Social investment: where to now?

2016 was a big year for social investment and not just because Bono launched an impact investment fund in December.

The major events that took place last year – including the UK Brexit vote and the election of Donald Trump – will definitely change the conditions that social investors operate under and have the potential to change both the focus of the sector and the outcomes that it’s possible to achieve.

So far, UK social investment has a mixed track record in responding to changes in social and economic circumstances. The original idea for the ‘Social Investment Wholesale Bank’ that ultimately became Big Society Capital was given high profile support by the then Chancellor Gordon Brown in 2005.

This was before the global financial crisis. Real wages were increasing and public spending (on actual public services rather debt) was growing.

The 2008 financial crisis changed everything

There were still plenty of problems, but they were different problems to the ones we face today. The then New Labour government was committed to reforming public services to deal with the challenges faced by a growing and ageing population.

In theory at least, the average person was doing ok earning a living in the mainstream economy. Social investment was about helping charities and social enterprises to help the public sector do more to meet the needs of the most disadvantaged people in society and ‘solve social problems’ – ‘scaling up’ to take on bigger public contracts and deliver verifiable outcomes via social impact  bonds.

When the 2008 financial crisis changed everything, supporters of UK social investment attempted to incorporate these changes into their narrative. After the Conservative/Lib Dem Coalition government came to power in 2010, social investment’s role subtly shifted from helping to spend growing public budgets better to helping charities and social enterprises secure what civil society minister Nick Hurd described as a bigger slice of a smaller pie.

Launching the ‘wholesale bank’ in 2012, the prime minister David Cameron explained: “Big Society Capital is going to encourage charities and social enterprises to prove their business models – and then replicate them. Once they've proved that success in one area they'll be able – just as a business can – to seek investment for expansion into the wider region and into the country.”

The first billion: we haven't reached it yet

In 2012, a report, The First Billion, from Boston Consulting Group, commissioned by Big Society Capital, predicted that we would see £1bn-worth of social investment deals completed during 2016, up from £165m-worth of deals completed during 2011.

The authors based this prediction primarily on “a series of favourable trends” in public service market: “Growing outsourcing of public services to private and social providers; a new statutory requirement for commissioners to consider social value when awarding contracts; and a shift towards higher-risk models of payment, such as payment by results.”

The figure for social investment deals completed in 2015 was at most £427m

There are exceptions, but mostly this has not happened. NCVO’s figures tell us that the high point of voluntary sector income from government contracts was £12.6bn in 2010/11, dropping to £11.8bn in 2011/12 before rebounding slightly to £12.2bn by 2013/14.

Unsurprisingly, the social investment market in the UK has not grown at the rate it was expected to. While Big Society Capital’s report, The size and composition of social investment in the UK, shows the overall value of outstanding social investment at over £1.5bn, the figures most directly comparable to The First Billion predictions in last year’s report suggest the market was on course to miss that £1bn dealflow target by a wide margin.

The figure for social investment deals completed in 2015 was at most £427m or, for those who don’t count investments into ‘profit with purpose’ companies, £309m. And while social impact bonds have achieved significant publicity, investment into that market has so far been worth an average of £5.5m per year.

The failure of charities and social enterprises to secure more public sector contracts is not primarily the fault of social investors – it’s mainly due to a cash-strapped public sector not outsourcing contracts of the size and type that charities and social enterprises are well placed to bid for – but social investors have, so far, struggled to respond usefully to these circumstances.

UK social investment has been both blessed and cursed by its status as an idea aggressively championed by politicians of all major parties but, in 2017, social investors in the UK have both an opportunity and a responsibility to respond to the world as it is, rather than the world as government strategy documents claim it is going to be.

UK social investment has been both blessed and cursed by its status as an idea aggressively championed by politicians of all major parties

While public services provide the clearest example of previous failures, finding more effective ways to help charities and social enterprises finance growth in public service delivery is only one of the key issues for the future.

The UK Brexit vote creates a need for socially enterprising responses both to the practical challenges created by Brexit, for example, due to European social funding no longer being available, but also for responses to the anger and disaffection with systems and power structures that at least partly led to the result.

At a global level, the election of Donald Trump and the rise of populists across Europe, highlight the need for economic models that leave fewer people behind. Social impact is not *the answer* to this problem, but some impact investors may be able to provide some answers to some bits of it.

Now it’s about working out what social investment can most usefully do.

• Flip Finance is running an event on 6 April 2017 in partnership with Big Society Capital at Marmalade, the fringe event to the Skoll World Forum on Social Entrepreneurship, in Oxford to look at practical responses to the changing world. It will be of interest to social investors, organisations seeking investment and those who are generally interested in the future of social investment.

Editor's note: This article was amended on 29 March to clarify some of the figures relating to deals made in the social investment market.