Social finance industry has got the wrong money

First off let me clarify some of the terms I will use in this article...

1. Social Finance: This is what we have now in the UK – sometimes confusingly called social investment. The current social finance model is almost entirely made up of short term debt offered with immediately repayable interest rates of 6-12%
2. Social Investment: This is the place the money should be if social organisations are to be given the capacity they need to positively re-shape poverty. Investment of this kind will typically be equity or other forms of patient capital. This form of investment is very rare in the current social money marketplace. Finance acts as little more than short term cash flow, allowing organisations to function rather than grow; investment provides long term capital to support innovation, scale and increased social impact.

I write this article as a social enterprise practitioner with 25 years’ experience of setting up, leading and advising social enterprises as they trade for social impact. What you are about to read is not a ‘leftie’ rant, as one social finance practitioner called an earlier paper I wrote; but information and views I can share after researching, sourcing, managing and writing about social finance for the past seven years.

It’s been a very interesting journey wherein only one thing has stayed constant – the money within the social finance marketplace is still the wrong money to tackle social need. At Emerge, I will talk about why this is a problem for anyone who cares about social justice in the UK. I will talk about the current conditions of play, the difficulties social enterprises face as they try to raise capital to expand and why, with just a few changes, social investment could become a facility that transforms how poverty is tackled in the UK. Here is a flavour of my interesting social finance journey so far.

Starting with that leftie paper I wrote, a paper titled Does Social Finance Understand Social Need? which sets out arguments for money that is social first, indicates why social enterprises need considerable time to strengthen their practice and demonstrates why most of the money available predicated on finance models has no place in tacking the complicated issues that poverty determines.

Three years on, the same situation exists and for many social enterprise practitioners knowing where to get the right money, on investment terms remains unresolved. Right now, the finance we are offered is little more than a mechanism installed to try to make more money out of poverty with scant regard for the quality of the impact. A harsh commentary this may seem, but based on my experiences, true nonetheless.

Privately, most social finance intermediaries agree that they have the wrong money, often determined by the rules of their wholesale lenders such as Big Society Capital. This is a problem. However, another big problem is the same social finance intermediaries taking the money in, knowing that when it’s offered out to social enterprises the terms are prohibitive to delivering high impact, good social business.

It feels like there is now a social finance industry comfortably contained within its own finance model; a model geared more to serving them rather than facilitating the enterprises it was meant for. Earlier this year, Jonathan Jenkins, CEO of the Social Investment Business, said “the social investment market is at risk of losing sight of why it exists” further describing that social investment is full of “a lot of ex-bankers patting themselves on the back for being very clever.” In my experience he is right, but it will take a lot more than the honesty Jonathan was willing to display to change what has now become the prevailing practice amongst most intermediaries.

So, how do we change things for the better?

In areas of high poverty, the marketplace is completely dysfunctional and function appears when enterprise, time and patient investment converge. To tackle poverty, there needs to be a move away from ‘clever’ financial modelling and a far greater understanding of the complexity of trading in those poverty marketplaces. Put simply, trading viably with real impact within the circumstances of poverty, a strong social enterprise will typically require seven to ten years to mature. Therefore, no social investor should ever look to make money out of poverty until there is money to be made out of poverty.

Photo credit: Jo Jakeman