Towards the end of the first part of my interview with Big Society Capital (BSC) chief executive, Cliff Prior, we discussed the possible role of social investment in the context of the wider economic climate facing charities and social enterprises in the UK. –
The discussion prompts me ask Prior about the extent to which he feels the expectations for the social investment market at the time the organisation launched four years ago have proved to be correct – and to what extent they’ve been modified.
The answer is clear: “Oh, I think substantially modified. Then, any startup will tell you that the business plan that you’ve got, once you’ve hit reality, you rapidly discover the world is a different place.”
The biggest difference between the world social investment leaders imagined and the world that currently exists is, it seems, the attitude of institutional investors. As Prior explains: “I think there probably was an initial idea that it would be possible relatively quickly to draw on institutional finance, and to scale up deployment of social investment very rapidly. That hasn’t happened. From my contacts internationally, there are very few places where that has happened.”
Safe as houses
So what’s going wrong? Is it that institutional investors are disgusted at investees lack of enthusiasm for impact measurement and won’t invest until charities and social enterprises can definitely prove they’ll generate £100 of SROI for every £1 invested?
Apparently not. It’s that most institutional investors only interested in safe, profitable property investments. Prior explains: “Institutional finance tends to come in not for the first fund, not even necessarily for the second fund. It’s the third one. Institutional investment wants proven risk and reward characteristics and it wants a quantum, some people say half a billion and that’s the smallest you’ll ever get them interested in. Well, in the UK, that’s social housing and not much else.”
So where has new social investment been coming from? “In practice it’s been foundations, high net worths, family offices. Now more angel investors have come in. That isn’t to say that there aren’t some sources of funds from institutions outside of social housing but it’s been more on the CSR end.”
I ask whether BSC has changed its strategy as a result. Prior’s response is that: “There is still a scenario that sees institutional finance come in. That’s social property. There is going to be the need for institutional finance into key social assets in the UK. They are at a scale. They are asset backed. Institutions could come in and do that. That’s great. Having that stream of work does not stop us also looking at other streams of work, including the much more peer-to-peer, community end and that middle ground of the more wealthy people, family offices, foundations. Impact led money. People putting their money into things where their first priority is the social benefit.”
I’m not entirely sure what this means for BSC’s investment activity. I ask if it means that they’re going to end up putting most of their £600 million into property, while focusing on other areas in the other role as ‘market champion’. It seems to be more complicated that that: “I don’t know that’s the case. With social property, we get much higher leverage. For every pound we put in, we get a lot more pounds from elsewhere. So, the total investment fund amount might be much bigger, but I don’t know that our slice of it would be overly disproportionate.”
No business plan for a politically expedient semi-detached quango survives contact with reality
At this point, Prior mounts a wider defence of BSC’s initial business plan: “Just come back to that initial view. People criticise that quite a lot, and I don’t. I think the only way something like BSC was ever going to happen was to ‘speak future truth’. A vision of the future. It might be 10, 20, 30 years ahead, but this is the big put your flag on top of the mountain. If you don’t do that, you don’t get anything big. There are plenty of other examples in the social sector of that.”
Unfortunately: “Reality then hits, and it turns out to be rather different. The path is a lot more long and winding. Other paths branch off and go into really interesting and fruitful directions. The creators of this organisation did a really, really amazing job of getting something which now the rest of the world looks on with huge envy. Six other countries trying actively trying to replicate it, at the moment. Yes, it’s got some constraints around it, but the constraints don’t stop us doing some really useful things for charities, social enterprises, and their beneficiaries.”
I suggest one way that BSC’s worldview may have changed over the past four years is in relation to public services. In 2012, there was speculation that there would be a real shift towards charities and social enterprises delivering public services. The First Billion report, produced for BSC by Boston Consulting Group, had public services a key element of its forecast for major growth in demand for social investment. It doesn’t seem like that growth has happened.
Prior partially disagrees: “Well, yes. It’s happened, but it’s happened smaller scale and more piecemeal. We come up against a number of other barriers. I think this is still worth working at very hard. I think, for example, work and health, as a new initiative, it’s of a size and broken up into segments which are within the reach of our charities and social enterprises, which previous programmes weren’t.”
Our friends with metrics
Then, of course, there’s these things called Social Impact Bonds (SIBs) . Prior explains: “We are doing all we can to get SIBs to be larger and repeat. The evidence that we’ve got from SIBs to date is pretty positive on the social impact but it’s not big enough, and it doesn’t have a sufficient control to compare what would have happened otherwise, with normal service, to convince the Treasury.”
