The end of the beginning

The end of the beginning
Beanbags and Bullsh!t, By David Floyd

“The sun always shines on Big Society Capital & sometimes out of it” – so said Minister for Civil Society, Nick Hurd, addressing the sharp suited changemakers escaping the summer rain to hear the uplifting speeches (followed by fine wine and disruptively innovative canapés) at the 2nd birthday party for popular social investment wholesale finance institution, Big Society Capital (BSC), earlier this month.

It wasn’t an evening of contemplative humility. While BSC chief executive, Nick O’Donohoe, did draw attention to the challenges the organisation has faced getting money to ‘the frontline’ and acknowledged concerns in the social sectors about the cost of BSC’s money, the overall thrust of the presentations was celebratory.

It’s not necessarily wrong for BSC to celebrate their achievements and many of the new Social Investment Finance Intermediaries, supported in the last year, such as DERiC, seem good but clearly things aren’t going quite as well as some social investment enthusiasts once expected.

Whatever you do, don’t look at page 39

The key problem (possibly missed by those who haven’t yet made it to page 39 of their annual report) is that while BSC has made £149.1m in commitments to intermediaries, the total value of investments signed is £47.9 million and the total value of investments drawn down (by the end of 2013) is just £13.1million.

Nick O’Donohoe’s primary explanation for this situation, both at last week’s party and in this interview, is that: “a lot of what we do is making commitments to organisations to invest over say a four-year period so, if you take a £150million and divide by four, you would expect £35-£40million a year, based on just that level of investing, to go out. It has been less than that but not to the extent where we think there’s serious issues.”

£13.1 million does seem quite a lot less than £35million and while O’Donohoe may be right that it’s too early to say whether there are serious issues, ‘not getting the money’ out is an issue that could soon become serious.

The current level of BSC investment reaching frontline charities and social enterprises is less than the annual grant spend of a medium-sized grant funding organisation such as The Tudor Trust, which awarded grants worth £17,460,380 in 2012-13.

Over the same period, Big Lottery Fund awarded grants worth £778 million – meaning that Big Lottery currently gives out more grant money in the average week than BSC invests in a year.

Whether or not you think outgoing BSC chair, Sir Ronald Cohen, is right in principle to say that philanthropy ‘is in a sorry state’, social investment seems unlikely to replace it as a major source of finance for social activity anytime soon.

If those stats are sobering enough to keep attendees of the most lavishly corporately-sponsored social investment receptions walking in a straight line, the comparison between ‘social investment’ and ‘investment in social organisations’ is a full on detox.

The latest NCVO civil society almanac reports that the voluntary sector currently owes around £4billion in loans. So the entire ‘social investment market’, currently estimated at £202million, amounts to roughly 5% of the total market for investment in voluntary sector organisations, with BSC’s £13.1 worth of investments drawn down by frontline charities and social enterprises equal to 0.3%*.

What do you mean ‘we have to start from here’?

That doesn’t mean that BSC has failed (or is failing) but it does mean that the organisation’s mission ‘To promote and develop the social investment market place in the United Kingdom’ is a more complicated one than some advocates of social investment initially believed and, in the case of politicians and some umbrella leaders, led others to believe.

The ‘social investment market’ that BSC was set up to develop is something different to both grant income, and to high street banks providing mortgages to charities and social enterprises that can afford them (on the same terms they provide mortgages to other organisations that can afford them).

BSC is aiming to build a market for finance provide by investors who (unlike grant funders) do want the money back but, unlike high street banks, are motivated to invest by the social impact of the organisations they’re investing in. Unfortunately, there’s no automatic link between investors’ motivations and the relevance of intermediaries’ products to charities and social enterprises.

What two years of BSC tells us it that there aren’t currently very many charities and social enterprises in the UK who are already ready, willing and able to take on the money BSC-backed intermediaries are offering on the terms that those intermediaries are currently ready, willing and able to offer it to them.

The average annual turnover for a social enterprise is £187,000. The average UK social investment is £264,000 and most of these investments are secured loans. If you’re an average-sized charity or social enterprise that doesn’t own a building, social investment isn’t much use to you.

This is not a new revelation, either in general or on this blog, but it’s worth restating to make clear that the situation has neither changed nor been meaningfully addressed by anyone in the social investment market.

Help, how are we ever going to invest any money in all these tiny organisations and how can we stop them hating us?

BSC’s new three-year strategy, partly outlined by O’Donohoe at the birthday party and published on May 2nd is a potentially useful first step towards addressing that.

