Fund managers feel ‘squeezed’ by Better Society Capital’s focus on returns – quadrennial review
Independent review finds UK's social investment wholesaler has driven growth in lower-risk funds but frontline social investors say more catalytic capital is needed.
Better Society Capital’s focus on financial returns over impact is putting a strain on social investment funds and limits investment in frontline organisations, according to fund managers quoted in the organisation’s latest quadrennial review.
The review is published every four years by the Oversight Trust, an independent body that reviews the performance of the organisations that receive dormant assets – funds held in idle bank accounts where the owner cannot be found. It is based on interviews with stakeholders from across the sector, as well as information provided by Better Society Capital.
“BSC has become more explicitly return-focussed rather than impact-focussed”, highlights the review, summing up the opinions of social fund managers, and as a result their business models are “squeezed”, limiting further investment in frontline organisations.
BSC has become more explicitly return-focussed rather than impact-focussed – social fund managers
Better Society Capital is the UK’s wholesale social investor, which provides capital to social investment funds (intermediaries) that in turn invest in organisations that deliver a social impact. Its mission is to grow the amount of money invested in tackling social issues in the country.
The review welcomes the investor’s achievement to scale the social investment market – which saw more than £1bn of capital invested as of 2023, a 12-fold growth since 2011. However, many interviewees suggest that, while growth undeniably leads to bigger impact, some “question the depth of impact” of Better Society Capital.
- Read more: UK social impact investments reach £10bn in 2023 but growth slows – Better Society Capital
The wholesaler has driven growth in “mainstream” impact funds, in particular social housing funds, by attracting commercial investors such as pension funds at scale,but the review finds Better Society Capital’s additionality in those deals remains “unclear” – in other words, those low-risk, reliable-return investments may well have gone ahead without BSC’s investment.
“A wide range of interviewees, both mainstream and social, argued that BSC needs to demonstrate the additionality of its investments in mainstream funds that are widely perceived as making ‘safe as houses’ investments,” says the review.
Speaking to Pioneers Post, CEO of Better Society Capital Stephen Muers, disagreed: “We are definitely additional – in two significant ways – in that market.” Some of the funds in the social housing sector, which was seen as safe by investors, were often very small to start with, he explained, so they needed Better Society Capital’s investment to grow enough to start attracting capital from other investors.
Muers added that when investing in a bigger, well-established fund manager, Better Society Capital used its leverage as an investor to push for increased impact, setting objectives and assessing performance regularly. When it came to social housing, given the scale of the homelessness crisis in the UK, billions of pounds were needed to address the problem, so larger fund managers were needed, he explained. “While the fund might happen without us, the level of impact, we believe, wouldn’t.”
Catalytic capital
Meanwhile, impact-focused, high-risk social investment funds are still struggling to attract investors at scale, according to the review – while the money is desperately needed by social enterprises and charities facing a wobbling economy and a fundraising environment described by one of the interviewees as the “most difficult in 50 years”.
Emerging fund managers, in particular, said BSC’s strategy should focus on the more challenging social impact sectors that need catalytic investments – such as guarantees of concessionary capital, which can bear lower-than-market rate returns and higher risk.
“Social fund managers who focus on more risky and often harder-to-scale catalytic investments have struggled to raise capital (especially since 2022) and remain fragile,” according to the report.
For Muers, balancing safe or higher-returns investments and riskier ones is necessary for the organisation, which committed to have a portfolio return of 1%, after covering investment and market-building costs.
“We have our overall sustainability return target to meet, and we are just about there – but it's not like we're making that with a large margin,” he said. “So if you look at the whole portfolio of what we’re doing, it looks like we might have got the risk in roughly the right place for our mandate to be sustainable.”
He added: “There’s healthy, natural tension, I think, between us saying we’re trying to build a market that's sustainable and growing and can bring money in beyond us, and then people who want to get as much done as they can now, where cheaper money is going to be helpful.”
Muers said Better Society Capital aimed to achieve scale without losing the depth of the impact the organisation created through the intermediary fund managers.
Our goal is to hopefully build a market that can do both scale and depth - Muers
“There are risks around depth – and I think we’ve seen examples, not necessarily where we’ve been invested closely, where the depth has been an issue, or been compromised.
“But our goal is to not have that as a trade off and to hopefully build a market that can do both scale and depth, maybe in different ways, through different fund managers.”
He added there was no question Better Society Capital took risks. He said: “I think we take considerable risk and appropriate risk for our mandate…We make lots of investments that lose money, consistently.”
Equity needs deeper conversations
While the review welcomes Better Society Capital’s efforts to improve diversity and inclusion – such as introducing internal diversity targets, and including diversity, equity and inclusion metrics in portfolio monitoring – it notes that there is concern that the organisation is having a “process-focused” approach to improve diversity, “without having the deeper conversations needed about what is truly required to create equity in the system”.
The paper notes: “It is no coincidence that most people put forward by BSC for interview during this quadrennial review were male and white, given the continuing challenge of diversity within financial services, where BSC could play an exemplary role.”
Top image: Freepik.
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