Tag Archives: big society capital

What’s Next For Big Society Capital?

“… With new CEO, Cliff Prior, poised to take up his role in March 2016 and growing interest in setting up similar institutions elsewhere in the world, it is worth considering the extent to which this principle is currently being fulfilled. As it stands, to what extent is it accurate to describe BSC as a wholesaler? … ” – My blog as part of the Flip Finance ‘What’s next for Big Society Capital?’ series.

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Another year over and is social enterprise really the answer?

As 2015 draws to a close in a haze of turkey and prosecco, it’s a good time to revisit some of the social enterprise world’s oldest chestnuts and see what they’ve been pickled in this year.

Old Chestnut One – Now that grants (and grant-style block contracts) really are disappearing, is social enterprise really the answer?

Those of us old enough to have been around in the glory days* of New Labour will remember that social enterprise was once the answer to the end of grant-funding. Fortunately, in the 2001-2011 that was a fairly easy role to fill because grant funding wasn’t actually ending.

According to NCVO, grant funding by government to the voluntary sector peaked at £6 billion in 2003/4 before falling to £2.2 billion by 2012/13 – but in many local areas the end of grants just meant a switch to models of commissioning that, though more bureaucratic, were ultimately broadly similar to grants.

Now public funding for local organisations to do some good stuff in their local area – however labelled – is disappearing fast. Contract income reached a high of £12.1 billion in 2009/10 and but was already down £11.1 billion in 2012/13.

At a local level in Waltham Forest (where my social enterprise, Social Spider CIC, is based) local charities (excluding housing providers) saw a 34% drop in income between 2010-11 and 2014-15. And with remaining council contracts coming up for renewal in December 2015 and March 2016, that picture is about to get much worse.

The grim reality is that the story that copiously grant-funded social enterprise advisers spent the 2005-2012 period telling charity leaders about grant funding is finally true. State support for the voluntary sector is on the same trajectory as Dunwich but (with apologies to both present and former residents of Dunwich) leaving a slightly bigger social and economic absence in its wake. So this should be the point where social enterprise steps in to fill the gap with some ‘sustainable’ revenue streams.

According to Social Enterprise UK’s 2015 State of Social Enterprise report, Leading the World in Social Enterprise: “27% of social enterprises have the public sector as their main source of income, an increase on 2013 and 2011” – but are social enterprise doing something different and more viable than what conventional charities are doing, or is just that the ones that are keeping going are taking a bigger percentage of an ever smaller pot?

As public sector outsourcing collapses, is social enterprise really the answer?

The decline in government contract income for the voluntary sector outlined above is just one relatively minor act of violence perpetrated against the deeply unwell horse of public service reform in the UK.

Left-wing critics of public service outsourcing have spent much of the past 20 years tugging at their beards and scuffing their sandals in despair at the thought of private companies generating huge profits at the expense of the poor. Unfortunately, if you’re one of those who thought that was bad, you might not be much keener on the new, updated version – private companies failing to generate huge profits at the expense of the poor.

A quick case study is offered by Serco: everything was going swimmingly in 2010, the seas of surplus were becoming choppier by 2012, and by 2015 that whole, humoungous contract-guzzling oil tanker of privatisation was seemingly headed for disaster. Tune in this year for the next hilarious episode.

Some might regard the news that Serco along with outsourcers A4e (amongst others) are handing back contracts as good news but is it really? Serco, A4e and colleagues are really good at slashing costs to a minimum to deliver contracts while making a profit. If they’ve slashed everything in sight and the numbers still don’t add up, what does that mean for those of us who want to deliver added value?

In some sectors, such as social care, the problems are particularly stark, even with some extra money on the horizon.

The winners of Big Society Capital’s Business Impact Challenge – charity, Catch 22, in partnership with construction company, Interserve and investment managers, Club Finance – will receive up £5 million worth of investment to:  “create an independent vehicle that enables community organisations, charities and social enterprises to deliver public services at scale.”

Will what could be tagged a ‘social Serco’ succeed where Serco is now struggling? Good luck!

As social investors continue to ask ‘what can we spend all this government money on?’, is social enterprise really the answer?

The run up to Christmas saw afore-mentioned social investment wholesaler, Big Society Capital, publish its first set of ‘deal-level data’ – that is information about where their money’s gone (along with deals made or arranged by two organisations – Charity Bank and Clearly So – that they’ve invested in directly).

Elsewhere, Pioneers Post‘s Quarterly Dealflow Update, does what that title suggests for the wider social investment market (or those bits of it willing and able to report the flow of the deals).

2015 also saw Engaged X publish The Social Investment Market Through a Data Lens before being forced to pivot away from overall analysis of the social investment market, apparently because no one would pay them to continue to do it.

