Shaping the future of social investment? We need to listen – and learn from the past

I welcome the debate about social investment kicked off by Richard Litchfield, picked up by David Floyd on Twitter, and then responded to by both Cliff Prior and Seb Elsworth. It’s a debate that has already touched on many key questions: use of subsidy, interest rates, the cost of capital, and more. And it’s a debate that matters: not for the benefits of navel-gazing social investment geeks, but because there is a scarcity of resources available to charities and social enterprises at a time of increasing need. If social investment isn’t effectively listening and responding to this increased need in the current context, then what is it for?

From Social Investment Business’s perspective, we start by looking back at our own experience for learning and insights. Since 2002, we have invested over £300m worth of loans and grants to UK-based charities and social enterprises through major government-backed funds: namely Futurebuilders, Communitybuilders and the Social Enterprise Investment Fund in Health. Collectively, they give us one of the largest, most mature social investment portfolios in the UK to analyse and assess: a portfolio of investments that often blended grant with loan in different ways. Our experience is therefore extremely pertinent to the debate in hand.

If social investment isn’t effectively listening and responding to increased need for capital, then what is it for?

Take Futurebuilders, which was created in 2004 to encourage voluntary and community organisations to use repayable finance to help them bid for and deliver public service contracts. As our forthcoming impact report will make clear, we can now see that in many cases, it has delivered benefits that are different to those of conventional grant funding or business loans from mainstream providers:

• It is patient – the average loan length is more than nine years; of the £35m remaining under management, a majority still has another 10 years to run
• It is flexible – on average, each investment has had at least four substantial financial or non-financial variations to the original terms (in some cases, more than 30 or 40 amendments have been made, as their business model and context changed over time)
• It is repayable – Futurebuilders was around £125m loan and £25m grant; of the £125m loan, around £90m has already paid back (and been paid back to government); this largely by organisations that banks and social banks refused to lend to
• It strengthens organisations – though we wouldn’t overclaim, there is some initial evidence that an organisation’s asset bases, turnover and income mix is stronger after investment from SIB
• It invests where needed – 38% of the investments were made in the top 20% most deprived areas of England

Of course, Futurebuilders wasn’t perfect. The average interest rate on Futurebuilders was 5.5%, but the average deal size was around £500k, so it didn’t suit the entire sector – our early funds tended to work with more established, medium-sized charities and social enterprises, rather than those who are served by the Access Growth Fund (including our own Forward Enterprise Fund, where the average deal size is around £50k). Futurebuilders also built no social impact measurement at all into its systems, so any judgement we make is retrospective and will not be as accurate as we would like. There is also some validity to the claim that it skewed the market for other nascent players back in the early-to-mid 2000s, and that the quality of the deal-making occasionally suffered under external pressures. Nevertheless, from an original target of writing off 25% of the loans made, we are currently anticipating that being more like 15%.

Why is this relevant now? Because it demonstrates what is possible – that social investment can deliver on its promises, and that its benefits are different to those of other forms of finance and have a role to play as part of the mix of funding that the social economy needs.

Of course, Futurebuilders 2.0, if it were created today, would be different: it could be done more strategically through a network of partner intermediaries (the field is much stronger today); it could be broadened (to help smaller organisations), deepened (to focus on sectors or geographies where help is needed most) and expanded (to provide risk capital to ambitious and transformative business models); it could build in sensible and proportionate impact measures; and it could return the repayments to the lending organisations to recycle and re-use, rather than back to government (or a wholesaler?). Much else, though, would remain the same: patience, flexibility, responsiveness, subsidy, strengthening organisations, and investing where need is greatest.

Those of us in social investment need to be less apologetic, particularly about grants and returns

I believe those of us in social investment need to be less apologetic, particularly about grants and returns. When an investor tells you they require a market-rate return, do ask them next time what they think that is: perhaps they haven’t seen the 10-year forecasts on UK investment funds, or the performance of a stock market near them recently. Similarly, neither the language of grant dependency nor apologies about subsidy are much heard from large manufacturers receiving grants to relocate factories or as part of large-scale infrastructure development projects in transport or tech. The £25m of grants that went alongside £125m of Futurebuilders loan was well spent in and on the organisations it was intended for, and made it possible for those organisations to benefit from the longer-term positive effects of the fund’s flexible and patient capital. Doors remained open, services continued to be delivered against the odds; in many cases those services improved, and organisations developed and grew.

Ultimately, it comes back to those charities and social enterprises: they are our customers, and it is our job and purpose to serve them, to help them get the finance and support they need to do their job well. Few disagree with the wish to make mainstream investment more impactful, but our collective ambitions to influence and attract such capital shouldn’t divert or distract us from that primary purpose – particularly at a time when those charities and social enterprises, of all shapes and sizes, need access to the right finance and support more than ever. Any part of the social investment market that isn’t helping that to happen needs a decisive rethink – and that applies as much to ourselves as everyone else.

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Header photo: P3, a Futurebuilders investee, is a charity that improves lives and communities by delivering services for socially excluded and vulnerable people. Photo credit: P3