The cost of money: Big Society Capital in the hotseat

The cost of money: Big Society Capital in the hotseat
Pioneers Post
31.07.13

Many commentators don’t believe the rhetoric is matched by the reality on the ground. Nick Temple, director of business and enterprise at Social Enterprise UK, says, "for all the excitement surrounding the social investment industry, the jury is still out on whether it can meet the needs of the vast majority of social enterprises in the UK."

Sophistication reaps rewards

For Temple, two issues dominate the discussions of his members: first is the perceived high cost of borrowing from any of the UK’s fledgling social investors and, second, is the slow pace at which they seem to make investment decisions. “It seems to be the case that only the larger of our members are getting the investment they are seeking,” he says. “But the reality is that two thirds of our members are micro in scale and as such are seeking relatively small amounts of capital, usually in the £50k to £100k bracket.” He believes all the political and media attention being given to new social investment vehicles such as Social Investment Bonds are clouding the situation of front line organisations on the ground.

"We were set up under the principle that we will be self sufficient and that we will not make grants.The expectation is that we make a return and at least preserve our capital" – Nick O’ Dononhoe, CEO, Big Society Capital
 
Temple believes a debate is now needed on how to “encourage softer, sometimes riskier” models of investment. He even raised the spectre of legislation based on the US Community Reinvestment Act to compel UK financial service companies to provide softer investment to civil society organisations (CSOs). Temple is not alone in citing the importance of the role that BSC is playing in shaping the market. BSC is a wholesale bank set up to invest in social investment intermediaries, who in turn will invest in frontline social businesses generating both social and financial returns.

BSC was set up with £400m from dormant bank accounts, while up to a further £200m is available under the Merlin Agreement signed by government and the major high street banks to boost lending to business in the downturn. He says: “Given that Big Society Capital’s remit is to grow the social enterprise market, the debate needs to be about how we can make sure the needs of civil society are being met. It appears that most of the products being offered by finance intermediaries are not appropriate for our members."

Temple continues: “In many ways I’m most excited by the development of other types of finance, such as crowd funding not necessarily from the social investment space. It may be that these kinds of products are more appropriate for the social enterprise industry as it actually is today.”

James Perry, CEO of the Panahpur Trust, which has already made joint investments with Big Society Capital, argues more work needs to be done to see what type of investment products work in the market. “Big Society Capital is showing it can meet some demands from CSOs but these have tended to be the most developed and sophisticated outfits,” he says, expanding to Pioneers Post on a paper he wrote reviewing the performance of BSC’s first year. “This is right and proper in one way because BSC is being seen to reward sophistication. But equally it could be argued BSC was set up to develop this market in the first place.”

Big Society Capital on a collision course

But it is Big Society Capital’s remit to grow the social enterprise market that many believe puts it on a collision course with another of its own mandatory responsibilities: to grow a ‘sustainable’ social investment industry that does not rely on continuous top ups from the Treasury coffers. Nick O’Donohoe, CEO of Big Society Capital, says: “The truth is that we were set up under the principle that we will be self sufficient and that we will not make grants. The expectation is that we make a return and at least preserve our capital.”

"Potentially I’d like to see BSC be able to carve out a chunk of capital so they can test out different products on different types of organisations" – James Perry, CEO of Panahpur Trust
 
Perry describes BSC’s situation as one of “damned if I do, damned if I don’t”. “If BSC doesn’t take risks they’ll be accused of failing social enterprise, but if they take on too much risk they’ll be accused by government and potential investors of being a quasi investment outfit – nothing more than child’s play” he says. This is exactly the image the social entrepreneurs must shake if they are to lever in investment from new sources, including the banks and foundations, he says. “If the mandate is not to lose money, then BSC can’t take the risks many will ask of them. Indeed, if BSC fails what signal would this send out to other investors out there?”

This is why Perry believes there is a case for allowing BSC to take controlled risks in the name of research and development. “Potentially I’d like to see BSC be able to carve out a chunk of capital so they can test out different products on different types of organisations. “We all like the strategy of BSC in terms of developing the social investment industry, but no one said it shouldn’t have a remit to pilot different instruments. I am not going to be critical about BSC because I think they are good people and have done a great job with the mandate they have been given, but I do think we need a debate about this.”

But O’Donohoe does not believe his organisation can take this step without agreement from the powers above. “I see what James [Perry] is getting at,” he says. “But this would require the government to relax the principle of sustainability. What we’re talking about here is a pot of money where we’re permitted to make a negative loss. We could argue for such a tranche of money, but not as we’re currently constituted.” He adds: “I do think, by the way, that we are taking more risks than most other financial institutions.”