The social investment market is, for better or worse (or possibly mixture of both), finally making the leap from rhetoric to reality. The headline news is that – even leaving aside social impact bonds – there’s now lots going on in the social investment market. As the Access Growth Fund starts to invest its fabled ‘blended capital’ next year, even more will start happening.

One way or another, by this time next year we’ll have a clearer (if still not fully developed) picture of the extent to which a ‘social investment market’ is an idea with a long term future and, if it is, what that means for social enterprises. And both social enterprises and social investors will have better idea of where they fit into a landscape where, in the vast majority of cases, the government money is not coming back.

 

*delete the word ‘glory’ or not according to preference

 

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Pretty good year

If you want to know what’s been happening in social investment in 2014, the answer is that Iain Duncan Smith (IDS) thinks it’s going brilliantly and I think the market is experiencing a ‘different level of success’. That’s the headline news in Big Society Capital (BSC) CEO, Nick O’Donohoe’s blog-based review of the year.

It’s an honour that O’Donohoe is taking my views into account in his assessment of the current challenges facing his organisation but (while I can’t speak for IDS) he’s wrong to suggest that I’m one the ‘stakeholders’ continuing to ‘judge success or failure by a rather one dimensional yardstick’.

As regular readers will know, the vast majority of my blogs on social investment over the years have explained why the market is failing at least two different interest groups in at least two completely different ways but O’Donohoe is clearly right to highlight the difficulties BSC faces in supporting the development of a social investment market that works for different people who want different things to happen.

Ironically, the one unequivocal aim that BSC has – to support the development of the social investment market – is a ‘yardstick’ that no one apart from BSC staff and trustees, and possibly few civil servants, is particularly interested in (in itself).

In fact, the main argument for the existence of ‘the UK social investment market’ as a specific sector or space within the UK economy is the fact the BSC exists to develop it and the clearest, if not necessarily the most (socially) useful way of outlining that markets parameters is based on whether or not an activity is something that BSC could invest in.

O’Donohoe’s blog post reviews progress against in priorities areas outlined in BSC’s current strategy (launched in May 2014): small and medium-sized charities; innovation; mass participation; scale. It encompasses a wide range of activities from community shares to hedge fund-led housing investments that BSC invests but which have nothing much to do with each other plus some – such as Nominet Trust’s grants programme – that BSC isn’t involved in.

This not a bad thing. It’s vastly preferable to BSC investing in a narrow range of activities relevant to a tiny segment of the social economy and taking no interest in anything other funders/investors are doing but it doesn’t do much to alleviate confusion about what the social investment market is and what BSC is ultimately for.

For all the positive news in 2014, there is no realistic expectation that Nick Hurd’s claim on BSC’s launch day that: “For many years, charities and social enterprises have been telling government how hard it is to access long-term capital. We have listened and within two years have delivered a new institution that will make it easier” – will ever be fulfilled in the sense that that most observers would understand the terms ‘make’ and ‘easier’.

And Prime Minister David Cameron’s statement that day that social investment: “is a self-sustaining, independent market that’s going to help build the big society” – now reads like a message in a bottle from a land beyond our comprehension.

2014 has seen BSC gradually move beyond its initial failure to get money out the door to distribute its own funds with growing competence primarily (if not exclusively) into funds and institutions intending to make relatively safe asset-backed investments, while also providing some of the financial muscle to back up the government’s (as-yet undimmed) enthusiasm for Social Impact Bonds.

It’s also successfully completed part two of its lobbying operation to secure the introduction of Social Investment Tax Relief, with the eligible limit raised to £5million in the Chancellor’s Autumn Statement.

Alongside this activity, BSC has been furiously seeking ways to outsource the wider obligations bestowed on it by the fundamentally political nature of its creation. In particular, providing finance for small charities and social enterprises (which, in reality, is most of them) – which O’Donohoe told me in February is ‘just not possible’ on a commercial basis.

We’ve seen Big Lottery Fund step in to take some of the pressure off with the (much trailed build up to the) launch of the £150million Power to Change grant fund for ‘sustainable community-led enterprises’.

Behind the scenes, BSC and Big Lottery have also been working together to develop a new institution to work with intermediaries to provide blended finance/mixed-funding products/loans with grants (delete according to taste) to organisations who aren’t in a position to take on fully commercial investment.

While it’s not exactly prizes for anyone, there’s been enough happening to keep enough ‘stakeholders’ happy to keep some kind of social investment show on the road – even before you consider the phenomenal pdf action generated by monumental solution-in-search-of-a-problem of the year ‘Profit with Purpose Businesses‘.

When you add in success stories like community shares, the messier social investment market that’s emerged in 2014 is more useful to more organisations and (hopefully, ultimately) more people than the pointless venture capital tribute act that was on offer in 2012.

It’s less clear what moral or functional principles, if any, hold it together and, as a result, on what basis any forthcoming battles for BSC resources will be fought. Dan Gregory’s question: ‘What’s so social about social investment anyway?‘ has not been answered.

