It’s a truth widely acknowledged that, when in conversation with a London-based social investment expert, you’re never more than six minutes away from discussing social impact bonds (SIBs).
In fact, we’re barely three minutes into my late-June chat with Big Society Capital (BSC) chief executive, Cliff Prior, when the much championed instrument rears its disruptive head.
We’re talking about whether Prior is finding the new role different to what he expected and he cites SIBs as an example of where he’s view from the inside of the social investment wholesale organisation is different to the situation he imagined while looking on (while in his previous role as chief executive of social entrepreneur support organisation, Unltd).
Acknowledging that SIBs are “a contentious area” that will “probably cause people’s eyes to roll” he’s keen to talk about the feedback from organisation funded using the model:
“Talking to the charities and social enterprises that have delivered them, I haven’t heard anybody yet who hasn’t said, ‘A painful process, but we come out of it way stronger, and the social impacts are fantastic.’”
On the other hand, he adds that: “the financial side is not so good. So, people think of [SIBs] as a finance structure, but actually the thing that’s going well with it is the social side.”
While disagreeing with him on many issues, I always found Prior to be friendly and thoughtful during his time at Unltd and these qualities are now combined with clear excitement about taking on his (relatively) new role.
Expanding on the idea that his new sector is often misunderstood, Prior suggests there is a divide in perceptions of social investment between the minority of organisations who have received investment and, in many cases found it helpful, and the “great majority” who “haven’t even looked at it, let alone tried and decided it wasn’t for them.”
The missing middle
BSC published research earlier this year estimating total outstanding UK social investments worth over £1.5billion, made up of over 3,400 individual deals.
I wonder whether Prior has a broad idea about how many charities and social enterprises in the UK social investment might ultimately be relevant for? He cites some more recently published research highlighting the likely markets:
“In the piece of work NCVO did it for us on the most promising territory they were identifying was not the biggest charities and social enterprises, because they can largely do things of their own, and not the smallest, because they’re too small for it to be viable. It’s the middle ground, and certain kinds of organisations in the middle ground.”
Prior’s back-of-an-envelope-style totting up – based on a working knowledge of the total numbers of social organisations in the UK is: “If you think of charities and social enterprises that actually hire a team as reflecting what would be an investable group, it probably would be around 50,000 or 60,000.”
Though he caveats that with: “What proportion would want to use social investment at any one time? That’s really the question. I think it’s always going to be a minority. ”
It’s a question that immediately provokes several other questions: “Different kinds of money on different terms, how much would that change? So, for example, pricing of social investment is a very live issue. Is that a determinant that would really make a difference? Is it complexity that makes a difference? Is it risk cover that makes a difference?”
Given that the latest state of social enterprise survey from Social Enterprise UK notes that the median turnover of a UK social enterprise is £151,000 and the average amount of finance sought is £60,000. I suggest that in the event that social investors were looking to invest in 50,000 to 60,000 organisations, the size of the deals on offer will be a really big factor.
Prior is (seemingly) not completely convinced: “That’s probably the case. Of course, by number of deals, that will always be the case. By volume of money, it would skew it differently. That’s already the case with the 3,000 that are using it now. The lion’s share of that are things like social bank lending, then some of the funds that have been around for a long while like Key Fund, doing relatively small amounts but to large numbers of charities and social enterprises.”
He adds: “I guess what I’m saying is it’s likely not to be one story. There are likely to be different segments of charities and social enterprises for whom different things matter.”
These differing priorities are currently being considered as BSC develops its new three-year strategy (the current one ends in 2017). Prior reflects that, having been operating since 2012, BSC is: “not in absolute pioneer zone anymore. We’ve done four years’ work, five years by next year, but we’re still probably in early adopter territory.”
As a result: “We will be able to identify a number of plausible scenarios for different parts of the sector. Some of those might look a little bit contradictory. Some of them might say, ‘Actually, it’s pretty close to full commercial financing. It will draw in institutions, and it’ll be big scale.’ That would be a perfectly reasonable approach, for example, for social housing.”
Alternatively: “On the other end you might say, ‘Small community organisations.’ You’d have a plausible case to say, ‘Crowdfunding; peer to peer; community shares.’ Those kinds of things would be much more likely to succeed. It’s much more passion led.”
State Aid squished my impact
While it’s clearly true that different organisations have different needs, it’s less clear about whether BSC has the flexibility to meet them. Most funds developed by BSC-backed intermediaries only invest amounts of £200,000 or more. I ask to what extent the terms under which BSC was created inhibit its ability to respond to demand from different groups of charities and social enterprises.
Prior’s response is measured, if inconclusive: “Somewhat. Being a wholesaler means there are two levels of cost. There’s our cost, and there’s the retail investor’s cost, apart from the burden on the charity and social enterprise itself. The expectation of a rate of return, that makes some things difficult.
Probably the biggest deal is the question of state aid. Big Society Capital is designed to support the development of a market that’s currently broken or not even there, without distorting. It’s very unlikely, even regardless of a referendum vote*, that any government, European or UK, would not be worried about distorted effects, so would have some similar set of constraints on us.”
