Tag Archives: social finance

The rise of European social investment

As in the UK, the needs and expectations of German social investors and social enterprises are very different” – my latest feature for The Guardian‘s Social Enterprise Network looks at the emergence of social investment in Germany.

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You’re gonna have to serve somebody

Can Cook director, Robbie Davison, quotes Bob Dylan in his timely report, Does Social Finance Understand Social Need, published last week. The report gives a practitioner’s view of the current state of the market for specialist social finance (also known as impact investment and social investment).

2012 was a strange year for the social investment sector. On the one hand, there was the triumphant unveiling of Big Society Capital (BSC). At the launch event for Big Society Capital, the prime minister, David Cameron explained that: “While direct grants from government might be going down, the money available to charities and social enterprises is actually going up.  We are moving from the old stop-start hand-to-mouth way the social sector was funded, towards something new, and, I believe, very exciting.

On the other hand there was the growing atmosphere of discontent and anger within the social enterprise and voluntary sectors about the direction that this bigger, shinier social investment market appeared to be taking.

Davison explains part of the problem in the background section of his report: “The UK Voluntary and Community Sector (VCS) will lose around £911million in public funding a year by 2015-16. Cumulatively, the sector stands to lose £2.8billion over the spending review period (2011- 2016). Current estimates reckon that there will be a replacement investment of £500m and this investment will be almost entirely loans.

Social investment organisations as a whole, and Big Society Capital in particular, have struggled to counter repeated attempts from government ministers, from the Prime Minister downwards, to imply that a bigger social investment market will directly ameliorate the effects of massive public sector cuts.

While these communications failures may be relatively easy to address, the key message of Davison’s report is that it’s the overall approach of the government-backed social investment sector, led by Big Society Capital, which is not fit for purpose.

For Davison, a social investment (or impact investment) market should be about: “Stepping back, then stepping in where there is societal market failure. Impact investment should be looking for solutions that overcome the deficiencies of the norm and take on the challenge of supporting services that wish to expand by providing solutions to societal need.

He makes the distinction between ‘buyers’ – investors primarily looking for an opportunity to buy an investment that will generate a return – and ‘builders’ explaining that: “The term ‘builder’ refers to a process of investment that is knowledgeable in its understanding of the problems and is patient in the reclaim of any investment. As builders, investors acknowledge that building takes time and is an episodic process that will understandably feature peaks and troughs in performance. During troughs, builder investors work with the investee to design the appropriate programme of support to enable their enterprise to cope and, later, prosper.

He adds: “Crucially, these types of investors are aware of the right time to dismantle their growth capital ‘scaffolding’ in order to demonstrate that they have helped build an enterprise that can stand on its own. In a market focused on tackling need, these lenders are the real change-makers. Right now, there is a chronic shortage of builder investors.

From his perspective as an experienced social entrepreneur who has received social investment he explains: “Today, the narrative is one of ‘social investment’ which looks top-down from the point of the investor, wherein, the debate has shifted from a focus on market failure addressing unmet need, to a leap of faith in social investment/finance becoming a good thing per se.

Despite the success of programmes such as Unltd’s Big Venture Challenge, in demonstrating a positive role for grants in de-risking private investment in social enterprises, there is a growing orthodoxy amongst some in the social investment sector that grants are bad because they ‘distort the market’ for investment.

This position appears to ignore the question of whether a market that fails to respond to social need is really best left undistorted but Davison’s report offers a pragmatic explanation for why grants are an important part of the social investment package: “For a multitude of reasons, larger organisations trading within the sector often have access to income streams that are out of reach to those smaller enterprises servicing the lives of the poor.

He adds: “In the face of growing need, it is therefore appropriate for these particular enterprises to fight for the continued injection of grant as both necessary capital for start-up and growth.

In his 2011 e-book, Betterness: Economics for Humans, the author and economist, Umair Haque, describes some of the problems of the global financial sector: “The role of the financial sector is to allocate the many kinds of capital, not to produce them. The producers of capital are fighting tooth and nail for a smaller and smaller share of the pie.“*

He continues: “Such an economy is unsustainable in the deepest sense of the word: the incentives to produce capital are drying up, and that is why little or nothing is being added back to the buckets. Today’s economy rewards people for merely allocating existing capital. That’s not a recipe for prosperity; it’s simply a game of musical chairs.