If the UK social investment market of 2015 was a social enterprise emerging from a programme of investment readiness support what would it’s shiny, new elevator pitch be?

Another BSC employee, Development Director, Danyal Sattar, has recently published a series of blogs that provide a brilliant overview of the ‘what’ of social investment but still don’t really address the why.

The Alternative Commission on Social Investment is not going to provide a single, direct answer to that question but hopefully it will provide some useful suggestions on what a more social ‘social investment market’ could look like.

2014 has been a pretty good year for UK social investment. It’s a year that seen most people working in social investment move decisively beyond rhetoric towards doing. In 2015, it may become clearer what we’re doing and why.

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How bad is the bad news, how good is the good?

Apologies for the lengthy silence from me in recent months. It’s been a busy time for Social Spider CIC. Amongst other things, we’ve launched a community newspaper and a national mental health blogging project. I’m also heading up The Alternative Commission on Social Investment: an initiative set-up to investigate what’s wrong with the UK social investment market and to make practical suggestions for how the market can be made more accessible and relevant to a wider range of charities, social enterprises and citizens working to bring about positive social change.

The last few weeks have seen (at least) two major events in the UK social investment market. At the end of October, the Ministry of Justice announced the preferred bidders for Transforming Rehabilitation (TR) programme. Then the following week, social investment finance intermediary (SIFI), Social and Sustainable Capital, launched a £30million ‘Third Sector Loan Fund’, complete with £13.5million investment from high street bank, Santander.

The former story is seemingly terrible news. In fact, the apparent failure of charities and social enterprise-led bids to secure any significant contract value as prime contractors for TR may mark the death of the ‘plan A’ vision for the UK social investment market conceived in the mid-2000s.

The wonderful blog post (at least, as wonderful as a blog post can be when it’s essentially a cry of pain emitted through the medium of analysis of a government procurement process) from Big Society Capital‘s Christine Chang and Matt Robinson, explains what went wrong from a social sector point of view.

Ultimately, the key demands of the TR procurement process were not having a great plan, high level skills and a track record of competence in delivery the services being commissioned, they were: be a massive company with the ability to engage in a 13-month procurement process and to provide a ‘Parent Company Guarantee’ worth 100% of annual contract value. Not surprisingly:

Preferred bidder consortia all have at least one multinational member with assets in the hundreds of millions, if not billions, with the exception of one (Seetec with total assets of £43mm).

While many social sector organisations have a role in TR bids, the BSC blog suggests they’re unlikely to end up with big roles and the big resources that come with them.

Ironically, given that Justice Secretary, Chris Grayling, is not widely regarded as a left-wing politician, he has done more than any other individual actor in public service markets to ensure the scenario most feared by traditionally left-wing voluntary sector campaigners – that significant numbers of charities and social enterprises will ditch independent voluntary action to become direct competitors to Serco, A4E and Sodexo in battles for government prime contracts – remains as unlikely as ever to become reality.

Pre-TR, Grayling’s CV in his previous role as Employment Minister, included the creation of the Work Programme – a programme which saw large private companies mop the vast majority of prime contracts, leaving charities and social enterprises to sub-contract themselves towards bankruptcy.

This is not to suggest Grayling hates the voluntary sector and is opposed, in principle, to charities and social enterprises secured large government contracts but that the overarching priority in the commissioning and procurement processes for the Work Programme and TR has been to save public money and transfer risk from the government to organisations providing services.

This is not an issue that’s going to bring protestors on to the streets. Some people to in the UK do strongly support largescale public service outsourcing whilst also believing passionately that this outsourced market should be set up in a way that provides genuine opportunities for charities and social enterprises to win contracts. Unfortunately, while there may almost be enough of those people to fill the away end at a non-league football ground, they definitely don’t represent a social movement big enough to swing the next general election.

On the other hand, for social investment as a market/professional activity, the TR process is a big deal. It’s confirmed once and for all that the current government – for all it’s support for social investment in theory – when faced with competing priorities, does not see a diverse outsourcing market supported by social investment as a priority.

For those, both in the voluntary sector and the social investment market, who were dreaming of a social Serco, this is disastrous news. Those most angrily opposed to social sector contracting will probably be too busy being angry about everything that’s happened since 1976 to even notice the significance of what’s happened. For social sector pragmatists, the death of (at least, a big chunk of) social investment plan A, may help create the space to get on with creating plan B.

If the biggest bit of bad news in UK social investment isn’t necessarily all bad, it’s equally unclear whether the good news is all that good. Once again, there’s no doubt that it is big news. A high street bank, Santander, have made a £15 million commercial investment in a social investment fund.

