Is social investment bad for the charity sector?

Is social investment bad for the charity sector?
Civil Society Finance, By David Ainsworth
27.10.14                                  

 

In recent months senior figures in the world of charity have questioned whether social investment is good for the sector. David Ainsworth examines why this new field is facing a backlash.

 

Recently a lot of people in the charity sector have said they don’t like social investment. Kathy Evans, chief executive of Children England, gave the latest and perhaps the strongest critique last week, saying it was “absolutely the wrong thing” for charities. But she’s far from alone. A lot of senior people doubt its practicality, its morality, and its effectiveness.

 

There’s clearly quite a broad base of people who dislike the whole idea and feel the sector would be better off without it.
Even among those who promote it, there is a move to say that social investment is very important but that it’s “not for everybody”. Even its backers feel that this is an idea with a PR problem, as laid out last month by Clare Pelham, chief executive of Leonard Cheshire, who said many people felt "alienated" by the idea.

 

So can we really say social investment is a good thing or a bad thing? If it is a useful tool, who is it useful for? And why, with so many people trying so hard to sell it to the sector, does social investment have such an image problem?

 

I think we can group the objections to social finance into four main categories.

 

1.    It won’t work
This argument basically says that the charity sector isn’t suitable for debt, or that there is no need for the sector to borrow. Those who advocate this argument point out that charities are mostly funded hand-to-mouth, and they don’t have the income stream to pay cash back.

 

Where, they ask, are all these charities ready to borrow £100,000 and provide “mid single-digit returns”?

 

Social finance people have started to respond to this by saying it isn’t for everyone. But that yields another obvious question. Who is it for?
I think social investment is actually suitable for a fairly select group.

 

Apparently NPC runs courses on social finance which they introduce by saying “The first thing about social finance is you have to pay it back”; at one such course two people at the back heard that and walked out.

 

So let’s start there. The first thing about social finance is you have to pay it back. If you don’t have a way to pay money back, social finance is not for you.

 

The second thing is that you need to fund a big, one-off project, rather than day-to-day activity. And the third thing is you have to need quite a lot of money, or it just gets too expensive. Nineteen in 20 charities are just too small.

 

There are three principal things you might want social finance for:

 

1.    Buying land, or a building
2.    Starting or growing a business idea
3.    Delivering a contract, particularly one where you don’t get paid for a while

 

And actually, I might be able to simplify this even further. Social finance is probably only useful if you want to grow.

 

If I look at some of the big advocates – Dai Powell of HCT Group, Richard Hawkes of Scope, and Alastair Graham of Golden Lane Housing – you see exactly this type of organisation – medium-sized or large charities which want to grow.

 

It is fair to say that the charity legal model isn’t particularly well-suited to taking on investment. Because charities can’t sell shares, they’re limited to debt. This is a major problem for charities that want to use social finance, and finding a way around it is probably key if social finance is going to work well.

 

All of this leads to another question. Why not just get a grant? Why not fundraise?

 

Often, to be honest, you can. In which case social finance is a big fat waste of time. Common sense would suggest that if you can get someone to give you money for free, there’s not a lot of point getting someone else to lend it to you.

 

But this isn’t always true. Maybe you can’t raise enough. Or maybe you can, but it would just be very slow. Maybe it makes more sense to borrow the money and get going today.

 

Also, grant funding in particular tends to come with a lot of restrictions about what you can do with it. Social finance sometimes has more freedom. It requires only that you pay the cash back. What you do in the meantime is your business.

 

2.    It’s wrong to take on debt

 

A lot of people have put forward the argument that debt is a bad thing for charities to take on. Debt crashed the UK economy, and so people shouldn’t take on debt. This is the only debt-free sector in the country, and we should stay that way.

 

It’s a bit simplistic to say debt in and of itself is bad. In our personal lives, most of us will take on debt many times – to pay for education, to buy a car, to buy a house. All of those are probably sensible decisions. And while debt did cause huge problems for the economy, it also fuelled the boom before the bust.

 

The problem comes when you take on debt without any expectation that it will help you generate more cash in the future – either permanently scraping along on the bottom of your overdraft, like me in my early twenties, or issuing a trillion pounds of gilts, like the government in the past few years. Both of those decisions were dumb.

 

Debt is a tool, and you need to use it right.

 

But there’s another argument which has more traction. Those who put this forward say that debt forces a change in culture in the organisation which takes it on. If you owe money to someone, you end up dancing to their tune, not your own.

 

This is a very real worry. I suspect that a lot of people in the sector are worried already about being beholden to funders, rather than beneficiaries. You can end up as a pseudo-commercial entity, just one which doesn’t pay taxes.

