Why a year's a long time in social investment

The annual Good Deals conference brought together social entrepreneurs, investors and policymakers to exchange ideas and negotiate deals. You would expect the social investment industry to be riding high as the year draws to a close given that the last 12 months has included the formation of Big Society Capital as well as the launch of numerous investment funds and innovation pilots. The mood should be bullish. But curiously, if anything, confidence in the sector appears to be lower now than a year ago. Talk privately to many of the key players and they admit to a form of collective angst. Fundamental questions about the nature of social investment remain unresolved. Bold aspirations for innovations such as social impact bonds are far more restrained now than this time last year. The government seem far less evangelical about the possibilities of payment by results. The mood is cautious, even reticent. The explanation for this paradox is that the implications of the social investment vision, the linking of social and financial returns, are more profound than people first realised. The logic of social investment, when followed through, challenges existing business models across the sector and requires all the main players to face up to some home truths. This is a somewhat painful process – hence the mixed feelings. For charities and social enterprises there is a dawning realisation that social investment is not the free lunch people first hoped it might be. In fact, it's not even a free biscuit because investors expect to get all their money back - with interest. This means organisations hoping to attract social investment need proper revenue streams that more than cover their costs. New Philanthropy Capital published an excellent report yesterday pointing out that social investment will not be suitable for everyone for exactly this reason and charities in particular will need to change their business models, sometimes radically. Government, meanwhile, is realising that just because they stop paying for something, doesn't mean that social investors will rush in to fill the gap. In fact, because government is the primary source of revenue for many charities this helps to create the necessary conditions for many investment opportunities. Without those revenues there is nothing to invest against. Many of the opportunities in the future will therefore depend on government commissioners being willing to take some risks by commissioning for outcomes, something the Treasury remains cautious about. Finally, social investors need to decide whether they are philanthropists or real investors. By 'real' I mean do they actually expect a financial return that is genuinely linked to an improved social outcome. It is far too easy to either waive returns altogether or featherbed deals with 'soft' money to inflate returns. Neither is healthy for the long-term prospects of the social investment market. Too often, the debate around all these issues has been informed by opinion rather than fact. The publication of the a comprehensive survey of the social investment landscape I co-authored with The Young Foundation means the sector finally has some data to work with. This doesn't provide all the answers, but as Nick O'Donohoe, the chief executive of Big Society Capital, says in the foreword to the report, it does provide "a line in the sand" from which progress can be measured over the months ahead. This time next year, no doubt, it will all feel very different. Adrian Brown is a Principal at The Boston Consulting Group in London