The key point of investment is what happens as a result of that investment (the impact). That’s not just true for social enterprises and charities, and specialist social investment, it’s equally important in the world of conventional commercial business.

While Haque is not commenting specifically on the market for social investment, and clearly the UK’s social investment has the potential to develop into a positive alternative to the situation he describes, there’s a big danger that we could end up with a social investment market that simply transfers the failed, rent-seeking behaviour of commercial financial markets into the social sector.

If conventional financial markets have failed/are failing because they’ve become focused on rewarding those who slice and dice capital rather than produce it, the last thing we want is a social investment equivalent – delivering investment to the low-risk organisations best able to interact with investors, while failing to develop pragmatic and/or innovative models for investing in organisations tackling the greatest social needs.

The answer to these challenges is clearly not to reject idea of social investment. In a thoughtful post on the Third Sector website earlier this month, Social Enterprise UK‘s Nick Temple recognises that social investment: “is officially taking on Marmite status: you either believe it will revolutionise the social sector (and the investment industry) by leveraging billions of pounds, or you think it is the worst and most inappropriate thing since Rylan on The X Factor.”

He suggests that: “Among all the talk of investment-readiness (a leading contender for the most over-used term of the year) and investment returns, we should be thinking much more about investment relevance: how social finance fits into the current context and situation of the third sector and, in turn, its relevance to each individual organisation.

In the recommendations at the end of his report, Davison calls for the creation of a Compact/Alliance of Big Society Capital, social investors and social enterprise practitioners. It’s a conversation worth starting as soon as possible.

*Words in bold are italicised in the original document but bolded here due to my convention of italicising all quotes.


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Toynbee savages Social Impact Bonds

Social Impact Bonds are, by some distance, the most hyped innovation in a sector – social enterprise finance – that is currently rivaled in the spin versus substance stakes only by reality TV. Based on expectations raised in recent years, anyone who attends both social enterprise conferences and football matches would probably be unsurprised to see their team’s physio running on to the pitch and massaging their star striker’s injured calf with a social impact bond in place of the famous magic sponge.

With that in mind, it was probably high time that Social Impact Bonds were on the receiving end of Polly Toynbee’s moral outrage. It’s a shame that Toynbee’s critique is topped and tailed with a jibe at Bond advocate Sir Ronald Cohen over his attitude to tax. While this provides a neat hook for the article, there’s no reason in principle why Sir Ronald shouldn’t be entitled to campaign for or against rich people paying higher taxes (or, as seems to be the case, not be publicly committed either way) and also to seek to use his expertise to tackle social problems. These are separate activities which should be judged on their own merits.

Where Toynbee is on target is with her questions about the workings of Bonds themselves. These include the issue of whether it’s actually possible to measure the impact of particular social interventions in a way that can be accurately monetized. This point has already been raised by sceptical voices within the sector, such as Senscot’s Laurence DeMarco. Many of us who believe that effective measurement may be possible in specific cases, such as the current pilot project to tackle re-offending at Peterborough Prison, will sympathise with Toynbee’s reflection on possible wider application: “This small scheme with a simple target – prisoners reoffending less – raised those dilemmas. Imagine the headache of drawing up watertight contracts that take a “problem family”, evaluate their addictions, mental health, education, crime, truancy or unemployment, then put a price on their heads, returning to measure the cash value of any improvements a few years later.”

Equally important, though, is the question of whether, even Social Impact Bonds did succeed on their own terms, they would be the best way of raising money to deliver positive social change. Toynbee’s verdict is an damning, unequivocal ‘no’. The Bonds will not be good value for public money: “Here is an extraordinarily cumbersome way of creating a PFI, worse than those recently castigated by the Treasury select committee. All this springs from a belief that the private sector is always more efficient, whatever its mind-boggling extra costs. After all, the government can always borrow at 1% less than the private sector.”

