UK's social bank turns two: Has it met expectations?
When the Prime Minister David Cameron launched Big Society Capital on 4 April 2012, expectations were high.
In a statement released by the Cabinet Office at the time, it said that the institution’s mission would be to grow a new market – social investment – so that it would be easier for charities, social enterprises and community groups to access affordable finance.
“This is about applying business principles to tackle social problems on a sustainable basis – the institution’s innovative funding structure carries no cost to the taxpayer and represents a new partnership between banks, government and the social sector,” it said.
It said the social investment bank would be capitalised with a total of £600m, £400m of which was from unclaimed cash left dormant in bank accounts for over 15 years, and £200m from the UK’s four largest high street banks – Barclays, Lloyds, HSBC and RBS.
So, two years later, how has Big Society Capital fared, and, under its guidance during this period, has the UK social sector seen the growth in social finance that was predicted back in 2012?
(Almost) hitting the targets
Nick O’Donohoe, who has been the organisation’s chief executive since it was launched, says that when looking at the key financials – how much money it has received and how much it has invested in social finance intermediaries – the figures are “pretty much in line with what we thought”.
He says that so far it has received £225.4m, which is slightly less than the £300m it had anticipated by now, although O’Donohoe says it depends when the year end is believed to be. And of this, it has invested £149.1m across 31 intermediaries.
“These were quite aggressive targets,” he says. “And there have been a lot of things to do during this time which take a lot of time, like ensuring due diligence over choosing which intermediaries receive funding and so on.”
Where he says the organisation has been a bit disappointed, however, is in the amount of this funding that has found its way from the intermediaries to front line social sector organisations – which totals only around £15m so far.
We need a greater diversity of products with better terms for charities and social enterprises.
O’Donohoe says there are good reasons for this though, including the fact that when Big Society Capital commits to an intermediary it is typically on a four-year investment cycle, and that they only draw on the money when they need it. “So I think we’re not hugely surprised, but we are a little disappointed by this,” he says.
Working with the front line
He admits that the organisation has recognised it needs to work more actively with front line organisations to help them better understand how they can access social investment.
“On the one hand, we could say, ‘We’re a wholesaler to fund intermediaries and it’s their job to work on the front line’,” he says. “We could take that passive role. But I think it’s clear there’s a need for everyone, in order to build a social investment market, that building front line demand is a critical part of it and we need to play an active role in that.”
This heavier involvement with front line social sector organisations is something others agree Big Society Capital needs to focus on.
Asheem Singh, director of public policy at charity chief executives' body Acevo, says the metric by which Big Society Capital's success (and the success of the social investment sector in general) will be measured is the degree to which it engages with the social sector.
He says that he has started to notice a much more collaborative approach emerging from Big Society Capital in recent times, but that it is crucial that this continues to progress.
“The market is clearly immature,” he says. “We need a greater diversity of products with better terms for charities and social enterprises. But that is partly because the market is so new, so the kind of products front line organisations can use aren’t there.”
He is hopeful for the future though. “I think social finance could be genuinely transformative under certain circumstances – if it’s aligned with a strong sense of what social sector organisations need, rather than what financiers want,” he says.
Robbie Davison, director of the social enterprise Can Cook, a Liverpool-based cookery school, says that while Big Society Capital has been an “ok vehicle” for creating some capability for social finance intermediaries, it has done “hardly anything” to impact social enterprises on the front line.
“It might be the right money for some sort of social market like big spin-outs from the public sector or large charities, but otherwise it’s the wrong money for the social enterprise market,” he says. “Organisations that couldn’t access investment still can’t get their hands on money from intermediaries as it has already been leveraged.”
He says that his organisation, which turns over £500,000 a year and employs 16 staff, is exactly the type of enterprise money from Big Society Capital should be reaching, but it is impossible for him to access any of it.
“When it lands in Liverpool it’s got about a 6-12% interest rate, which is just not feasible,” he says. “And the intermediaries don’t understand the business model. I forget how many times I’ve had conversations with intermediaries that are not interested in my social model but will make assessments purely on the basis of finances.”
He says the type of money that is missing from the sector is “patient investment”, where social enterprises would not be expected to pay investors back for six or seven years. “Their money is too short term at the moment, and it leverages need,” he says.
Dan Gregory, independent advisor at Common Capital, and a former policy advisor at the Cabinet Office and Treasury, is equally worried about the direction of the social investment market overall.
“I have no criticism of BSC – they’ve done as much as they can with their mandate, and have been very honest about the challenges they face,” he says. “But I worry sometimes with what’s going on in the social investment market – things like people simply copying and pasting press releases about all the ‘good’ things that are happening.”
He says that a lot of the noise around social investment has been from the perspective of investors rather than front line social organisations, and that he would like to see more honesty about the realities of social enterprises’ experience of it on the ground.
“I would like to see a range of players, including policy makers, respond to the demand more responsively,” he says. “I think we’ve had this ‘build it and they will come’ mentality. That’s fine, as long as what we build is what people might want. But there needs to be more focus on what the actual demand for finance is.”
Irrelevant to many
Others point out that social finance will never be applicable to all of the social sector.
“I just don’t buy the argument that 30 years ahead all social organisations will be funded in this way,” says Dan Corry, chief executive of the think tank New Philanthropy Capital. “It might be irrelevant to a lot of the sector – for example, a lot of local voluntary groups, and we must never forget that.”
He agrees that there have been periods in the past when the financial, rather the social side of social investment has been focused on too much, but he believes things are showing signs of improvement.
“Big Society Capital has made some good hires recently, people who understand the charity sector better,” he says. He adds that the bank will face new challenges over the next year, musing that it could be used as a “political football” in the run up to the next election.
“You can see the political parties descending on it, so it will be interesting to see how they handle that,” he says. “And one thing that over the next year they are going to have to keep thinking hard about is how they measure their outcomes. In the run up to the election people will be asking, ‘What has this organisation been achieving?'.’”
Others point out that there were bound to be initial challenges in trying to grow a market that was so new to a large majority of the social sector.
Antony Ross, partner at Bridges Ventures, which has worked with Big Society Capital on a number of social impact bonds, says it is unrealistic to think that the rate of growth could have been a lot faster.
“They’ve had to get going from a standing start,” he says “We hope the work they’ve done now will result in the money being drawn down at an increasing rate, and there’s no reason to say why that shouldn’t happen.”
Loans, not grants
He also points out that it is important for everyone to remember that Big Society Capital was established to make loans and not grants, and that that type of finance will not necessarily be suitable for all.
“If the capital available to invest in social enterprises is going to grow, the sector has to move on from funds that have a history of not being able to pay all the money back to investors,” he says. “I think it’s fair to say that the market is more complex than people originally expected, and in part it’s because it has taken a while for social sector organisations to understand Big Society Capital’s brief.”
Overall he is very positive about the start that the bank has made. “They’ve genuinely catalysed new activity in the market, they’ve supported a good range of funds to get going, and they’ve built up a really smart team,” he says.
O’Donohoe agrees with these points. “Our role is to build a market,” he says. “And we’re providing repayable finance not grants, and that’s frustrating sometimes… The challenge is how do we work with the sector to understand what opportunities that is relevant for?
“The risk capital of social finance is particularly good for innovation, for example with social impact bonds, and we need to continue to do more to develop that market…Overall though, from a standing start two years ago, we’re proud of what we’ve achieved.”