As Social and Sustainable Capital (SASC)’s chair, Nat Sloane tells Civil Society: “What excites me most about this is the mixture of philanthropic and commercial capital.” He adds: “Santander has come in on the same basis it would make an investment in a mainstream fund.” While Bridges Ventures have recently attracted some private money to their Social Impact Bond Fund, both the level of investment from Santander and the fact that it’s in a loan fund do mean that SASC have achieved something significant.

There is a ‘but’, though. The ‘but’ is that it’s one thing to set up a fund and another thing to successfully invest the money in charities or social enterprises (let alone successfully get it back with interest). After years of hype, many in the social sectors now greet SIFIs’ announcements of new funds with the same level of scepticism they deploy in response to government ministers’ announcements of ‘new money’.

It’s important to remember that in its latest annual report, Big Society Capital had made £149.1million worth of commitments to SIFIs but that – at that point – only £47.9million had actually been invested in funds and just £13.1million had been drawn down by frontline charities and social enterprises.

SASC should be congratulated for doing the first part of their job really well but, while the fact that a high street bank is involved in this deal is pretty exciting for social investment insiders, it’s of no major relevance to charities and social enterprises trying to work out whether what’s on offer is appropriate to them.

Ultimately, not investing Santander’s money is not significantly more useful than not investing the government’s money. The number of charities and social enterprises in the UK in the market for a loan of £250,000-£3million is pretty small – the average UK social enterprise has an annual turnover of £187,000. The hardest part of SASC job is still ahead of them.

 

 

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Report from emerging market

In April 2012, the prime minister launched ‘a £600m fund to support grassroots social projects’. At least, that was how The Guardian described social investment wholesale finance institution, Big Society Capital (BSC), the organisation set up to spend ‘unclaimed assets’ on developing the UK social investment market. Earlier this month, I dropped into BSC’s Fleet Street offices to ask chief executive, Nick O’Donohoe how he thinks it’s going?

There’s been signs of a shift in thinking in recent months, whereas in 2011, as the organisation prepared for launch, O’Donohoe told Third Sector that “We’re not interested in grants or soft loans” and emphasised that: “We are an investment institution“, recent statements have been far more supportive of subsidy. So, what’s changed?

I feel like the first comment is taken a little bit out of context. What I was referring to was the fact that BSC, rightly or wrongly, has been set up under certain principles and one of those principles is that we don’t give grants – that we need to be sustainable and the capital needs to be preserved. We’ve always felt that grants have an important part to play in the development of social investment.

O’Donohoe concedes that: “at the beginning perhaps being focused a bit more on the fact that we can’t do [grants], we’ve changed our emphasis a bit to focus more on ‘there is clearly a need’ and we have a role to play in terms of trying to help.

Sense of commitment

While some in the social sectors may unjustifiable blame BSC for not doing things it is not able, and was never intended to do, the organisation has seemingly also struggled to do what it is intended to do: investing in social investment finance intermediaries (SIFIs) so they can invest in social sector organisations.

O’Donohoe believes his organisation is doing its best to make money available: “If you say, do I feel good about that fact that we’ve managed to commit £150million or so to roughly 30 different organisations, intermediaries of various types? Yes, I think that’s a pretty reasonable achievement, actually – it demonstrates a certain sense of urgency.

He is frustrated, though, at the gap between BSC making commitments to invest and the money actually going out. The problem is that: “Once you make a commitment, then you’ve got to actually close the transactions – sometimes that’s just a legal process and sometimes it’s contingent on [SIFIs] achieving matched finance. I have to say it’s been disappointing how long the closing process has taken.

If you take an LGT for example, they closed a month or so ago, we committed £10million contingent on the fact that they would raise another £10million and it took them a year to do that – they had to meet with 500 different investors.

BSC initially had a policy of only making investments when their money was matched by an equal level of investment from other sources. O’Donohoe felt that approach wasn’t working: “We realised, after about a year, that [closing transactions] was taking longer than we thought. The most important way we tried to change that was to try to persuade our board to make unmatched financing available where appropriate.

Fortunately, the board agreed so: “We have now agreed to fund two organisations on an unmatched basis – that’s just our money. That was quite a big step for us – it’s a way to shorten the period between our commitment and them actually opening their doors to the frontline.

Overall, though, O’Donohoe believes things are going broadly according to plan: “I’m not sure that I’m surprised by what’s happened. A lot of what we do is making commitments to organisations to invest over say a four-year period so, if you take a £150million and divide by four, you would expect £35-£40million a year, based on just that level of investing, to go out. It has been less than that but not to the extent where we think there’s serious issues.

“It’s just not possible”

O’Donohoe is thoughtful and engaging, seeming genuinely interested in the work he’s doing. Maybe partly as a consequence, he doesn’t deliver off-pat answers: responses evolve through a gradual process of mid-sentence modification.

