Putting the slow pace of social investment into perspective
In the early days it seemed that social investment would be a great new source of finance for charities, with both charities and investors making the most of what was envisaged as a growth situation. In 2012, it seemed likely that social investors would be pushing at an open door. The Boston Consulting Group’s "cautiously confident" prediction that annual demand would rise to "£1 billion by 2016" demonstrated the positive mood of the time.
But was this optimism misplaced? Many in the industry were seduced by the idea of finance and charity colliding to create a marketplace where commercial skills and disciplined analysis helped to improve the lives of those most in need.
Five years on, Big Society Capital (BSC), the largest wholesale social investor in the UK, has announced that a cumulative £1 billion has now been committed by BSC and its co-investors and is currently available to the social sector.
Of this first billion, just under half has been deployed to charities and social enterprises across the country. This is a great achievement and one that investors seeking to help those in the voluntary, community and social enterprise (VCSE) sector, and do more to support those in need, should be very proud of.
Highlighting the reality
However, this also highlights the reality. The market has grown at a much slower rate than everyone expected back in 2012. Many of the reasons for this have been outside the control of both social sector organisations and investors. Continued austerity has put considerable pressure on the income and surpluses of many organisations in the voluntary sector. Additionally, the environment has not been conducive to organisations taking on investment, especially for organisations doing it for the first time.
Social investing involves more than regular investors acting socially. Much of the activity takes place within stand-alone specialist organisations. More recently, this has centred around Big Society Capital and its 20 or so intermediaries - organisations which receive funds from BSC and others and make investments in impact driven organisations in the UK. Social investing has become the focus of more discussion and less action than most would like, especially those trying to make a living from doing it!
Balance of motivations
Although their balance of motivations is different, commercial finance organisations have a long history of working with the VCSE sector. What commercial lenders have historically offered has consisted almost exclusively of asset backed financing through mortgages and secured lending. But it is not the case that commercial players are not aware of the demand from VCSEs for riskier forms of finance.
Rather, they generally prefer not to engage with it. Whilst those in social investment can disagree with their assessment of the risk, they must acknowledge that this decision isn’t necessarily ill informed. Many of these mainstream investors or lenders have been working closely with VCSE organisations for many years.
The original vision for social investing was that it would provide the unsecured lending to voluntary, community and social enterprises that most commercial players would not touch. But the market for unsecured investments has not developed at the pace expected – even the most sceptical player most likely thought that the scale of resource thrown at the problem would have moved the needle further by now. The reality is that demand from VCSEs consists of a smaller number of transactions, each of them in turn individually smaller than anyone involved with the sector would like.
Returns plus impact
Early discussions around social investment assumed that double digit financial returns would be possible alongside significant social impact. Some thought social investment would be able to step in and replace lost revenue as government cut spending on vital services. Both of these ideas are of course false.
The good news is the social investing market is evolving, albeit more slowly than expected. Over the last five years there has been an increase in the amount of risk that social investors are prepared to take, and a fall in the returns they will accept for taking that risk. We are now at a level where there has been a meaningful increase in the number of projects and organisations to whom social investment is relevant, as demonstrated by the latest BSC data.
In the past it may have felt like social investors saw themselves as born again financiers, refugees from the City ready to lead charities and social enterprises into the light. If that was ever the case, it is no longer true. Competition amongst social investors has been a powerful tool – every social investor now recognises that, as in any other market, they will only succeed if they create products that the market wants.
And what does the market want? This is not an easy question to answer. Significant differences remain in the amount of risk that charities are prepared to, or should, take on to grow their social impact.
Backing for judgment
Broadly, though, they want investors that will back their judgement and expertise. They need money for the roll out of new services and new ideas. They sometimes need money for asset purchases when they just can’t get the ear of commercial lenders. And increasingly, they need to be able to share the risk of loss with investors – something commercial funders are unlikely to do when the upside returns needed to offset this risk are not available.
Encouragingly, there are now many inspiring examples of the right kind of financial resource getting to the right place – from large established charities moving into a new geographic area, rolling out a new intervention, or working with a new beneficiary group down to small start-up characters with big ideas.