution, a new form of social investment known as ‘Builder Capital’. Builder Capital basically involves a social investor putting between £250,000 and £2million into a social enterprise on the basis that they’ll receive no financial return at all for the first seven years. From then on, assuming the business succeeds, they receive a set percentage of the enterprise’s revenues every year until year 20 – resulting in anything from simple repayment of capital to a 5% annual return (depending on the percentage agreed).
The plus side of this approach is that it’s a model for social investment that genuinely offers social enterprises something that isn’t on offer from either grant funders or mainstream finance providers. Grant funders might offer social enterprises money that doesn’t need to be paid back but they’re unlikely to give them 7-years’ worth to spend on developing a business – rather than delivering a monitored set of outcomes. Mainstream finance providers (and most providers in the current social investment market) might offer a social enterprise a mortgage or other forms of loan finance but only if the enterprise can begin to repay the money immediately at commercial rates, which makes it very difficult to both build a sustainable enterprise and meet social needs not already met by mainstream business or the public sector in the process.
The obvious downside to Builder Capital is that it doesn’t currently exist, with an apparent lack of investors keen to put large amounts of money into social enterprises on the basis that they may get it back, eventually, over a 20-year period, being the biggest problem. Davison and Heap are clearly aware of this problem and are planning to do something about it. They’re running a series of events to discuss how to make Builder Capital a reality, starting with this one in London on July 10th. After these discussions, the plan is to establish a ‘Builder Capital Hub’ that will bring together investors, entrepreneurs, customers and beneficiaries with the ultimate aim of ‘developing and growing a market for Builder Capital that we estimate could soon reach a size of around £50million per year‘.
Given that the latest available figures (albeit, figures from a couple of years ago) tell us that the entire market for all social investments other than secured loans was worth £19.8million per year, this seems relatively ambitious but whether or not they achieve that target, Davison and Heap’s work on Builder Capital is an important step towards to making social investment more relevant to ambitious charities and social enterprises with the potential to grow into sustainable businesses meeting social needs.
*The claims are true, as long as you’re prepared to accept that a PLCs merging with another company is the same as ceasing to exist. 50 companies from the 1984 FTSE are not in the 2014 because they’ve been acquired. Examples include popular pharmacy group, Boots, which is now part of Alliance Boots. Alliance Boots had a total turnover of £25.7Billion in 2013/14. Only 3 companies that were in the 1984 FTSE100 have gone bankrupt.