We move from discussing whether BSC is doing as well as could be expected, to considering what other people expect from BSC and whether they’re being realistic.

According to the latest available market data, the average UK social investment is £264,000 and 82% of the current estimated £202million market is made up of investments of averaging £723,000. The latest data from Social Enterprise UK shows the average turnover of a UK social enterprise is £187,000 and the average investment sought by social enterprises looking for finance is £58,000. Can BSC find a way to bridge the gap between where social investment is and where social enterprises are?

O’Donohoe is clear on the answer: “If you’re talking about [investments of] less than £250,000, some part of the investment will always have to be grant.

Without subsidy: “I think it’s just not possible. Small loans are expensive. They’re expensive to originate, they’re expensive to monitor. The default risk is always going to be reasonably high and there’s a point at which the rate of interest is just inconsistent with the social mission of the enterprise.

O’Donohoe understands why this might be unpalatable to many: “I think there’s sort of a mismatch where social organisations will say with total justification that if we have to pay more than, I don’t know, 10% for funds we can’t make that work and it’s inconsistent with our mission. I think they’re right most of the time. Likewise for the SIFIs, they say if we don’t charge more than 10% that cannot possibly – in the absence of any grant support – be sustainable given the size of the loans. I think they’re right too. So the market doesn’t clear effectively. And so how do you square that?

He believes a major answer is more subsidy: “I think you have to accept that and our challenge there is to find out who can bring in that grant layer and that’s what we’ve spent a lot of time talking to people like Big Lottery Fund about.

The point of no return

Some in the social sectors believe that the reason BSC can’t channel investments into smaller organisations is that the returns it needs to generate from its investments in SIFIs are too high. Some critics blame this problem on ‘the Merlin banks’ who invested £200million in BSC to top up the estimated £400million from unclaimed assets and expect a ‘market rate’ return.

O’Donohoe believes the problem is partly overstated and partly unavoidable. He explains: “I know there are people out there who think our cost of capital is too high and if it was cheaper then we’d be able to square the circle. When you look at what we’re really doing – we’re making unsecured lending available on an unmatched basis at projected returns of just over 3%. Now that’s nominal. You take off our own operating costs, which we said we’d try to keep at less than 1%, and you take off 2% inflation that’s zero real rate.

O’Donohoe is not clear what, if any, alternative approaches are available: “I find some people suggesting that our cost of capital should be lower but I don’t really anybody suggesting that we should be running down our capital over time. Forget what the banks may or may not feel like they should be earning, just to preserve the capital, and certainly to preserve it on a real basis, I think we are making money available at the cheapest rate we possibly can.

It takes predictions of billions to hold us back

It may be that BSC is making steady progress based on its terms of reference but given that part of the reasons his organisation came into existence was the massive wave of massive expectation about what social investment could deliver, I wonder if O’Donohoe now regrets some this hype.

For example, the predictions that the social investment market would grow to £1billion or even £3billion by 2015. O’Donohoe is good humoured but unrepentant, paying tribute to the work of BSC’s former chairman, Sir Ronald Cohen, in promoting social investment in the UK: “I can’t remember what the exact figures were either but I think there have been some incredibly visionary people who have been driving the development of the market in this country for over a decade – and obviously Ronnie Cohen the best example. Ronnie sets a big vision and he’s right to set a big vision. It’s worked in the sense that it’s got a whole lot of support that wouldn’t have been there otherwise.

Enthusiastic promotion of social investment is not solely a UK phenomenon. O’Donohoe, who before joining BSC was Head of Global Research at JP Morgan, explains: “We had the same discussion in the US, I was responsible for a piece of research that JP Morgan did where we put a very big number on the growth of the market as well. People get worried that you’re hyping something and it’s not deliberate hype but I do think you have to get people’s attention. If you look at social impact investing here or globally it’s moved forward significantly. So, I don’t know how big it will be but it certainly will be a lot bigger that it would’ve been if we hadn’t talked about it at all.

Our government took our grants away and all they replaced them with was a series of expensively constructed payment-by-results pilots

While many in the social sectors are sceptical about social investment, scepticism about Social Impact Bonds (SIBs) is growing fast even amongst those who like the idea of social investment in a general sense.

SIBs are a way of financing a payment-by-results contract so that charities and social enterprises delivering services are paid upfront by investors for the work they do, with investors getting paid (or not) by the government at the end of the contract based on the outcomes that have (or haven’t) been achieved.

Supporters say (amongst other points) that SIBs are an innovative way of offering opportunities for social sector providers to win new business and offering governments a method of trying new approaches to service delivery at reduced risk.

Opponents arguments’ include the claims they’re too expensive to set up and manage, and are not necessarily a cost effective way of delivering services. Then there’s the hype, which is even more intense than the basic level social investment hype. The Prime Minister loves them so much he wants the rest of the G8 to have them too. New York Mayor, Michael Bloomberg, set one up (and underwrote most of the cost through his charitable foundation).

