“If not you, then who?” – Big Society Capital board urged to shift course

by Helen Heap – Pioneers’ Post, 26th November 2019

Why isn’t there much more patient risk capital available to the rest of the social investment market – when that was considered the most appropriate funding method for the main wholesaler? A social investor picks up on the ongoing debate about Big Society Capital, urging the wholesaler’s board to take a more creative approach and make more use of its strong balance sheet if they want the organisation to fulfil its mandate.

In his recent article, Is Big Society Capital a big problem?, Richard Litchfield of Eastside Primetimers wrote about the need to open up the debate about the type of capital required and how it could be supplied more cheaply. He argued: “Without a fundamental change in approach, I fear that Big Society Capital will fail to live up to its mission of transforming social investment.” As someone who has been involved in the UK social investment market since 2011, both as an investor and a researcher, I wholeheartedly agree. Now, I think it’s time for the boards of both BSC and the Big Society Trust to reconsider their strategy for the UK social investment market.

I am a member of the investment committee for a social investor delivering the Growth Fund, a blend of grant and loan money provided by Access – The Foundation for Social Investment to charities and social enterprises. In that role I have seen first-hand both the benefits and the frustrations that come with this type of finance. There is no doubt that the Growth Fund, and others like it, are a necessary part of the social investment landscape, providing much needed working capital and short-term funding for organisations delivering substantial social impact. But the average interest rate of 7.3%, as Richard pointed out, means that the Growth Fund is not an affordable option for many.

In his response piece, Big Society Capital CEO Cliff Prior argued that the organisation was ‘part of a big solution’. That article focused exclusively on loans but I believe we need to widen the debate to include other types of capital that also form part of a healthy, diverse social investment market. Specifically, equity – patient risk capital which can be used to build and develop an organisation so that it can sustain itself in the future.

Probably the best example of a social organisation which is funded using patient risk capital is Big Society Capital itself

It is often argued that social organisations are not able to fund themselves using equity because their governance structures do not permit them to issue shares. However, there is growing evidence that where there is a will, there is a way. Connect Fund’s investment in SinglifySIS Ventures’ investment in Talking Medicines and Big Society Capital’s own stakes in Capacity The Public Services Lab and Spacehive are all examples where social organisations have been able to raise equity capital from investors. In Liverpool, I worked with two other social investors to provide a form of socially-motivated patient equity, that we call Builder Capital, to fund Can Cook, a social enterprise tackling food poverty. Overseas, US social enterprise Revolution Foods has benefited from substantial amounts of equity funding to support its fast-growing healthy school meals business.

In fact, probably the best example of a social organisation which is funded using patient risk capital is Big Society Capital itself. In the seven years since its formation, BSC has issued £581.3m of shares. £200m of these are owned by the four “Merlin” banks (the four big high street banks that agreed to provide capital to BSC as part of a number of measures following the financial crisis). The remaining £381.3m are owned by The Big Society Trust, which has paid for its shares using receipts from Reclaim Fund Ltd (money held in dormant bank and building society accounts). Having such a strong equity base has enabled BSC to easily absorb the cumulative loss of £23.4m which it has generated since it started trading in 2012. That is precisely what equity capital is designed to do – providing the fuel to support the development of the organisation and a buffer to handle the losses which are generated along the way.

In his Pioneers Post article of 18 October, Cliff Prior highlighted BSC’s role as co-investor and argued that loans need to be priced in line with those of other investors, in order to avoid “crowding out”. This, he said, limits the organisation’s scope for offering lower interest rates. That may well be the case, but isn’t the point of social investment to facilitate innovation in promising new solutions to longstanding, difficult problems? Given the scale of the issues to be tackled, we’re not going to achieve that with available capital of just £3.5bn and a market growing at only 30% year on year. We need a more creative approach from the main wholesaler of social investment capital if we are to “build and sustain a successful social investment market” (BSC’s strategic goal number 4).

With such a strong balance sheet, it can be argued that Big Society Capital should be taking much more risk than is currently the case. Its latest financial statements show that in December 2018 40% of the portfolio was invested in financial instruments other than loans with 12% (£70m) in Ventures and Equity. While a useful contribution, the Ventures and Equity portion is miniscule in relation to the need – as with BSC, many social organisations seek patient risk capital which enables them to focus on business development and revenue growth without the need for constant fundraising activities. £70m is also a disappointingly small amount given BSC’s unique position as the recipient of over half a billion pounds of open-ended (no time limit) equity. With £548m of the original £581m already invested or committed, I hope that it is not too late for the wholesaler to use most of their remaining funds to significantly increase the availability of patient risk capital to the social investment market.  

The Ventures and Equity portion is miniscule in relation to the need

Another suggestion is to follow the lead of Bridges Fund Management and the Omidyar Network in thinking more creatively about the risk part of the risk/return equation. Asking “Under what conditions should an investor accept a risk-adjusted below-market return in exchange for an opportunity to achieve social impact?” is likely to yield a wider range of funding solutions than the current approach. A thriving social investment market requires a rich diversity of different types of capital and risk mitigation methods – the right money, on the right terms, at the right time.

As things stand, I’m afraid that I agree that Big Society Capital is part of the problem, not the solution. Why is there not substantially more patient risk capital available to the rest of the social investment market – when that was considered the most appropriate funding method for the main wholesaler?

It doesn’t have to be this way. BSC’s balance sheet strength and talented staff team mean that it is uniquely placed to come up with innovative and effective ways to support and fund social organisations.  The directors of Big Society Capital and The Big Society Trust have the opportunity and responsibility to do something meaningful for the benefit of society with the capital they have been entrusted to distribute. If not them, who? If not now, when?

EDITOR’S NOTE: This article is an amended version of one originally published on 18 November. The earlier article included some inaccuracies in relation to BSC’s capital position, as shown in regulatory statements, and also incorrectly gave the impression that BSC only provides loans. While BSC’s Pillar 3 disclosures refer to “Surplus – Own funds less Pillar I requirement” of £492,897, it is not the case that this “means that BSC could grow their social investment portfolio five-fold and still have surplus capital” as stated in the original article. BSC’s website and financial statements provide detailed analysis of their social investment portfolio which clearly show that loans form only part of the total – around £200m (40%) are invested in other financial instruments including social impact bonds, property and equity. The author and Pioneers Post are happy to correct these inaccuracies.