How do we balance our different objectives as an investor? | Big Society Capital

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How do we balance our different objectives as an investor?

How does the money allocated from ordinary people’s “lost bank accounts” end up being used to deliver public benefit by charities and social enterprises?

As an institution fortunate to have the mandate to invest up to £600 million to help grow the social investment market, we’re rightly often asked how Big Society Capital makes its investment decisions. The simple answer is that we have three key criteria that all investments are assessed against:

  1. Social impact
  2. Financial sustainability (covering risks and returns)
  3. Potential to develop the social investment market   

In practice, none of our decisions are particularly straightforward. On social impact, we’re interested in what outcomes the investment is intended to achieve, and for whom. Whilst our Social Impact Tests  provide a framework for us to assess whether social impact is likely to be strong, medium or weak, there isn’t a precise value that can be calculated and compared across our investments. In addition, as a “wholesaler”, often the more relevant assessments around social impact are ultimately made by the social investment providers that we fund.

Contribution to “developing the social investment market” can cover a range of things, such as whether new investors or significant amounts of additional investment will be brought in (generally we seek a match for our investment). We consider how the proposal increases access to investment by charities and social enterprises, and what parts of the sector it is most relevant for.

Whilst a great deal of work and analysis is carried out by the team to help inform Investment Committee decisions, judgements on the strengths of investment proposals against these criteria are exactly that – the collective view of our Investment Committee of whether on balance the investment is likely to deliver overall against these criteria.  

There isn’t a scientific formula for quantifying social impact, financial return and market development or the tradeoffs between these three criteria (and I’m not sure there ever will be), but we do have a sense of strengths and weaknesses against these criteria and what the risks are. Our approach to risk and how we manage these varies with the amount of money involved (anything from £100,000 to £15 million), and how long it will be invested for.

I thought I’d share a bit of our Investment Committee discussions on a few investments.

Charity Bond Support Fund

The Charity Bond Support Fund is managed by Rathbones, set up to buy bonds issued by charities. We felt this would be a useful development for the sector – giving more certainty to charities that they could successfully raise investment through this route. It was also likely that there would be lower financial risk with this fund, given the size and profile of organisations likely to be issuing bonds.

But were there social impact risks? With our aim to maximise social impact, should we prescribe any exclusions (eg not investing in private schools that are also registered charities)? Although Rathbones had been focused on impact in any case, in our agreement, we’ve specified that the fund had to buy bonds in organisations delivering social outcomes in at least one area of our Outcomes Matrix and supporting people in poverty or other vulnerable groups – this was kept deliberately broad so as to maximise the market development contribution of this fund. Since its launch, this fund has invested in bonds in Greenwich Leisure, disability charity Thera and Glasgow Together.

Spacehive

Spacehive is a crowdfunding platform enabling communities to raise donations for local civic projects. We have invested share capital investment into their organisation. On the financials, they had a credible business model, including through partnerships with corporates and the public sector, although we recognised risks around crowdfunding models. We could see the potential social impact in stronger community engagement from their work to “bring civic spaces to life”, often in more deprived areas, but have encouraged stronger measurement around this.

Will this investment help develop the social investment market? Well, possibly, although this is uncertain. Part of the rationale for this investment was taking a long term view - that some of the community projects funded through donations would then be in a stronger position to access social investment, or could combine crowdfunded donations with investment. Spacehive is now shifting its model to more directly connect grant seekers with grant makers, many of which are foundations with whom we regularly partner. To test assumptions made in our investment decision, we’ll look to track which of these organisations do go on to take on social investment in future.

Cheyne Social Property Fund

Proposals we see are adapted over time, partly to reflect investor requirements. The Cheyne Social Property Impact Fund was originally conceived as a fund with a mixture of property investments to deliver social impact with a financial return, alongside investments that would deliver higher impact, but for a lower return (for more intensive, innovative services for people with more complex needs).

This cross-subsidy model was interesting for us, but the mixed approach wasn’t attractive to institutional investors. We agreed to invest in a revised simpler version of the fund, with an overall higher financial return, whilst still delivering social impact. Given the scale of the challenge around availability of housing for those in need, attracting investors was a key aim for us – with a fund target of £300 million that could support up to £850 million investment in housing, our £12 million commitment has been an effective catalyst.

We didn’t want to lose sight of the original intent to enable property investment tackling more complex, entrenched issues and we continue to work with Cheyne on a standalone facility for our investment to deliver higher impact albeit on a smaller scale.

Evolving approaches to respond to our mission

This is just a brief flavour of some of the things we consider – we have lengthy discussions on a range of issues. Is there evidence that the sector can benefit from the type of finance being supplied? For investments that provide equity for companies limited by shares - are there adequate frameworks to ensure social impact is core to the business? Investments that our funds have made into Unforgettable.com and Big White Wall have demonstrated this working in practice. We turn down proposals if this isn’t strong enough, or if we’re not (yet) convinced around social motivations of the fund manager or intermediary.

Every week is a different discussion. Some decisions can feel like a compromise in one area in order to achieve another objective. Not all investments will deliver as intended.  But all our decisions are underpinned by the question of how the proposal delivers on our mission to grow the use of social investment to address social need.

As we learn from whether our investments are living up to the reasons we backed them, and we continue to look externally to the needs of the sector and the role our investment can play in addressing different social issues, our priorities and focus will continue to evolve.

Last updated | 
24 February 2016