When I ask whether SIBs really are the answer to everything, O’Donohoe again responds with reference to Sir Ronald Cohen: “Ronnie Cohen has been a big visionary and very visible in terms of this organisation and I think that Ronnie has a real belief that Social Impact Bonds can be transformational, and I respect him for that.

On the other hand: “I don’t think we as an organisation have ever stood up anywhere and said that we believe Social Impact Bonds are the only form of social investment. When you look at we’ve done with our money, in terms of our commitments, less than 5% of our commitments have been Social Impact Bonds.

There’s no suggestion that O’Donohoe is necessarily less enthusiastic about SIBs than Cohen but his support is less visionary, more focused on the nuts and bolts: “I think it’s going to take a long time for that market to develop but I do think its further development would be very valuable.

He’s also noticed social sector scepticism and is wary of it: “I worry sometimes about the fact that the sector seems to be critical of Social Impact Bonds. My experience of talking directly to people who are actually charities who’ve been funded by them – whether it’s St Giles or Action for Children or the other people – is that they actually appreciate the fact that Social Impact Bond gives them a form of funding that’s more flexible than a typical government grant and allows them to take on payments-by-results contracts without taking on the risk of a payments-by-results contract and I think they find that valuable.

So the minister said: ‘we’re giving you £600million’ and everyone clapped

A recurring theme in our discussion is the combination of the practical challenge of creating a new investment market – big enough, in itself – with the challenge of managing the expectations of both social sector organisations and other interested parties.

Most prominent amongst those interested parties are politicians. From the Prime Minister down, many government ministers have been enthusiastic supporters of social investment and BSC is named after what, at time of launch, was the government’s flagship policy idea.

I ask whether this political support been a help or a hindrance. Thinking carefully before offering a response, O’Donohoe concludes that: “It has been a bit of both. There has been a lot of value to the level of support we’ve got from the government, being seen as part of policy – the Cabinet Office have stayed involved, they could’ve walked away after setting us up but they’ve stayed involved providing funding for the Investment and Contract Readiness Fund and the Social Incubator Fund, so in that case it’s been a help.”

“It’s been a hindrance that we’ve been launched at a time when – for better or for worse -there’s been a significant austerity programme been ongoing and it’s sometimes difficult to distinguish between cutting funding on the one hand and trying to do something relatively new, and different on the other hand. This has led to some miscommunication and sometimes some bad feeling.

That sounds great but will it work?

I ask whether some of that bad feeling and miscommunication have been avoided. Could more research have been done before BSC launched to find out what kind of investment, if any, most social sector organisations wanted? “Was there enough work done on demand before we started? Maybe there wasn’t but you learn so much every day here by looking at and trying to evaluate individual and specific transactions. What is possible with forms of funding and what isn’t possible? And what value or social value can you create or can you not create?

So, nearly two years into the job – running BSC and, in doing so, leading the development of the UK social investment market – does O’Donohoe still think social investment’s going to work? “I think the only way you’re going to find out whether an idea like this works is actually trying it in a prudent way.

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“Finance isn’t the story”

At the beginning of a workshop at last week’s Good Deals social investment conference, the panel chair suggested that the panelist from Big Society Capital (BSC) needed to put a toilet on their head because everyone was crapping on them.

While, Caroline Mason, the social investment wholesale institution’s outgoing chief operating officer, wasn’t the person on the receiving end in that specific instance, she’s had to deal with plenty of tough questions since the organisation was launched by the prime minister in April 2012.

At the time, minister for civil society, Nick Hurd claiming it would make it easier for charities and social enterprises to access long-term capital but this has not been the experience on the ground.  As a result, over the last 18 months there’s been a growing feeling within the social enterprise movement, well encapsulated by Robbie Davison and Helen Heap’s report Can Social Finance Meet Social Need? that social investment, in its current form, is not for us.

I meet Mason as she prepares to leave BSC to become chief executive of the Esmée Fairbairn Foundation, a role she describes as ‘a bit of a dream job, really’.  Thoughtful, well informed and understated are not necessarily terms that would come to mind when describing most leading figures in UK social investment but Mason is one of a handful of honourable exceptions.

When asked whether, 18 months on from its launch, things going well at BSC, she gives a considered response:  “I think that there are some things that are going well and there are some things that are not going in the way that it was expected.

For Mason, what’s going well is that people are beginning understand that: “Finance isn’t the story, it’s a mechanism by which money flows from here to there and it should be as lean and as mean and as efficient as possible.

Where once it was all excitable talk about complicated financial products: “Now people are talking much more about unsecured finance being made available, they’re talking about simple charity bonds. There’s still quite a way to go but I think that’s been a positive move in the last year to 18 months.

