Social investment: friend or foe? It’s complicated…

Social investment: friend or foe? It’s complicated…
Pioneers Post, By Ellie Ward
16.01.2015

 

Ideologies clashed in a heated debate about social investment held at London’s School for Social Entrepreneurs this week.

 

The Question Time-style event Social investment: friend or foe? provoked passionate discussions about whether the current social investment market is meeting the demands of the social enterprise sector, what the role of the state is and whether the sector’s reputation is under threat from widening definitions.

 

Panellist Les Huckfield, a former Labour MP and current Senscot board member, said: “The main funding need is for loans or some kind of funding of maybe £50k-£100k.

 

“The difficulty is that when those organisations are asking for those sums of money they don’t have any collateral, they don’t have any assets to give security. That’s where the main demand is.”

 

Huckfield cited the Boston Consulting Group and Big Society Capital’s 2013 report The First Billion: A forecast of social investment demand and the G8 Social Impact Investment Taskforce 2014 report which included plans to unleash $1tn in social impact investment and then referring to Big Society Capital’s second annual report, said: “How much social investment did they shift? £13m.

 

“So I have to say to you: where is the success? Where is the rip-roaring take-off?”

 

Some members of the audience were in agreement with the argument that the real needs of the majority of social enterprises in the UK are for smaller loans of between £50k and £250k.

 

Daniel Brewer, founding director of Resonance and panellist, spoke about the potential for the new Social Investment Tax Relief (SITR) introduced in George Osborne’s 2014 Autumn Statement to provide a solution to the challenge facing social enterprises in need of investment but without assets to offer investors.

 

He said: “Frankly, I’m not very keen on tax-driven models but the reason we’re interested in it is because of the demand for sub-£250k ‘cheap’ loans. Social enterprises don’t want to pay more than 3-6% – as if it was a secured loan – but they don’t have any assets to offer.

 

“Investors are saying, ‘are you kidding?’ The risks they have to take to invest in organisations only turning over £50k-£100k deserves a double-digit return at least. And actually the tax relief reconciles that.”

 

In its first SITR deal, food waste charity FareShare South West received £70,000 from a small group of angel investors. “They were able to borrow with no security, no issues with interest only for the first three years at 5% which was at least less than half of what it would have been otherwise because the investors saw that some of their risk was compensated through the tax relief – we’re using tax relief simply to drive down the cost of capital," said Brewer.

 

“I think the vast majority of asset-based finance for this sector will come from individuals lending money to charities at around the 4-7% mark and it will be the most effective development."

 

Role of the state

 

A topic returned to countless times in the discussion was the role of the state and the idea that the coalition government led by David Cameron is pushing the social investment agenda forward in order to increase private investment into public services.

 

Kathy Evans, panellist and CEO of Children England, said: “There are certain public goods – and the one I have spent time on most recently is residential care for children – where there is only one funder. It is the state.

 

“What we’ve ended up with is hedge funders owning clusters of childrens homes because the state has stopped investing. Residential care for children isn’t working right the way down and is near point of collapse. 75% of children’s homes are now private sector, charities are down to 2% from around 70% in 1942 when we were founded.”

 

Evans argued that creating a social investment marketplace in some core public services, also including drug addiction treatment and support for homeless individuals, simply does not work. “It was flawed to think market forces help to get children into the right places where they receive the quality of care they need.

 

“The state has to pay for these services – we collectively have to pay,” she said, while also recognising that there are examples where public sector and private interest mix. For example, nurseries – here there is a natural private market underneath because “if you take the state out completely, there will still be people who can afford to do it who will make private arrangements with other people to look after their children.”

 

Bringing Blair, Brown plus the current leaders of the coalition into the discussion, Huckfield introduced one of the key ideological disputes around social investment. The former New Labour prime ministers and the current coalition’s main aim “is to get private money in various ways into a whole range of third sector organisations to deliver public services.

 

“The way that you gradually withdraw public provision is to replace it by private or third sector provision wherever possible funded by private investment – that’s what social investment is all about,” he said.

 

Outspoken social entrepreneur and Pioneers Post columnist Liam Black responded that while it was “absolutely legitimate to have a discussion about the role of the state,” it was unhealthy to tie all of the social investment discussion around it, “when there are a whole generation of social entrepreneurs who don’t come anywhere near the state in what they do”.

 

Reputation under threat?

 

In the space of just one hour, discussion also turned to another of the biggest questions looming over the social economy right now – the issue of definitions and asset locks. Last year, Pioneers Post spoke to CEO of UnLtd Cliff Prior about ‘profit with purpose’ businesses, a term widely introduced via the G8 Taskforce report.

 

Prior explained that this type of business, while not a social enterprise, will help meet the demands of entrepreneurs who want to start companies limited by shares that have the potential to grow quickly, but that are also driven by social and environmental values.

 

Board member of Senscot – which last year ended its relationship with UnLtd because it claimed public money was being used for private gain – Huckfield said: “We don’t believe organisations ought to do distribution to external investors and there ought to be an asset lock to safeguard what happens to the business in the future.

 

“The reputation of social enterprise out there, if it isn’t already, is going to be absolute rubbish…People will not know what a real social enterprise is.”

 

Self proclaimed ‘friend’ of social investment and founder of Oomph! – a social enterprise which provides inclusive exercise classes for older people – Ben Allen said: “My strong personal belief is that if you want to get great entrepreneurs from great businesses into social enterprise you’ve got to let them raise equity, you’ve got to let them grow, you’ve got to let them take risks and the only way to do this is through risk capital.”

 

Accepting increased complexity

 

Despite the event’s title being Social investment: friend or foe?, it soon became clear that this was not simply an either-or debate – nor will it ever be as the social investment landscape becomes increasingly complex.

 

Highlighting the the different ends of the spectrum of social investment, Black described how in one of the funds he is involved in £25k has basically "been given away" to a community-based project in the north east, while in another £1m has been invested in a tech business that has the potential to be sold to one of the tech giants such as Google in five to 10 years’ time, resulting in a return worth millions that will then be reinvested.

 

“We should be celebrating the diversity there is in the social enterprise movement, given that not so long ago everyone was booing and throwing things at me and other for saying we have to have viable, profitable enterprises.

 

“Whether we like it or not what is emerging is a more diverse, more complicated market,” he concluded.

 

In the final straw poll of the evening – as was the case with the first – the majority of the audience placed themselves in the social investment "friend camp" with a couple of people resigning to the fact "it’s complicated".