Over the past four years, State Aid has played a recurring role as the obscure, incomprehensible bogeyperson often blamed for BSC’s failure to direct its funds to the most obviously underserved areas of demand**.
It is broadly defined by government as: “Using taxpayer-funded resources to provide assistance to one or more organisations in a way that gives an advantage over others” – and BSC was required to seek State Aid clearance from the EU before setting up the organisation***.
It’s potentially mind-boggling stuff but, considering Prior’s specific point, I struggle to understand how it’s possible to do anything very useful in a market that’s ‘broken or not even there’ without distorting it.
I suggest that if, for example, it turned out there were some investors who were happy to invest in charities and social enterprises for no return beyond getting their money back, and BSC chose to invest alongside them, it would be aligning itself with a market rather than distorting it.
Prior’s response is: “Yes, but if that was all there was, would that ever be enough? You have to think about the shape and size of the social sector.”
He continues: “We’ve identified £1.5bn of socially-minded investment into social organisations. We’ve also identified around £60 billion of commercial investment into the social sector. At the moment, a huge wodge, over £40 billion of that, is social housing. There are plenty of other charities and social enterprises that have big, capital-intensive needs. That’s almost certainly going to exceed any zero-return money that might be available.”
Prior goes on to explain the ways that Social Investment Tax Relief could offer an opportunity for investors to get a return while providing small organisations with loans at close to 0% but, given that the wholesaler has £600 million to invest, I’m keen to get an idea of whether BSC is able (or willing) to change it’s own approach to investment to make more smaller, riskier deals more widely available.
While the answer begins with yes, the meaning seems closer ‘no, unless someone else is prepared to subsidise it’:
“Yes. There are different ways that we can do it. We can invest into blended finance, as with Access. We can support the development of social crowdfunding.”
“Social crowdfunding hasn’t had anything like the same journey as yet. Could it? There are other countries where it does. Or might it work more as in the French system, so it’s people choosing to put some of their long-term savings into funds which include a social investment element.”
“So, yes, there are different ways of achieving different things. This isn’t one story.”
Things are getting worse, please take our expensive money
We move on to the question of where social investment fits within the wider landscape of social sector funding. How can social investment help charities and social enterprises respond to the current economic climate?
For Prior: “Social investment is one tool in the toolbox. There is always a danger of people thinking it’s the tool and that has all sorts of distorted effects. Probably a minority of charities and social enterprises will use it but then that’s also true of mass public fundraising: only the very biggest charities that do that sort of thing to any scale.”
He makes clear that: “For social investment to be viable, there has to be an income stream. So, is it public fundraising? Is it trading? Is it public service commissioning? What is it? Do those sources generate a surplus? If there isn’t a surplus, you’re not going to be able to pay it back.”
For non-asset backed investments in particular, Prior acknowledges this is a major problem: “For charities in particular, completely asset locked, profit locked, rather different for social enterprises, they’re often trying to use debt for things which, in the commercial world, you would use equity or some other means.”
He adds: “So, where is this going to work? In general terms, for the social sector, this is probably the worst bear market**** in memory. It is a really tough time and, at the same time, the social needs they’re trying to meet, generally speaking, are rising. I think most charities and social enterprises have come to the conclusion that this isn’t a temporary aberration. It’s not just hunker down and try and survive until better times. This is the new normal.”
It’s a picture many charity and social enterprise leaders will be familiar with but Prior outlines a clear hypothesis for the role (or, at least, a role) for social investment in helping organisations find a way forward: “So, then you start thinking, ‘How can we do things differently? Can we achieve more impact for less revenue?’ I’ve met a number of organisations where the leadership has thought hard and grasped the nettle of, ‘We just have to do it in a very, very different way.’ The change from model A to model B has some cost to it, social investment, on the basis that you’re going to transform the model, and that you will get the income back to do a new style of work.”
If that sounds risky, that’s because it is: “Of course, it’s a courageous thing to do and I hugely admire the folk who are doing it. For some charities, it will not be the right thing to do. Financial risk is one thing, but the risk of vulnerable beneficiaries suddenly losing their services is quite another order of consideration. So, this won’t be for everybody but I think that is a particularly important use of social investment in the current circumstances and what looks like prevailing for the next few years, at least.”
Part two of this interview will be published next. There’s more on SIBs in part two, I promise.
*The interview took place on June 23rd, the day of the referendum on the UK’s membership of the EU
**Explored in detail in the report of The Alternative Commission on Social Investment, most of which I co-wrote with Dan Gregory.
*** In a recent blog post for Flip Finance, BSC’s former Head of Strategy, Matt Robinson, suggested that the government should: ‘use Brexit to get rid of state aid rules for the UK social sector entirely’.
****Prior is not suggesting there’s a bear market in social investment itself but in the commercial activities – such as delivering public services – that organisations might use social investment to undertake