It outlines four key elements of their vision for the next three years (BSC’s bolding):

Improving access to finance for small and medium sized charities and social enterprises
Helping the most innovative approaches to tackling social problems grow and replicate
Building mass participation in social investment
Bringing far greater scale in the financing of social issues
While they’ve never been actively opposed to any of these things, the decision to highlight and focus on the the first and third of these aims (in particular) offers hopes of a gradual shift away from the current ‘build it and they will come‘.

‘Improving access’ – is really a euphemism for ‘help, how are we ever going to invest any money in all these tiny organisations and how can we stop them hating us?’

One way to tackle the problem is subsidy. The only significant piece of research into demand for social investment from charities and social enterprises, the Big Lottery-funded ‘Investment Readiness in the UK‘, reported that  43% were not interested in pursuing social investment at all but, of those who were interested, 49% were hoping to secure a ‘mixed-funding product’ – an investment that’s part-grant, part-loan.

On that basis, it’s good that BSC are suggesting: ‘blending our capital with grant capital to improve the supply of products for investments of less than £150,000‘* (and it’s also good that they’re ‘looking at additional regionally-focused funds, to build on our commitments in the North-East of England and Scotland‘).

The big gap in the strategy, though, is the lack of commitment to supporting new financial products that actually meet the needs of charities and social enterprises. Nick O’Donohoe’s point, (also made both at the birthday party and in this interview), that investments of less than £250,000 are ‘just not possible’ was a good starting point for understanding the challenge but it shouldn’t be the end of the discussion.

While there’s definitely an important (ongoing) role for subsidy in the social investment market, intermediaries can’t (or, at least, shouldn’t) be subsidised to give up on trying to find sustainable ways of meeting the needs of the majority of their customers. It isn’t impossible to lend less than £250,000 on a commercial basis. As an individual person with no assets, I have borrowed more than £10,000 but a lot less than £250,000 from a commercial lender and invested it in my social enterprise. It must be possible to develop working models for smallscale social investment.

One of the many good points in Dan Gregory’s recent blog on ‘How to make social investment more social – and financially viable’ is that: “Zopa, Kiva and crowdfunding models which enable disintermediation – cutting out the middle man – can take costs out of the system by introducing investors more directly to investees. No wonder our models can’t stack up if there’s layers of intermediaries to maintain – let’s try new models which reconnect investors with investees.“

Whether or not that specific suggestion can work, there’s a desperate need for some properly funded R&D into new products that can meet needs – alongside some high risk investments into innovative intermediaries prepared challenge the idea that investments under £250,000 can’t work.

It would be really useful to know whether a fund making unsecured loans of up to £30,000 that just cut out most due diligence processes (beyond checking that an organisation is genuine) would necessarily lose more money than it costs to grant-fund existing intermediaries to run uneconomic due diligence processes under existing models. Is that ‘Action Research’ or a really risky investment? Maybe it’s a pilot project?

Here comes everybody

More hopeful (and so far more successful) that social investment through intermediaries, is social investment of relatively small amount of money by people rather than intermediaries. The section of the BSC strategy on ‘mass participation’ seems like a half decent starting point for positive action.

It mentions likely support for ‘retail platforms for charities and social enterprises wanting to issue their own bonds’, ‘looking at ways of accelerating the community share investment market’ while adding that: “Other ideas we want to explore include how we might support crowdfunding platforms that channel funding to social organisations.“

BSC can and should support the development of platforms – and it will be interesting to hear more about what they’re going to do to ensure non-High Net Worth Individuals find out about and make use of Social Investment Tax Relief – but ultimately there’s only so much a relatively small national wholesale finance organisation can do to stimulate mass participation.

The big question in terms of mass participation is partly whether investing can be made easier but primarily whether there’s enough people who want to invest in charities and social enterprises. There are thousands but are there millions?

So, what happens now?

For BSC and the intermediary-based social investment market things will definitely get better than they are now. There are some charities and social enterprises who are ready and able to take on large investments or, based on the investment readiness support available, will reach that stage over the next year.

Charities and social enterprises will draw down more than £13.1 million of BSC’s money in 2014 and lots of social good will be done as a result. The danger, though, is that the plateau for a social investment market based on the kinds of investments currently on offer may not be very far away.

It’s not too late to build a social investment market that’s relevant to more charities and social enterprises but there’s lots of work to be done to found out what’s needed and how to provide it.

 *The NCVO and social investment market figures are from different years, so it’s possible that BSC has increased the size of the overall market for investment in social organisations by 0.3%.