The publication in June of The Social Investment Market Through a Data Lens was a big event. It was the first significant step towards advocates for and sceptics about social investment in the UK bringing down the gavel on their seemingly endless auction of rhetoric on the potential of the market and beginning to discuss some facts.
The picture the initial Engaged X data – of 426 closed deals completed by 3 social investment finance intermediaries (SIFIs) – provides is nowhere near complete but it does, at least, finally tell us something.
On the plus side, most social sector organisations (72%) who were lent money paid it back. This is important because it proves, fairly decisively, that there is a market for finance for ‘unbankable’* social sector organisations that is not grants. This does not mean that social investment is replacing – or is likely to replace – grants but it does mean that the doubters who claimed social organisations ‘just want free money’ were not entirely correct.
At 28%, the default rate for the sample is comparable with small businesses receiving state guaranteed loans through the government’s Enterprise Finance Guarantee (EFG) scheme. While limited data means we have to be cautious, those who argue that a business having social aims does not make an investment inherently more risky than when that business is simply ‘small’ may be on to something.
The total financial return of the sample is negative 9.2%. The clear positive of that is that a substantial amount of capital deployed for social use has been repaid and can be deployed again. It’s also notable that, as Engaged X’s Karl Richter points out in his blog, the sampled market was improving over time. So while the return on investments made from 2002-2008 was negative 17.50%, the return on investments made from 2009-2013 was a more palatable negative 3.37%.
In an asset class of our own
This suggests that ‘unbankable’ social investment could be (and may already be) an efficient way of recycling some money located in existing social pots. It doesn’t suggest there’s any realistic prospect that direct investments into ‘unbankable’ charities and social enterprises are ever going to be the vehicles for the 7% annual return with limited risk investments that Sir Ronald Cohen and others have been confidently dangling in front of business leaders in Davos for past five years.
This small dataset doesn’t, in itself, prove that ‘social investment as an asset class’ dream is dead but it’s a further the reiteration of the fact that the dream is about something quite different to direct investment into ‘unbankable’ charities and social enterprises.
For those in the social investment market that are interested in mainstream social organisations, the big challenge now is around subsidy. The Engaged X data reinforces the position – now often stated by outgoing BSC chief executive, Nick O’Donohoe – that ‘Most social investment requires subsidy, and subsidy should not be a dirty word‘.
Grants for us, loans for you
On the one hand there’s the subsidy needed to cover the money that funds are losing. In this sample, that’s an apparently quite manageable and, based on EFG figures not untypical, 9.2%.
On the other hand, there’s the costs of running the SIFIs, both in terms of setting up deals and in terms of providing the wide range of ‘additional support’ that most, for better or worse, claim to provide. For most SIFIs, it seems likely that the second hand is the one with the most money in it.
Unfortunately, Engaged X have no data on this so we don’t know how much it cost the SIFIs providing data to lose 9.2% of their capital. They note that: “All returns are gross and are not net of costs. Management costs may appear on face value to be disproportionately high when reviewed against the investment size, but the anecdotal evidence suggests this highly engaged approach is key to being a successful social investor.”
As noted in an earlier blog, the 2011 Young Foundation report, Lighting the Touchpaper, reported that: “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.”
Unfortunately, discussions about subsidy in UK social investment have, so far, mostly been conducted with all participants blushing and covering most of their mouth with their hand. While the presence of subsidy is often acknowledged and passionately justified in the abstract, there are not (to my knowledge) any SIFIs openly saying: “It costs us x to run x fund and, as a result of this subsidy, the social benefit is x”.
It’s a position located half way between bullshit and denial, that serves everyone badly including SIFIs themselves but, it’s important to acknowledge, it’s not a situation that SIFIs are entirely responsible for. Many SIFIs do good work that many social entrepreneurs may agree should be subsidised but the way the market has evolved mean even the clearest subsidy models are currently fairly opaque.
One positive hoped for outcome from the launch of Access – The Foundation Social Investment’s growth fund – where BSC capital is subsidised with BIG Lottery grant – is that SIFIs will be applying for funding through a mechanism where they will have to be clear about how their losses and/or processes are being subsidised and (hopefully) about the social impact they are claiming to deliver as a result.
Only then can we seriously begin to address the question of whether, and in what circumstances, it’s worth it.
*The report states: “The data sample analysed a high-risk portion of the market by definition. Many of the SIFIs implemented a policy for only considering investment applications for organisations that had been refused finance from mainstream or retail providers.”