And, if impacts aren’t delivered, the state is still bound to pick up the tab: “Sir Ronald and the government say these are suitable investments for pension funds, ISAs and even junior ISAs where families save for their children. In other words, they are rock-solid safe. That means, as with previous employment schemes and the current work programme, if targets are missed you can bet the state will pay out anyway. So the risk will not be transferred from taxpayer to investor, but the state is borrowing expensive money to pay back later come what may. The public accounts committee will need a beady eye on money wasted on a fancy financial vehicle. If it looks too good to be true, it probably is.”

For Toynbee, “It’s a novel solution to extreme inequality, inviting the rich to make money out of the poor.” While many in the social enterprise movement will understand where she’s coming from, even if her assertion were true, it would be a mistake to reject Social Impact Bonds solely on that basis. It’s pointless and counter-productive to object to practical solutions to social problems, that could transform the lives of some poorer people, on the basis that some richer people (and possibly some pension funds holding the pensions of many moderately off people) will get a financial return.

Where Toynbee is right, though, is in challenging the myth that money raised through Social Impact Bonds is new money coming into the social sector. The reality is that Bonds, as currently proposed, are an advance on government money to be paid at a later date. As yet, it’s been a challenge to get anyone other grantmaking trusts to put money into (relatively safe) pilot Bonds. For Bonds to even have a measurable claim to be increasing the available resources for social change we would need to reach the point where individuals and financial organisations from outside the social sector were prepared to put money into Bonds with the genuine risk that they wouldn’t get a return. At the point, it would be time to start the discussion about whether Bonds are better vehicle for financing social change than government borrowing.


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Bond issues

Big news in the world of social investment with the announcement yesterday of a £11.25 million investment of Big Lottery funds in Social Impact Bonds. The Social Impact Bond (SIB), launched in March by social investment organisation, Social Finance, is a new kind of financial instrument whereby investors in the Bond receive a share of a the long-term savings made by the government as a result of the work funded by their investment.

The first ever SIB will fund a pilot project at Peterborough Prison where social sector organisations including Ormiston Trust, YMCA and St Giles Trust will provide intensive support to 3000 short-term prisoners to help them resettle into the community thereby reducing re-offending rates.

The rational is that keeping people in prison very expensive (it costs an average of £50,000 a year) and most (60%) of short term prisoners go on to re-offend in the year after their release. If the SIB funds work that reduces re-offending and saves the government lots of money over a six-year period, the investors should be entitled to a return on their investment which reflects the money that they’ve saved through their intervention.

£6.25 million of Big Lottery’s total SIB investment will go towards funding the Peterborough project with other investors in the first SIB including a mini-Who’s Who of top charitable trusts: Barrow Cadbury Charitable Trust, Friends Provident Foundation, The Henry Smith Charity, Johansson Family Foundation, LankellyChase Foundation, The Monument Trust, Panahpur Charitable Trust, Paul Hamlyn Foundation and the Tudor Trust.

This stellar line-up clearly reflects a high level of excitement in the grant-funding sector about the potential for SIBs, along with a credible desire from these trusts to put some cash into testing a new model. That’s a positive thing in itself, what’s currently less clear is the SIB’s potential to bring in new money from outside the current social investment sector. The launch press release quotes Rob Owen, Chief Executive of St Giles Trust explaining that:

“The Social Impact Bond represents the start of a funding revolution for organisations that specialise in preventative work. By unlocking future savings and capturing their value, the SiB allows access to capital from a wide range of new investors. This means that charities, such as St Giles Trust, can deliver their life changing services over a larger scale, with greater impact.”

The difficulty with this statement is that the investors in the first SIB aren’t ‘a wide range of new investors’, they’re an impressive list of trusts who already give out grants to pay for positive social outcomes who are using the SIB instrument to provide money in a slightly different way.

Is this because no investors without an existing grant-giving remit were asked to invest in the pilot or because they were asked but weren’t interested?

Either way, that leaves two big questions which the Peterborough pilot and further Big Lottery funded work will need to answer. The first is whether the SIB model works in terms of delivering money-saving social incomes – given the the amount of cashing going into one project, we’ve got to assume that the one project concerned is a reasonably decent bet in those terms – and the second is whether, if it does work and the Peterborough investors get a decent return, that will be enough encourage other investors (banks and wealthy individuals) to invest in future SIBs.


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