Is Boston Consulting Group’s estimate of social investment demand right?

A few weeks ago, Adrian Brown produced another useful report on social investment: The First Billion. The report, commissioned by the daddy of social investment Big Society Capital,  tries to establish how big social investment demand might be over the next few years. It is a good and intelligent report, transparent in what it tries to do. In headline terms it has gone down as Market to grow to £1bn by 2016.’ But a closer read shows a lot of interesting depth, and puts a few question marks  over the weight we should put on its conclusions.

First, as Adrian says, even if the market hits £1bn, this is still pretty small beer—just 1% of the market for small business loans, and equivalent to the amount charities borrow annually today from commercial lenders. Very useful, very important. But let’s not get carried away.

Second, it is interesting to see who Adrian thinks might be getting this money. His analysis confirms what NPC thinks, that it is clearly not going to be your common or garden charity. It is social enterprises; it is some for-profit players. Indeed the BCG paper says that social investment is virtually anywhere where there is a social return as long as it is ‘clearly defined a priori and [is] not an incidental side effect of a commercial deal,’  a very broad definition indeed.

Third, to get to these numbers Adrian quite sensibly tries to model demand. He sees it as dominated by government contracts (although there is some talk of more buying for social value by so called ‘value sponsors’—businesses and consumers). Key assumptions include that the government will continue to outsource a lot, lot more; that a decent proportion of that will go to social organisations (not necessarily charities); and that they will in fact increase their share of this market overall (even if as sub-contractors); that sectors where social organisations are strong will grow (like health); that there will be more uptake of asset transfers, the Right to Bid and spinouts of mutuals from the public sector; that personal budgets will increase and lead to more work for social organisation; and that a higher percentage of lending to social organisations will come from social not commercial investors not least as commercial lenders are deemed to be wary of risky things like payment by results.

Fair enough assumptions, but perhaps all vulnerable to public mood swings, changes in policies, governments and the relative returns available in the commercial sector.

Fourth, it is unclear whether we will know if all this hoped-for social investment is actually leading to better social returns, a point made recently by NPCs Tris Lumley.  There is little discussion of this is in the BCG report but we have to be careful that in the dash for money we are clear that we are creating new social value, and whether any ‘new’ social investment is additional or just replacing commercial or government money.

Another way of looking at all this is from the point of view of providers, or charities. To do financeable deals, you need organisations that can take on social investment. This challenge was investigated by a joint ClearlySo/NPC team on behalf of the Big Lottery Fund. This research, based on numerous interviews and a survey of 7,500 organisations, showed that there is quite a task to support charities and social enterprises looking for capital at the riskier end of the spectrum—for growth and innovation. There was hunger for more guidance on how to become investment ready and what financial products to seek, signposting of where to get what sort of finance, and bespoke support to help organisations through the process. These are fixable problems, albeit requiring funds to fix.

The data also suggests that there may be some organisations pursuing social investment that perhaps shouldn’t—our experience of running social investment training taster sessions bears this out, as often charities leave the session relieved that social investment is ‘not for them’.  That still leaves a lot of organisations that could, with the right support, go for this market and succeed, but how this side of the market will evolve is still highly unclear.

The First Billion is a very important attempt to sketch out a methodology for measuring social investment demand. But given all the uncertainties, we should not take it too literally.

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