Interview: Nick O’Donohoe
David Ainsworth, Third Sector
The new chief executive of Big Society Capital, a former investment banker, says it will want to promote ‘quasi-equity’ investments and social impact bonds
Nick O’Donohoe, the new chief executive of Big Society Capital, makes it crystal clear that it will not be a soft touch. "We’re not interested in grants or soft loans," he says emphatically. "We are an investment institution."
O’Donohoe was appointed to lead the wholesale lender in July after 28 years as an investment banker. Big Society Capital will invest in other social lenders and support innovative social finance products.
The new organisation is expected to have £400m to spend from dormant bank accounts over the next four years, and another £200m from four high-street banks. It expects to start work next year with about £150m, and O’Donohoe already has clear ideas about how to use it.
He intends to make relatively few loans and concentrate instead on equity and ‘quasi-equity’ investments, where the return is linked to the success of the organisation invested in. "Loan finance is problematic," he says. "If we lent money to organisations that make loans themselves, it would be challenging to do it in a way that allowed us and them to make a return."
Quasi-equity, he says, is a relatively new idea with no clear template, but is useful for investments in charities, which cannot sell shares. "We expect a template to emerge as we make more investments," he says.
Social impact bonds
He also expects the institution to invest extensively in the new social impact bonds. "We expect both to invest in them and to underwrite them," he says. "They’re a very good idea – the sort that doesn’t come around too often. But we feel there’s a lot more work to be done. How you price them correctly, for example, is something that hasn’t been explored at all."
He is also interested in investing in organisations that can prove the value of what they do. "Charities need to get much more sophisticated at measuring their impact," he says. "If you can find ways to focus on outcomes, measure those outcomes and deliver on those outcomes, Big Society Capital can find ways in which to fund you."
O’Donohoe says he first became interested in social investment three years ago as global head of research at JP Morgan, when he volunteered to head the bank’s first social finance group. "Social finance was supposed to take up only 5 or 10 per cent of my time," he says. "It wasn’t supposed to be a major part of my work, but I became passionate about it."
When he decided last year to leave JP Morgan, he was asked to work on Big Society Capital with Sir Ronald Cohen, who originally proposed the concept of a social investment wholesaler. In February, the two were appointed by the Cabinet Office to design a blueprint for the new entity.
"It was supposed to be one day a week, but it became full-time pretty quickly, and then eventually it became clear to me that I wanted this job," O’Donohoe says. "I think there are very few people in banking, at my stage of their career, who would have turned it down."
Big Society Capital will primarily be an investor, but it will support other work to develop the social investment market, he says. "We understand that we’ll be quite influential. We want to think about how social impact will be measured, and we might need to do some research. It may be that tax breaks and regulatory changes will be useful, and we could also work to support those."
As Big Society Capital develops the products it will use, O’Donohoe says, it will also look at the sectors it will be active in and decide what they need. "We’re expecting to concentrate on areas such as housing, education and health," he says. "We also want to look at supporting community ownership. We will have to develop plans for how we’re going to address each sector."
One task is to increase levels of social investment. "Total social investment is very small – somewhere between £150m and £200m a year in the UK," O’Donohoe says. "And 90 per cent of that is being carried out by seven or eight intermediaries. We need to scale up those intermediaries and create more."
A key problem, he says, is that relatively few social enterprises and charities are set up to take on investment. But he believes that if you make the money available people will emerge to make use of it.
"Investment readiness does have to be supported," he says. "There are a number of initiatives to encourage this from several charitable foundations and organisations such as the Big Lottery Fund, Nesta and the Cabinet Office.
"But supply creates demand. Just the fact that we exist is getting people thinking about how they can access the capital. It’s making people more willing to put proposals together. I’ve spent a lot of time talking to people about this, and I’m consistently amazed by the quality of the ideas that I hear."
2005: Global head of research, JP Morgan
2002: Global head of equity research, JP Morgan
2000: Head of cash equities for Europe, Middle East and Africa, JP Morgan
1998: Head of European equity research, JP Morgan
1993: Head of international marketing, Goldman Sachs Asset Management