When it comes to what’s not going so well, Mason explains that: “It’s taken longer [than expected] for BSC to really understand the underlying market. It’s in a difficult position where it’s a wholesaler that can’t engage directly with the underlying market – it has to go through intermediaries – so sorting out that and making sure that the way intermediaries are assessed is in the context of what the need is. I think that is now happening and it didn’t happen at first.

It seems strange that need wasn’t a clear priority in the first place. I ask why: “I think it’s well recognised that a lot of the people within Big Society Capital did not come with an understanding of the market and the sector. That balance is now being addressed within Big Society Capital – more is being done in collaboration and more people are being brought in with some knowledge of the sector.

Another problem, which may or may have been related to the first one, is that in the first year: “Not very many of the existing [social investment] intermediaries came to Big Society Capital [in the first year]. They were all the new ones. So, I think the combination of a new organisation with new intermediaries meant a lot of learning happened on the job.

Supply vs. demand

The 2012 Big Lottery-backed report, Investment Readiness in the UK, the biggest survey conducted into the demand for social investment from social organisations identified that: “Organisations that are looking to raise finance are primarily interested in longer term finance of less than £100,000 to help them scale up their existing activities. This does not match the dominant type of capital on offer to this sector.

Several other reports, including the BSC-backed report, The First Billion, have also drawn attention the fact that while social investors mostly offer relatively large secured investments, social organisations want relatively small unsecured investments. I ask Mason, how or whether she believes the social investment sector can close the gap between supply and demand.

Her response is that: “I would say that [the demand for investments of] £10,000-£100,000 is never going to be serviced by social investment alone. I just don’t think that’s going to happen and actually, I don’t think it should happen, because generally speaking these organisations are either growing or they are dealing with people who are very vulnerable.”

Mason believes that what is needed is the right mix of social investment and grant funding but admits that she’s not completely sure what that is: “[Robbie Davison + Helen Heap’s] report on builder finance is exactly the bit [of the market] that currently isn’t being served. How do we do that? I don’t know.

After years of listening to bumptious, self-congratulatory social investment advocates declaring that grants are dead and that social organisations need to stop moaning and learn to live in the real world, it’s oddly refreshing to meet a leading figure in social investment who admits to not knowing the answer to anything – but it’s particularly surprising that Mason admits that whatever answer does emerge is likely to involve grants.

While there’s no reason to think Mason herself has ever thought otherwise, BSC as an organisation has spent 18 months being slapped in the face by reality after chief executive, Nick O’Donohoe’s 2011 pre-launch assertion – http://www.thirdsector.co.uk/news/Article/1090205/Interview-Nick-ODonohoe/ – that:  “We’re not interested in grants or soft loans“ because “We are an investment institution.”

While in a sense he was right – part of BSC’s remit is to be operationally sustainable so it can’t make investments that are likely to lose money – there is a clear disconnect between that position and the needs of social organisations.  O’Donohoe seems a bit keener on grants now.

Given that Social Enterprise UK’s 2013 State of Social Enterprise Survey, The People’s Business, revealed that the median turnover of a UK social enterprise is £187,000, I ask whether the underlying problem is that most social enterprises are just too small to take on investment.

Mason says it’s more complicated than that: “First and foremost it depends I think on the duration. I think investment can work but the length of time and the flexibility of that investment has to be congruent with the kind of organisation that it’s investing in. There’s no point in having a short term loan that will break the organisation that you’re investing in. So, is there a need for long-term, patient, flexible, unsecured lending? Yes. And do I think that organisations around that mark could use that kind of financing? I think they could. I think they’d need to use it alongside other forms of financing as well.

I ask whether it would be possible to set up an intermediary that could do that kind of lending and be financially sustainable itself. Mason is hopeful but agrees that this intermediary doesn’t yet exist:  “I’ve used the example about music: when I was growing up I used to tape the top 20 – nowadays you can create your virtual top 20 and you pay 79p a song. I keep thinking: can we not deconstruct this market in a way that people can identify things that they’re really interested in, and they’re not even having to invest £250 but they’re actually investing £5 into something? I really think there is something there that will take a very useful, entrepreneurial and a smart person who is very socially-minded to do that.

Eejits in pinstripes

In a recent column for Pioneers Post, Liam Black echoed the views of many in the social enterprise sector when he wrote that social investment has been characterised by: “too many eejits from the City sniffing around in their pinstripes displaying an arrogant stupidity which makes me ache to slap their smug chops.”

I ask Mason whether social investment is being held back by cultural differences between the social and financial sectors – or whether each just disagrees with what the other’s saying.

Mason, who worked in mainstream finance herself before joining Investing for Good and then Charity Bank, says that: “Most people I meet from the financial sector personally get this in spades and want to get it. They want to think that you can actually invest money in a socially beneficial way.

