The cost of money part 1: Big Society Capital in the hotseat
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In part 1 of an investigation into the cost of money for social enterprise, social investors check in with a harsh reality. A large number of social enterprises are clutching hopelessly at the fruit of the money tree. Should Big Society Capital re-think its responsibilities? – asks Henry Palmer.
It must have come as a nice surprise earlier this month when British Prime Minister David Cameron opened his morning post to find a letter of heartfelt thanks signed by the leaders of 80 financial institutions, charitable foundations and social enterprises from around the globe. The open letter was sent to the Cameron household to congratulate him on his efforts to grow the global social investment market by putting the issue at the heart of the UK’s Presidency of the G8 this year.
Taking the platform at the world’s first ever G8 summit on social investment at the London Stock Exchange, Cameron explained why in a time of cash strapped governments it was so important to use the investment markets to solve societal problems by encouraging investment in “charities, social enterprises and community organisations”.
Indeed, Cameron did not disappoint when he unveiled a new package of measures designed to build on the momentum already underway in the UK’s social investment industry – a tax break for social investors, the launch of the long awaited Social Stock Exchange, and a £50m fund to help local communities acquire and manage their own assets.
All this – on top of last year’s launch of the “world’s first ever” social investment bank, Big Society Capital (BSC) – would not only safeguard the future of charities, social enterprises and community groups, but would propel them to a mainstay of the government’s strategy to tackle those entrenched social problems that successive governments have failed in for centuries.
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" – Nick Temple SEUK
What’s more, the Prime Minister said he wanted to make social investment not only a success in Britain but to “sell it all over the world”. He said: “Businesses need finance to grow and make profit. Governments need finance to fund big infrastructure projects. That’s why we have banks, bonds, investment markets and all the rest. The idea here is just as simple and just as powerful. Social enterprises, charities and voluntary bodies have the knowledge, human touch and personal commitment to succeed where governments often fail. But they need finance too.”
On this last point, few would disagree. Treasury figures compiled as part of its successful bid for State Aid approval for wholesale bank Big Society Capital (BSC) in April 2012, claimed there was a funding shortfall of between £0.9bn and £1.7bn for civil society organisations in the UK. This picture was reinforced by trade association Social Enterprise UK, which published figures on the eve of the G8 summit showing that almost 40% of social enterprises continued to cite a lack of access to finance as the biggest barrier to growth. Moreover, these organisations were after relatively small amounts of investment, averaging just £58,000.
Taken at face value, Cameron’s pledge to create new market opportunities would have pleased the cash-hungry social entrepreneur. He said: “Government needs to be more creative and innovative – saying to social entrepreneurs: ‘If you can solve the problem we’ll give you money.’ As soon as government says that, social entrepreneurs can go out and raise capital. So that is exactly what the British government has been saying. And I am proud that Britain has led the way from the outset.”
But 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' Donohoe, 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, 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.”
Does risk have the final say? And if the buck is passed to the powers that be, will social enterprises simply have to accept the cost of money? In part 2 Henry Palmer considers the social enterprise mindset, alternative sustenance for hungry entrepreneurs and a question for David Cameron. READ IT NOW.
