Those of us working in the social investment market have often been teased about the creation of a whole new language in an attempt to blend the financial and social sectors. But in the last few months I have read two quite different views on the state of the social investment market as we approach the end of 2014. And it has left me wondering – what do we all mean when we say ‘social investment market’?
First, in a speech given by Iain Duncan Smith, a Minister whom I respect, given at the Centre for Social Justice, he highlighted what he saw as the successes of this Government. In the speech he described the social investment market as:
“The single most exciting development in how we deliver social programmes.”
Providing a very different view was a blog by David Floyd, a commentator whom I also respect. In it he responds to the announcement of new capital from Santander into Social and Sustainable Capital (SASC)’s Third Sector Investment Fund as:
“Of no major relevance to charities and social enterprises trying to work out whether what’s on offer is appropriate to them…The number of charities and social enterprises in the UK in the market for a loan of £250,000-£3million is pretty small.”
Social investment as a tool for reforming public services, and social investment to meet the repayable finance needs of small and medium-sized social enterprises are two very different things, requiring different approaches, and currently at different levels of success. And these two things do not even cover the entirety of what we are considering at Big Society Capital when we are thinking about the social investment market.
We have a mandate to grow this market. That is a broad remit. We know that different stakeholders have different priorities and many of them, as evidenced by the quotes above, inevitably judge success or failure by a rather one dimensional yardstick. We cannot afford to do that.
In April 2014, we articulated what we believe are the four essential elements of a robust social investment market and documented our strategy for success in each of them. So, as we near the end of 2014, perhaps this is a good time to remind ourselves how we are defining the social investment market, and to reflect on progress.
1. Small and medium-sized charities and social enterprises
We believe that a social investment market should provide access to small and medium sized charities and social enterprises to capital on flexible terms from organisations that place a value on their social purpose. This is the area that gets the most focus from many sector bodies.
It is still the case that not enough money is getting to small charities and social enterprises. Lending to any small organisation, social or commercial, is expensive and the credit risk is high. That is a problem for SMEs just as much as it is a problem for charities and social enterprises. It is particularly true if there is no security for the loan. In the social investment market borrowers need flexible and affordable capital. Lenders need to be able to lend on terms that ideally allow them to be sustainable and not constantly having to go cap in hand to government for assistance. If the type of loans do not allow for sustainability, then there needs to be subsidy.
Big Society Capital can approach this part of the market in two ways:
The first is by making more capital available to those lenders and front line organisations that can be sustainable. This year Charity Bank has been recapitilised and seen the value of loan approvals double since last year. A number of new funds including those at Social and Sustainable Capital (SASC) and FSE, as well as funds in Scotland and the North East have been launched to provide riskier unsecured lending. Together these initiatives make more than £150 million of new money available. Most of these will be larger loans.
The second is by seeking subsidy where sustainability is not possible yet, and in general these are smaller loans. The Social Investment Tax Relief, the first of its kind in the world, has been launched in the UK, and the first organisation has made use of it. Speaking about the investment, Jacqui Reeves of FareShare South West in Bristol, which received an investment of £70,000 from a small group of angel investors, supported by Resonance said:
“We needed investment to scale up our activities and to achieve our aims of addressing the imbalance by redistributing quality surplus food to groups working with vulnerable individuals in and around Bristol. The investment will help us create real jobs and work experience opportunities for vulnerable people who previously were unable to work.”
We also anticipate that we will shortly see new combinations of grants and lending to address this part of the market, both at a frontline level for charities and social enterprises, and at the intermediary level for the social investment fund managers.
We also talked about building a market that encouraged innovation, funding new ways to address critical social issues.
Social Impact Bonds (SIBs) are a key part of supporting innovative interventions. As Iain Duncan Smith’s speech highlighted the social impact bond market is growing. There will be almost 30 issues by yearend. By year-end close to fifty charities will have received funding through SIBs. They include many of the UK’s leading and most innovative charities – Action for Children, Tomorrows People, St Mungo’s, Age UK and others. I have talked with many of them about their experiences. There is great enthusiasm for structures that enable them to take a more flexible approach to service delivery, focus on outcomes and deliver new services that wouldn't otherwise be funded. However, there are clearly challenges around complexity, unnecessary oversight and bureaucracy. Commissioners and arrangers need to address these issues.
The other major strand of our innovation strategy is providing more growth capital to support ambitious social enterprise and social purpose companies. Last year over 1000 start-up enterprises were supported by UnLtd. Nominet Trust has backed over 700 UK social tech ventures since 2009, from a memory-aid app for people in the early stages of dementia to a ‘trip advisor’ that matches disadvantaged young people with personal development programmes.
These programmes are providing a pipeline for a number of new investment funds including Impact Ventures UK and Nesta Impact Investments. Both of these organisations have attracted significant additional capital and together they now have over £60 million to support growing organisations, and the things that they are investing in are really exciting: from Big White Wall, which took on an equity investment to grow its business using mobile technology to support individuals with mental health issues, to Oomph! which is using investment to expand its delivery of fun and interactive dance classes in care homes across the UK.
3. Mass participation
We talked about the need to build a market that encouraged and allowed for broad participation. That means making social investment more accessible to the public and making finance more accessible to large numbers of charities, social enterprises and community based organisations.
On this measure we are pleased with the progress. Charity Bond Support Fund was launched with £10 million from Big Society Capital and Golden Lane Housing became the first charity bond to be successfully listed on the London Stock Exchange. Golden Lane Housing is now using this £11 million to provide high quality supported housing in the community to an additional 120 tenants with learning disabilities.
The Threadneedle UK Social Bond Fund, developed with Big Issue Invest, has so far raised and invested over £60 million in their social bond fund. It also provides the first opportunity for savers to put their ISA into a dedicated social investment product.
More local people are investing in their communities. To-date over 200 projects have raised finance through community shares, with a total value of nearly £40 million, boosted this summer with a £1 million investment by Big Society Capital into the Community Shares Underwriting Fund. Crowdfunding will also be a key enabler for communities wishing to raise funds for locally based projects. Big Society Capital recently made its first investment in Spacehive to help support the growth of this market place. A great example of the power of community funding is down in Redruth, once the centre of Cornwall’s mining industry, where local residents have come together to invest in a wind turbine that will generate revenues for the community that will improve the provision of high quality local food for low income families.
There is also growing interest and engagement from angel investors into social enterprises. This year alone saw almost £2 million invested through the Clearly Social Angels Networks into twelve early stage ventures, including into projects like Third Space Learning which is using technology is schools to close the inequality gap in the UK education system.
The final element was building a market that could attract capital in scale - large sums of socially motivated money from institutional investors. It's clear that addressing certain key social issues, such as housing, will require significant amounts of investment.
One of Big Society Capital’s early investments in this area – into the Real Lettings Fund developed by St Mungo’s and Resonance has now reached £35 million. The Fund aims to help up to 600 vulnerable individuals and families by providing around 220 properties over seven years. We are in discussions of ways to replicate this successful model elsewhere in the country.
Cheyne Capital has recently announced a new fund which they hope will raise up to £300 million from a range of investors, to help tackle the chronic shortage of housing solutions for disadvantaged groups in the UK.
There is plenty of ammunition for both the optimists and the pessimists as they consider progress in social investment at the end of 2014. It is easy to be one dimensional. At Big Society Capital we need to be more than that and as I look across the whole landscape I am in the optimist’s camp.