He adds: “So, my thinking on this, and I think the team here are probably in agreement with it, is that what we need to do next is design the next step of that methodology bigger, more focussed, and with a proper control, so that, in two or three years’ time, we can go to the Treasury saying, ‘Look, this is now convincing evidence of where it works.’ So, it’s not going straight from the small experiments to full on. It’s having that intermediate stage.”
This sounds logical but if, having tested the idea, we are now going to see more, bigger SIBs, who are the customers? Councils don’t seem to have much cash at the moment – I ask whether Prior thinks they’re going to pay?
He’s hopeful: “I think it’s entirely possible that they would, partly through the devolution arrangements. In Greater London, there’s a couple of efforts at the moment with reasonable chances of bringing a number of boroughs together to co-invest. So, yes, it’s possible. It’s started to happen in the US. Larger scale initiatives. Obviously they’ve got a bigger population base to work with.”
In fact, SIBs might even help councils cope with cuts: “Just standing back from the methodology approaches, government and particularly local government have less money to spend. Many local government departments have had to cut so many headquarters’ staff that the capacity to think of something new, design something new, implement it, how much do they have that time?”
At least, if they’re made simpler: “In terms of staff who can lift their eyes from the day job, they are really constrained now. So, can we give standard templates? Can we make it easier for them? Or there’s this new Government Outcomes Lab. Can that do that kind of job?”
My work on SIBs has suggested there’s often divisions between those advocates who prioritise SIBs becoming bigger and more rigorous in their measurement of outcomes, and those who advocate larger numbers of smaller SIBs using easily replicable models. Prior seems to be suggesting a mixture of bigger, more rigorous and more simple. Is that right?
“I would say more standardised.”
He adds: “Maybe that’s a better way of putting it. If you buy a flat in a leasehold block, you will get a chunk of documentation an inch thick. The reason why you can sign that at a reasonable cost from a conveyancing lawyer is that 98% is standard and only 2% of it is something special to this. So, it’s not necessarily that you simplify it. If you standardise it, and you only have a couple of individual changes that apply to this particular one, that makes it easier for people to pick up.”
Exciting though SIBs are, it’s almost time to move but I can’t do so without asking Prior about Civil Society Minister, Rob Wilson’s prediction that the SIB will be ‘worth more than £1 billion by the end of this parliament’.
Given that, at the time of the interview, the current estimated market value of all UK SIBs launched between 2010 and 2015 was around £150 million worth of possible contract payments and around £50 million of investment* this seems optimistic.
Prior agrees: “If it was SIBs alone, I’d be really surprised, by 2020.”
Though he adds: “If we think of outcomes funds more broadly, I think that’s realistic. Yes. That could happen.”
Given that the market for outcomes-based contracts is already worth £15 billion, it’s not entirely clear what Prior means by this but he isn’t responsible for Wilson’s predictions so it may be a bit much to expect him to explain them.
We could talk forever about SIBs – and that may ultimately be how the world ends – but for now we move on to discuss the artists until recently known as Social Investment Finance Intermediaries (SIFIs)**.
There’s no shortage of opinions about what these organisations should be doing. I ask Prior for his take: do we need more of them? Do we need fewer of them? Whose job is it to make them viable businesses?
“I think that’s a really good question. That’s one of the questions that I came to about six weeks in. I suddenly thought, ‘Hang on a minute. What’s the right number?’ Too few and there’s not competition, and charities and social enterprises need to have a choice. They also need to have the different specialities. Too many and they undermine each other. It just doesn’t become workable.“
He adds: “This is an expanding field of work. We reckon about 20% growth each year. So, we should probably have just enough and a little bit more from now because next year that slack will be taken up. What is that number? That’s a very good question.”
I suggest that, as some social investment leaders have suggested (at least in private), we could have fewer intermediaries doing more deals each. Prior is not sure that’s a good idea: “You could, but if I was running a charity looking for social investment, I’d want to have a choice. One of the surprises of the team here is that people tend to go to one investor and do the deal with them and not haggle on price. I can’t imagine any charity or social enterprise doing that in any other way that they bought anything. They would tender. They would haggle. They would look at choices.
I think it’s great if there’s a choice of intermediaries for a charity. It’s fantastic. It’s fantastic if somebody offers better terms than somebody else. That’s how it should be. It should be driven from that end.”