 

This isn’t just limited to social finance, of course. The same argument applies to contracts, and even to grants from many funders. Even charities funded by public donations can find themselves pleasing those donors, not their beneficiaries.

 

There’s no easy answer here. Those who support social finance say they have succeeded in taking on funding without mission drift, and I can’t see why it isn’t possible. But it’s certainly something to watch.

 

3.    Social investors are tossers

 

I wonder sometimes whether this is actually charity workers’ single largest objection to social finance. There’s a perception that social investors are rich, arrogant and ignorant, and that they have wandered into the charity sector, ready to assert a different way of doing things, without listening to those who’ve worked at charities for 30 years.

 

Liam Black, the social entrepreneur, wrote about this at length in a blog a while ago:

 

 “The UK social investment space is messy, emergent, contested and contradictory.  There has been too much social investment sizzle and nowhere near enough social enterprise sausage. And there have been too many eejits from the City sniffing around in their pinstripes displaying an arrogant stupidity which makes me ache to slap their smug chops.”

 

There’s a bit of that going on. There’s also a massive language barrier between the City and the sector, which I think has led to some hideous miscommunications.

 

And then, it’s also easy to suspect that this is just the latest tentacle of the vampire squid, being thrust into the sector to see if it smells of money. This isn’t much of a worry to me. Charities just aren’t rich enough to interest Goldman Sachs.

 

Actually, I kind of think most social investors are good people who want to help. Most of them have given up lucrative careers to work in the sector. But of course it’s hard to make much headway with that argument when they still earn loads more than most people in the sector.

 

4.    There’s too much hype

 

It’s clear this is true. Social investment has been sold as a panacea when it’s no such thing. The amount of time spent talking about it, versus the amount of time spent doing it, is quite extraordinary.

 

I am not helping in this regard, of course, since I am talking about it too. But it’s the government who have been most unhelpful. A lot of people in the public sector who don’t understand social investment have made a lot of hyperbolic pronouncements about it, and perhaps understandably, it’s really got on the sector’s wick.

 

But just because it’s overpromised doesn’t mean there’s nothing there at all.

 

Nick Temple, business director of Social Enterprise UK, pointed the other day to this graph, known as the hype curve. I think it illustrates where we are quite nicely, so I’m going to nick it off him.

 

At the moment we’re towards the bottom of the trough of disillusionment, I’d imagine. Roll on the plateau of productivity.

 

In conclusion…

 

I think there’s basically something good here. In the right hands, social investment is a good tool, and people are beginning to work out what it is good for.

 

I suspect there will always be a lot of people in the sector who really don’t like it – the same people who really don’t like the sector delivering government contracts.

 

In the meantime, I think the social investment industry needs to think about its communications strategy. Social lenders needs to articulate which organisations they’re useful for, and explain why their product is good for beneficiaries.

 

It would be perfectly possible for social lenders to just talk to the people who do want the money and ignore everyone else, but Nick O’Donohoe, chief executive of Big Society Capital, said a couple of weeks ago that this wasn’t the right way to go. I think he’s right.
And anyway, I think social finance has strong potential answers to the objections I’ve highlighted. I’m just not sure they’ve always been strongly advocated.

 

Then there’s the problem of what social investment actually is. I haven’t talked much in this piece about the fact that social investment isn’t really one thing, it’s many. But this needs to be better explained. It isn’t just social impact bonds, it’s lots of things, all suitable for different charities. And it’s mostly just loans.

 

Some ideas will work. Some won’t get much traction. I’d love to talk about them all here, but that’s a whole other blog.
There also needs to be cultural change from within the sector, too. I think social investors have been surprised by how slow charities have been to come forward with investment propositions, because normally if you have money available people queue up on your doorstep.

 

But venture capital funding has never been tried before in a sector where cash is frequently given away for nothing. Also, it’s never been tried in a sector where an investor can’t take shares in the thing they’re investing in. So it’s not surprising it’s running into difficulties.
I suspect the sector’s caution is largely down to trustees, who are understandably and rightly inclined not to lose the charity’s money. In most cases even entrepreneurs and financiers are very risk-averse when they sit on charity boards, even if with their own businesses they move fast and grow fast. And there are many more charities than businesses which just don’t want to grow at all. The motivation simply doesn’t exist.

 

The social finance sector can’t lecture charities on that reticence. It can’t tell them they’re stupid for not taking on new ideas. It needs to persuade people that it has something to offer.

 

In the end, there will be self-selection. The charities which want to grow will try to grow, and social finance will probably help them. As it becomes obvious that borrowing to grow is something that works, more will take the plunge.