Can Big Society Capital succeed?

4 April 2013

Twelve months ago the Prime Minister launched Big Society Capital, providing it with an initial endowment of £600 million, a conspicuous politically charged name and, arguably, unachievable expectations.

While the term ‘Big Society’ has faded from political debate, its well-heeled namesake, Big Society Capital, lives on as the last scion of the brand. As a result, there is a great deal riding on its success.

It was hoped that Big Society Capital could serve as a catalyst for the nascent social investment market by matching investment funds with viable social enterprises. These enterprises would generate both a positive social impact and a financial return on investment. But so far allocating capital to generate both social and financial returns has proved a far more complex task than early proponents of the scheme expected.

In many ways, Big Society Capital has become a blank canvas, onto which myriad stakeholders from multiple sectors project their own view of what the organisation is for and where its true priorities lie. In part, this problem stems from the political baggage that weighs on the ‘Big Society’ brand.

The Government is, understandably, desperate to see the only meaningful manifestation of the Big Society succeed; for their part charities and social enterprises expect an imminent flood of cash into their sector; while Big Society Capital itself is focused on the mission at hand: finding investment opportunities that meet the dual requirements of generating financial and social returns. And herein lies the challenge; it seems getting money out of the door is much more difficult than anyone had anticipated.

Big Society Capital’s ability to provide investment funds for charities and social enterprises has never been in doubt, nor has the demand for social investment. A report by the Boston Consulting Group anticipates potential demand for social investment funding to reach £750 million by 2015. That’s a 38% p.a. rise from the £165 million invested in 2011.

However, the ability of existing organisations to utilise that funding, is far from certain. In short, there are too few social enterprises with a business model capable of generating the returns required to warrant investment.

As a result the social investment market is not suffering from a lack of capital, but a lack of places to allocate it. Eventually, something will have to give, and given the pincer movement of pressure on Big Society Capital from both government and the charitable sector, that something may well be the accepted levels of financial return on investments – currently set at around 5-6%. It remains to be seen if 1-2% returns on investment will be enough to coax more financiers into the game, which is ultimately the aim of Big Society Capital.

The social investment market in Britain is probably the most developed in the world, but the market is very much at the beginning of the journey, and nowhere near to reaching a state of maturity.

Companies enter established markets as new brands, offering new products every day. But rarely do they set out to establish and develop a wholly new market – let alone one that plays by a higher-minded, and subsequently more complex, set of rules.

With Big Society Capital struggling to find worthy investments there is a risk that the initiative will drift away from investment and move toward charitable grant giving. Social investment is still at an early stage though, with both investors and investees feeling out the best way to make the market work. While questions remain about the viability of this model of investment, the process of creating a whole new market is, after all, a marathon, not a sprint.

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One Response

  1. Robbie Davison on 4 April 2013 at 12:48 pm

    Following on from others, Jonathan continues with the thread that the problem with getting the money out is there not being enough strong models available to take on debt. This is wrong – There are some very good models that can take on debt but not on the ‘banking’ terms the social investment lenders enforce. It’s not by accident that social enterprise places the emphasis on the ‘social’ being the primary driver otherwise what would be the point? Developing this market will require finance that BUILDS not BUYS and pretty much every lender right now is a buyer, chasing safe targets, chasing short term returns and always starting from a point of fear as to whether they will geft their money back. Incidently BSC are themselves a buyer.
    To make the transition 4 main things will need to happen.
    1. Grants will need to become part of the model and soon
    2. Interest rates will need to be lowered and soon
    3 Repayment terms need to be extended and the process needs to be;
    4. Less competition and more about relationships

    Last point it is more about a sprint than a marathon. The social enterprise market is very sure of its financial needs and they will not change – need is need and services to treat need cant be leveraged to fit just because social finance want to ‘play’ this market and no amount of new products will change this fact.

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