The difficulty, she believes, is that: “the machinery of finance and the thinking that goes behind that machinery is pointing one way and increasingly people are pointing another way: individually people get it but we’ve had thirty years of a certain type of thinking and being – group think almost – around profit maximisation and growth; now people are having to rethink that and that takes some time.

While there may be something in this assessment, I suggest that the annoyance that Black and others in the social enterprise movement feel is more to do with the implied view from many social investors that most social entrepreneurs would have profitable businesses if they’d only let a kid from KPMG’s graduate programme teach them to create proper Excel spreadsheets.

Mason is diplomatically unsure about the extent of the problem: “I think if that does happen, it is unfortunate and all the sector can do is educate those people and show them that they do run very good businesses: [social organisations] may not understand investment structuring but similarly people from the finance and investment world don’t understand social change.

She’s clear, though, that it would be a mistake for social investment to replicate failing practices from the world of mainstream finance: “I think that what has happened, not just in the social sector but generally, is that there’s been a disconnect between mainstream financial institutions and advisory firms [and] the real economy, whether it’s about hairdressers on the high street or [a social organisation] buying two minibuses. Again, it’s coming back to this mechanics of finance: if we can take what’s there and use the skills that already exist in the financial world to make [the social] sector stronger then that’s a good outcome – trying to impose things that don’t work within the sector, that’s the wrong outcome.

Private matters

I ask about the growing concern in the social enterprise movement that social investment – including money from Big Society Capital – is being invested (or will be) in private sector companies, with prominent examples being some of the organisations funded through the government’s Social Incubator Fund.

For Mason, this is about finding a way to tackle the problem that organisations that have share ownership structures can’t take equity investment: “The fact is that company-limited by shares is currently the mechanism by which you can get equity investment. It’s very difficult to get equity investment if you’re not a company limited by shares.

Mason is supportive of Unltd’s work on Trust Engines, while being less keen on the label itself: “I call them trust mechanisms. I don’t like the word engine but trust mechanisms or something that can tie in equity, that can lock equity and mission, would be fantastic. I don’t think that’s a drift away from social investment, I think that’s people struggling with the fact that they can’t get equity investment into the existing legal forms that exist around social enterprise.

When I suggest that it is a drift away from social ownership, Mason responds that: “If we can find a way to absolutely lock mission, together with equity then that is a huge prize worth winning. I don’t know what the answer is to that but I think that as this sector matures that is another key thing that has to happen – to ensure that you don’t get mission drift and money not locked in for social purpose.

Floating the question

Mason displays the same spirit of good humoured pragmatism when discussing the Social Stock Exchange (SSE), the curiously-named social impact reports website for listed companies, launched by prime minister (a recurring curse in the world of social investment) at the G8 Social Impact Investment Conference in June 2013.

While this blog has noted that the SSE is clearly not a stock exchange and has dubious claims to be social, Mason is keen to point out the positive benefits of the project:  “It’s about making private sector organisations more accountable. That is exactly what it’s there to do. It’s there to push the disclosure and accountability of publicly listed organisations, and to bring the kind of disclosure and exemplar practices from the social sector into the listed public sector.

In response to my question about whether we could do with something that actually was a social stock exchange, she suggests ‘positive investment’ platform, Ethex, has a role to play:  “Ethex has raise £1million now in the first nine months. That is a trading platform for unlisted social organisations. It’s very early days but there is a mechanism there and people are trading, and buying and selling shares on a secondary market there. I’m on the board [of Ethex] so I declare [an] interest. I think it’s a fantastic organisation.

Mason acknowledges that the current options for social organisations looking to raise investment are insufficient: “There needs to be more places for organisations to go to raise money and there needs to be more marketing around these platforms. I can’t stand Wonga but their marketing and advertising campaign is second to none and that’s one of the reasons why it’s so successful because everybody’s heard of it, everybody knows how to access.  It’s really simple. So can we create some sort of social investment platform like that?

Given the big gaps between what social enterprises and charities need and what they’re getting, I suggest that there needs to be more opportunities for social sector organisations to make practical suggestions about what they want from the social investment market.

Mason agrees: “I think that’s actually very fair because if you think about when Social Investment Task Force [chaired by Sir Ronald Cohen, which ultimately led to the creation of Big Society Capital] happened, it happened before the crash and actually the world has changed since then:  the concept of finance has changed, I think the concept of business is changing and need has changed.

As Mason leaves BSC to view the changing landscape of UK social investment from a different perspective at Esmée Fairbairn, the team she leaves behind have a big job on their hands.

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Money matters

If you’ve attended a social enterprise event during the last year, you’ll probably be aware that ‘social investment’, which for ages was ‘the next big thing’, has finally become ‘the big thing’… my latest blog post for The Young Foundation – a report from Social Enterprise Yorkshire & The Humber‘s social investment conference, Working Capital.

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