What is the truth about social investment?

by Craig Dearden-Phillips 24/03/2016

Beyond the heat, light and hype, what is the truth about social investment? Might it soon dominate the way charities are funded? Or will social investment forever remain a well-shod support act to boring old grants and donations? And what are we to make of the government's £105m of "outcome funding" and its delivery mechanism, the social impact bond?

Making sense of the social finance landscape isn't easy. Its big breakthrough in the UK came about a decade ago when the private equity investor and philanthropist Sir Ronald Cohen convinced the last Labour government that third sector bodies should borrow from socially motivated investors to scale up their best solutions. Cohen's observation was that grants and donations represented a fraction of the resources that could be made available to charities from a new breed of social investors who are happy to forgo a full return on their money in exchange for verified social impact - or "blended return", to use the parlance.

Successive governments bought in to this idea and have since set up an infrastructure to make it happen. Its centrepiece is Big Society Capital, which is supposed to be a kind of Bank of England for social finance. BSC's job is to channel funding to socially motivated banks like Charity Bank and social finance intermediaries such as Social and Sustainable Capital, Resonance and Big Issue Invest. These, in turn, put money to work in charities and social enterprises. BSC has been controversial, not least because of its early domination by investment bankers rather than charity people. However, this is now changing with a new chief executive, Cliff Prior, who has deep personal roots in the third sector.

And now there is outcomes funding and its enabling mechanism the social impact bond. With austerity, the government has become enamoured of the idea of paying only for what works - or outcomes. SIBs involve government letting social investors pay up-front for charities to deliver the work and only paying out, from the Outcomes Fund, for that which delivers the desired result, thus leaving social investors to absorb losses on interventions that fail. SIBs encourage social investors (so the thinking goes) to consider very carefully which operating models and partners they choose to deliver outcomes.

One example of a SIB, of which there are is a fast-growing number, is Ways to Wellness, a new community interest company set up in Newcastle-upon-Tyne. Ways to Wellness works with a number of local charities to improve measureable health outcomes for local residents at risk of preventable, long-term conditions. The work is funded by £1.65m from Bridges Ventures, a social investor, and, if Ways to Wellness delivers its agreed targets, Bridges Ventures will get that money back with interest from the Newcastle Clinical Commissioning Group. Should Ways to Wellness fail or fall short, the CCG does not pay, leaving Bridges Ventures to absorb the costs incurred by the failure. Outcome funding and SIBs are currently less than 0.5% of all social investment, but according to Rob Wilson, the Minister for Civil Society, this will increasingly be the way public services are funded.

A mixed story

But is social finance actually working? In truth, it has been a mixed story. The reality has proved more complicated than first envisaged. There has not been the anticipated demand from charities and social enterprises in search of investment. Promising charities do not necessarily behave in quite the same way as growing businesses. While the uptake of social finance is rising steadily (see for example), we are still in what social investors politely term an early market.

So why have things gone more slowly than predicted? Three reasons stand out. The first is that the appetite in the charity and social enterprise sector for taking on large levels of debt finance was over-estimated. While many trustee boards are happy to borrow, say, £100k-£200k to buy tangible assets, such as a building or a fleet of minibuses, far fewer are comfortable with taking on £1m-plus of debt to spend on people and marketing to accelerate the growth of their organisations. There is, therefore, a bit of a mismatch between what charities want - smaller loans for assets - and what is being offered - mega-sums for growth.

Secondly, there is a feeling in many charities that social finance, with its requirement for repayment, just isn't achievable in charities dealing with genuine but intractable need.

In other words, producing decent financial returns for investors in addition to verifiable social impact is just too much to ask. As one senior charity executive put it, "we're not making Innocent smoothies, with a few nice social benefits on the side - we're dealing with hard-core social need, often with little or no visible progress. There's no financial return on that for anyone."

Evidence of this antipathy is to be found in the pipeline for social investment deals. Social finance intermediaries - the middlemen of social finance - complain about deal-flow and a costly slog to find and cultivate uptake. This makes social finance appear expensive and, to some, exploitative. To try to make social finance more appealing, the government has encouraged the creation of Big Potential and Access - The Foundation for Social Investment, all designed to ease the path to social investment.

A third problem is the culture clash, where polished brogue meets battered sandal. On one side sit the bright young things of social finance, fresh out of McKinsey. On the other stand mostly older, battle-hardened stalwarts of the charity world. The language, style and occasional brashness of the social finance camp has made selling the products harder. This is changing, though, as the relative success of intermediaries like Resonance, whose staff tend to come from the third sector, demonstrate how important a connection to the sector can be when selling new ideas.

So is social finance to be written off, as it is by some, as fashionable nonsense? To do so would be at best premature, at worst highly damaging. While it isn't always possible to use borrowed money to address social problems, sometimes it is exactly the right thing. Midlands Together raised £3m to buy houses for renovation by released offenders who are trained and then housed. Unforgettable, a social enterprise tackling dementia, raised £750,000 to develop new products and services. K10 raised £800,000 to develop apprenticeships for marginalised young people. None of these organisations would exist without social finance.

And we do need social finance to scale things up that work.

The third sector, like the UK economy in general, is full of creativity and innovation, but most of it stays small for lack of timely investment. Lots of good stuff is lost after a couple of rounds of grant funding. This is less excusable when there are now increasing opportunities to ramp up really good solutions.

Having been in and around social finance for the last 10 years, I think its benefits have been claimed too early without the examples of success to address the doubters. BSC has, until very recently, been very low profile. The costs of social finance are still too high, and it needs to be at least on a par with the high street for fuss-free everyday finance. And, yes, there are still a few people in Hugo Boss suits visiting community workers in Sunderland to talk about the need for "codified playbooks" and "verifiable impact measurement".


All in all, we have to be open-minded about social finance. Charity income is stagnant. Donations are levelling off. Grant funders are maxed out. Cohen, all those years ago, was right that the pool of money for good work isn't getting any bigger and our sector needs a reservoir of new money to tap into.

Sure, not all charities can or should pay money back. But charities like Midlands Together show that repayable money can be used in imaginative ways to extend their mission to larger numbers of beneficiaries. Indeed, Midlands Together might not exist without social finance.

So it is time to step up. If the third sector can't get its head around the possibilities, it's hard to see how we can grow the sector's impact beyond the high water mark of the pre-austerity years. This is a slightly depressing thought, given that social need is only going in one direction. So while social finance is clearly not without its problems and is still an experiment in progress, we owe it to our beneficiaries at least to engage.

While the core idea is easy enough to grasp - that social sector organisations can be invested in to create a 'blended return' of social and financial outcomes for investors - the reality is proving far more complicated.

As published in Third Sector on 24th March 2016 - 

Back to stepping out now