Big change at Big Society Capital? CEO Stephen Muers responds to Adebowale Commission

As Big Society Capital marks its 10-year anniversary, CEO Stephen Muers announces key changes ahead – including addressing past failings on diversity and changing a target return rate that is now “out of step” with the organisation's mission. 

Stephen Muers - Big Society CapitalIn January the Commission on Social Investment chaired by Lord Adebowale recommended “significant reforms… to make the market work more effectively” and concluded that “social investment had lost its focus: supporting the growth of social enterprise” and that “an urgent course correction is needed.”

As the CEO of Big Society Capital, founded ten years ago to help develop social investment, the Commission’s findings are extremely important if not always comfortable feedback for us. So, colleagues and I have been taking the time to digest the report, as well as engaging our board, and hearing what others in the sector are saying. We have been considering its findings in the context of other feedback we have received, such as the Oversight Trust’s Quadrennial Review commissioned in 2020.

Overall, we agree with what the Commission wants to achieve, and with many of its recommendations for how to get there. We at Big Society Capital can make some changes ourselves, and work with partner organisations to move others forward. Though, as our mission is wider than the focus of the Commission, we need to reflect that in how we respond to its recommendations.


“Enterprise-centric” finance

At the heart of the Commission’s report is a conclusion that more “enterprise-centric” finance is needed for many social enterprises to thrive. Such finance may be of longer duration or more flexible around return requirements.

We agree that providing this kind of finance is one important function of the social investment market, and that we have a key role to play in delivering it. We see that role as having three parts:

1. Building on what has already been achieved: Blended finance, in particular developing products where some form of subsidy adapts the finance to the needs of smaller social enterprises and charities, has been a central part of our strategy for many years. Access – the Foundation for Social Investment has been very successful over the last six years, enabling our capital to be blended with grants to reach more than 500 social enterprises and charities through the Growth Fund alone. We are proud of the effort we put into helping set up Access, and more widely of the £148m we have invested to make such subsidised or blended finance available to more enterprises using a range of tools including grants, tax reliefs and loan guarantees. Overall, the impact of all this work can be seen across the sector: Social Enterprise UK’s State of Social Enterprise survey of 2021 shows that issues relating to access to finance are no longer the top category of barriers faced by social enterprises but have fallen to third, after operational and economic barriers. While a quarter mention difficulties obtaining grant funding, the number of social enterprises citing debt or equity finance as a barrier has fallen significantly from 18% to just 6%, although provision of emergency finance during Covid may be a factor.

2. Increasing subsidy: We agree with the Commission’s conclusion that a sustained and increased level of subsidy will be needed to build a long-term supply of capital to some social enterprises. This is vital particularly for those that are smaller, have lower margins due to the way they deliver impact or are led by communities that suffer discrimination and disadvantage. We also agree that dormant bank accounts and the wider set of dormant assets that are set to become available in the future are a critical source for this. We have consistently argued for additional dormant assets to be devoted to subsidy for blended finance including the most recent allocation of an extra £20m to Access. We are pleased to commit to working with partners across the social investment sector to make the case for future targeted subsidy aimed at ensuring finance can reach organisations who would otherwise miss out, as argued for by the Commission.

Our original target return rate is now out of step with both our mission and actual investment practice

3. Looking at Big Society Capital’s role: The Quadrennial Review recommended that we discuss with our shareholders whether the target rate of return with which we were established is still the right one. In turn the Commission argued that we should aim for a similar return to the British Business Bank (which is linked to long-term government debt, currently in the 1.5-2% range). It is certainly true that a lot has changed in the ten years since we were established. Long-term bond yields have fallen and, more importantly, we have learnt more about what mix of investments is consistent with our mission of building a sustainable, growing and high-impact market. As a result, our original target return rate (4%-6%) is now out of step with both our mission and actual investment practice. Therefore, after consulting with our shareholders, Big Society Capital’s board has decided to revise our target for the net return for BSC as a whole, after costs, of around 1% per annum, measured as a rolling five-year average. Of course, there will continue to be a wide range of different rates of return for the investments within our portfolio, tailored to each specific circumstance and the needs of our co-investors.