Taken for grant dependent
I suggest that if we continue to have similar numbers of intermediaries to the 30-50 we have now, they’re going to continue to require subsidy and that this could be a problem. Prior agrees: “It is. Again though, some intermediaries might well need subsidy on a continuing basis, in the same way that you were highlighting that there are some charities and social enterprises with investment needs where really they just need repayable money on soft terms. It’s entirely likely that the intermediaries that are organising that for them might themselves need subsidy. That’s entirely possible.
So, again, look at the Access system. The blended grant element there is partly about the operating costs and risks to the intermediary, and partly about softening the interest rate pain on the individual charity.”
As the Alternative Commission on Social Investment (amongst others) has reported, 100s of £millions of state and Quango subsidy has been poured into the UK social investment market since 2010. I ask Prior about the circumstances in which subsidy is and isn’t right.
“Well, subsidy for particularly difficult areas. Subsidy for the development phase. Yes. We have to really think about the real value of the money. Would it be better just to give it out? At what point do the cost and subsidies to intermediaries and etc., etc., at what point is it better just to say, ‘Just do this as a grant. Do it light touch’?”
Prior notes that this is not just a question for social investment: “That is a really important question to keep looking at, and to keep looking at the total cost. In the total cost of social investment, of course, you think of the total cost of fundraising. Public fundraising averages around 15% of the cost of funds. It costs to raise money, however you do it.”
BSC are the champions
Before concluding, I’m keen to ask Prior about BSC’s dual role as a wholesaler investor into the social investment market and as the ‘market champion’. Does he think there’s a potential conflict between those roles?
“Oh, there’s definitely a potential one. We might feel it’s really important to develop the market in a particular kind of way, and therefore we will invest in an intermediary which, if we had looked at it logically and rationally, we would have realised that wasn’t ever going to work. So, are we spending the money badly because we want something to happen for market development reasons? Looking at it the other way, we might have invested in good intermediaries and used the market champion role just to support their continued existence. So, yes, of course there are risks to that but I think we’re in such early days that the benefits of the dual role considerably outweigh the downsides.”
I ask what happens if it turns out that the best way for the social investment market to develop would be to not have a wholesaler: “That would be a really big challenge for us, wouldn’t it? I don’t think that that’s an issue at the moment. Of £1.5 billion social investment out there, our slice of that is relatively small. If we were half of that, that would be a really big risk. I don’t think we’re anywhere near that. The way things are going, the market is escalating faster than we are deploying. So, we would become less and less a percentage. I think that’s useful. I look at some of the other countries that are trying to develop equivalent organisations, and I worry a bit, because they are so much bigger than anything else in their country.”
He adds: “It is a risk. One of the things I was really pleased to see when I came in here was staff are entirely happy and feel it’s absolutely right to support the creation of social investment mechanisms which are nothing to do with our investment, and in some places even undermine it. So, for example, the push that we’ve done on social investment tax relief, getting that out to financial advisors and other people who advise wealthier people and might use that. Potentially that undermines social investment funds.”
That all sounds great but ultimately what’s the point?
Finally, I ask Prior what success looks like for him at BSC. What would he like to have happened by the end of his time in this role, whenever that may be?
He responds: “To me, it is this tool in the tool kit. The tool should be accessible, easily understood. If people have got comfort that the tool is there and, if the time was right, they’d know how to use it, and it would be on reasonable terms without overbearing complexity and burden on them, that would just be fantastic.”
He adds: “As well as that, I would love social investment alongside social enterprise and all the other social innovation, all the other tricks that we’ve got in the book, to solve a problem. I look at something like, for example, the Winterbourne challenge. We know exactly who [people living in dysfunctional care homes] are. We know what their needs are. We know what their aspirations are. Years after an enquiry report, why are their circumstances still so poor? That should be solvable. Could social investment contribute to solving that?”
“Let’s be more ambitious. The Poverty Premium. If you’re poor, pretty much everything you buy costs more. Your power supply costs more. Your mobile phone costs more. What can we do about that? What can we do to solve some of the big problems that require capital investment?”
“There are other problems that are amenable to other things, but there’s some problems which need social investment. Along with the charities and social enterprises that are trying to address those issues, I would love to help solve some of those problems. That’s, maybe, being too ambitious, but hey…”
It’s good to be ambitious.
Thanks a lot to Cliff Prior for making the time to do this interview.
*Wilson has not explained whether his prediction is for the size of the investment market or the contract market.
**Current BSC guidance is that they should now be referred to as ‘social investors’