Six steps to building the social investment market

By Benedict Rickey 26 January 2012

Yesterday, NPC conducted an experiment. We convened a roundtable with about 30 social investment experts, including Iona Joy (NPC), Nick O’Donohoe (Big Society Capital), Adrian Brown (Boston Consulting Group), and Danyal Sattar (Esmee Fairbairn). We asked them where social investment is going.

Is social investment about to take off or crash dive? Are the current social investment lenders the vanguard of a global revolution in financing? Or are they inflating a financial bubble that promises much and delivers little?

We did not get a single conclusive answer, but we did get some very intelligent responses. By the end of the discussion, I felt we had a ‘big picture’ view of where social investment is, where it is going, and the barriers it faces. In short, we came away with the big issues we need to resolve if social investment is to work for society in the UK.

Here is my attempt at a summary of the discussion:

  • We need to sort out the plumbing before we turn on the taps: In other words, we need to make sure regulation, legal structures and tax structures encourage, or at least don’t create barriers to, social investing. We all agreed that CC14 (the new Charity Commission guidance) was useful. However, our legal categories (charity, company) are too binary for social investment, which is about creating social returns but doesn’t care if that is achieved by a business, a charity, or a social enterprise. Plus the FSA is largely ignoring social investment, leaving it to operate (to some extent) in a regulatory vacuum.
  • We need to expand the lending infrastructure. When Big Society Capital starts lending later this year, there is a risk that it will overwhelm the relatively limited pool of current intermediaries, who make social investments. There are around a dozen national and several dozen local intermediaries. If they don’t have the capacity to lend the money, there is a risk it takes a very long time to reach the organisations it is supposed to finance.
  • We need more dedicated ‘salesmen’. If social investment is to grow into a ‘market’, there needs to be a constantly growing pool of investors putting in money. At present, there is a trickle of grant-makers and high net worth individuals pitching in £100,000 here or £50,000 there. To achieve a jump in scale, we need ‘dedicated capital raisers’, or salesmen. They would talk to investors to understand their needs, provide data on social investment products (eg, historic performance), and then pitch for investment. ‘This groundwork is not being done at the moment‘, one of yesterday’s participants commented. But it needs to be done if the market is to grow.
  • We need to build a pipeline of investment ready charities and social enterprises. ‘Social investment’ is on the lips of pretty much every charity chief executive I’ve met in recent weeks. Its gone viral. A huge amount of work is needed to turn this buzz into actual deals. Social investment won’t be appropriate for many charities or social enterprises – the minnows, the ones with unstable income, the ones without assets are all unlikely to be candidates. We need to provide guidance to help them realise this. We then need to support those for whom it might be appropriate to get ‘investment ready.’ This could mean anything from a training session for a finance director, to consulting work to restructure their business model. We need a greater range of investment readiness support out there, and more of it.
  • Government needs to make sure commissioning supports the sector to take on social investment. To take on social investment organisations need a strong revenue stream. Government is one of the main sources of revenue to the social sector, but the government is cutting back. Plus, as contract sizes grow, fewer appear to be going to charities and social enterprises. If these trends (cuts and larger contracts) continue, many will have access to a growing pool of capital, but a shrinking pool of revenue. They’ll be like someone on minimum wage with a massive overdraft limit. If government made contracts more accessible to charities and social enterprises this would massively help social investment take off.
  • We need more consensus on measuring social returns. We need more consensus about how to assess and report on the ‘social return’ created by investments. A single measure of social return is probably a step too far. More ‘shared measurement‘ – agreement on how to measure impact in fields like homelessness or mental health – is probably the best way forward. We all agreed that reporting requirements need to be proportionate to the size of the organisation and the investment. However, there was also a recognition that not all investors are as interested as they could (or perhaps should) be.

So there is a huge amount of market building to do if social investment is to fulfil its potential to revolutionise financing in the social sector. No-one in the room underestimated the task ahead. But there was a sense of cautious optimism that a lot could be achieved if we moved together in the same direction.

Read more about our social investment roundtable in blogs by NPC’s Head of Charity Effectiveness Iona Joy for Alliance and Chief Executive Dan Corry for the Guardian.