It is important to stress that changing our overall return target will not lead to significant changes in the cost of capital nor reduce the need for long-term subsidy for parts of the market. However, it will more accurately and transparently reflect our investment practice and the way we balance competing objectives. The front-line cost of capital is driven much more by the likely level of defaults, the transaction costs associated with small loans, and crucially the requirements of other investors, than by our target return. While our actual net returns have always been closer to the new target, we hope this change will provide much-needed clarity and enable us and our partners to make the right choices about how to provide what social enterprises need in the future.


Equity, diversity and inclusion in social investment

The Commission set out some powerful findings and recommendations about equity, diversity and inclusion in the social investment market. These are clear and ring true. As an important player in the market, we at Big Society Capital clearly have some responsibility for past failings and need to contribute to solutions, alongside others.

We at Big Society Capital clearly have some responsibility for past failings and need to contribute to solutions, alongside others

We support the call for National Lottery and other funding to be used to establish a social investment intermediary specifically targeting Black-led organisations, which has the potential to fill an important gap. As we are not a grant-maker we cannot provide the core operating funding needed for such an intermediary but would be very interested to explore providing appropriate investment capital alongside in the future.

However, we also need to act ourselves. In 2021 we set out our equity, diversity and inclusion action plan, covering issues from recruitment to communications and our investment policy. More recently we have signed up to the sector-wide Diversity Manifesto. Implementing all that it calls for will not be easy or quick for us, but we are determined to make progress. Through our Ideas for Impact initiative we backed UnLtd and Big Issue Invest to create an online tool where social enterprises are able to understand and improve their diversity, equity and inclusion practices and policies. We are now well advanced in conversations with partners about supporting a fund they are creating to take forward many of the Commission’s recommendations in this area. And we are also reviewing our investment process across the board to improve how we reflect equity, diversity and inclusion in our decision-making.


Big Society Capital’s mission

The Commission believes that Big Society Capital’s mission should be changed: to be purely about supporting social enterprises and trading charities, and in particular to be focused on providing concessionary capital and not to try to build a wider market. This is a perfectly reasonable view, and as set out above we are clear that a crucial part of our role is indeed to enable finance to reach current social enterprises and to support the provision of concessionary capital through blended structures and the like.

However, we are also clear that we were given a wider mission for a reason. The total amount of money that will ever be available from dormant assets or other sources of grant is tiny in comparison to the scale of social need in the UK. To take just one issue among all those we want to help address, providing sustainable high-quality housing to everyone in the UK at risk of homelessness would require, between 2018 and 2041, an estimated £19bn according to Crisis. Therefore, we deliberately try to work with mainstream investors with deep pockets, making the case to them for investing in impact and avoid using Big Society Capital’s capital to create a niche market that crowds out other investors and cannot grow.

Social investment is not a zero-sum game where we need to take slices of investment from one area to benefit another. We should aspire to grow the total resources available

One example is Social and Sustainable Capital’s housing fund. It was designed around the needs of social enterprises and charities, providing the finance that organisations like P3 and Hull Women’s Network use to provide accommodation and support to some of the most vulnerable people in society. Big Society Capital was one of the initial investors, along with several foundations. But crucially the fund was set up so it could appeal to a broader range of investors, including more traditional institutions who are increasingly focused on impact, and so has now reached a scale at £73m – seven times what we invested – that enables it to support many more charities than would have been possible with a focus just on concessionary finance. Overall, the capital invested into social impact like this has grown eight-fold in less than a decade to more than £6.4bn and such scale is not simply about numbers, it is about improving many more people’s lives.


An important opportunity

We believe that it is possible to do both: provide investment that meets the needs of social enterprises and similar organisations, while also building a sustainable and growing market that has a level of ambition commensurate with the scale of social need in the UK. Social investment is not a zero-sum game where we need to take slices of investment from one area to benefit another. Instead, we should aspire to grow the total resources available, right across the spectrum from grants through concessionary finance to models facing more institutional investors. We need to make the case to investors and government to significantly grow investment for all, and look forward to working with Lord Adebowale, the other members of the Commission and other partners to do so. While it won’t be easy, the opportunity is enormous for the next decade of social investment if we work together. 


Top image: Students supported by West London Zone, an outcomes-based contract backed by Bridges Fund Management's £25m Social Impact Bond Fund, into which Big Society Capital invested £10m.

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