Big Society Capital: The performance review

Last year a new leader was appointed to stimulate the creation of an emergent social investment industry and this leader was called Big Society Capital. One year on James Perry calls them in for their appraisal.

The first thing to say is that the fundamental objectives have been met. Getting set up, clearing the EU and FSA regulatory hurdles, receiving the first deposits from the dormant bank accounts, getting stuck into the policy agenda, appointing a quality core team and getting some capital out there were not foregone conclusions. Significant credit must be given to Big Society Capital (BSC) for achieving this with such alacrity.

With a sector eyeing the considerable riches in its coffers, BSC has had the tricky task of navigating a route through the demands of a starving sector where investment propositions are often ‘in need of some development’, without losing touch with the task they’ve been set of achieving a positive net return on their capital.
As the year has progressed, BSC has generally done a good job of investing in propositions that have merited investment, giving some of the pioneering intermediaries a chance where perhaps the proposition has required a less comfortable ‘venture’ approach, and figuring out how this market might be grown in the medium and longer term. As a co-investor they have been a breath of fresh air and a pleasure to deal with.
As it looks back on the past year, BSC has good reason to feel satisfied and deserves credit for the solid start that has been made. Moving into the second year, the honeymoon period is likely to end as a number of issues come into sharp focus. The true measure of this sector leader will be in how it addresses the many challenges that lie in its path. These include:
Pressure to deploy
Social sector organisations need capital. Big Society Capital has it. But BSC’s capital has a demanding return expectation and it will only achieve its current mandate if it is careful to invest it into propositions which have clarity and manageable risks. There is a fundamental mismatch between BSC’s supply of capital and the demand side. One way to address this mismatch is for BSC to focus on fewer, bigger deals with established market participants, such as Ecology Building Society and Charity Bank. This is a no-brainer, but if it happens at the cost of some of the smaller and more innovative deals, then the moment might be lost for BSC to lead some of the more fundamental changes to how investment capital and civil society relate to one another.
Policy interventions
Everyone knows that the tax treatment of social investments is not currently optimised to stimulate the market. One way of introducing more of the risk appetite that the market so desperately needs is to address this through tax breaks for social investments. This way, some of the risk downside can be compensated by tax-break upside. BSC have done a good job thus far in making this case and will, alongside others, deserve considerable credit if their work bears fruit. George Osborne is certainly making encouraging noises.
Investors typically respond to opportunities presented. But in this underdeveloped market, key areas in which the market must develop may be a vacuum. Unsurprisingly, given the people involved, BSC have a core strength in strategy, so see this more clearly than anyone. There have been signs of a willingness to be proactive and signal areas of particular interest for them, as a challenge for the market to respond to. Rather than raising eyebrows, this should be welcomed and encouraged.
Creating a new culture
In many ways the hardest challenge for BSC has been the establishment of a new kind of institutional culture. This is a challenge with which all social investment entities have wrestled. Some err on the side of the social (perhaps struggling with some of the financial), and some the opposite. BSC needed to become truly ‘bi-lingual’, speaking fluent finance and fluent social transformation. At the heart of this culture must be a recognition of the deep value of the social sector as well as the value of the financial services sector. It will fail if it recreates the macho culture and superiority complex that makes so much of the financial services industry so objectionable to so many. The first twelve months have raised no questions as to the financial fluency of BSC. A question remains as to the extent to which it is achieving fluency in the business of achieving social change. Engaging with social investment is a bruising experience for the social sector, as it comes to terms with new expectations. If BSC cannot bring the social sector with it, then it will have to move into a bunker. The recently advertised social sector leader role at BSC is perhaps a recognition of the need to strengthen this area. It is crucial that this role is seen as strategically core to BSC and allowed to infuse every nook and cranny of BSC’s organisational culture, from top to bottom. 
Pressure for co-investors
Core to the purpose of BSC is to create a market, which means other investors must come and start investing. These other social investors are thin on the ground at the moment, and have limited capacity on a number of levels. Investors will come as the market matures and track record is developed. Whilst key in the longer term, in the short term this issue is a red herring. BSC need to be given the freedom to get the right things funded irrespective of the level of participation of other investors. 
Risk of politicisation
Labour see the establishment of a ‘Social Investment Bank’ as their idea, as it came out of the Commission for Unclaimed Assets, on their last watch. They were admirably supportive in the establishment phase. But take the Coalition government’s goal for London to become the global hub of social investment, add THE CUTS, smother with the rising political temperature in the run in to the 2015 election and season with a politicised name – and see what happens.
Leadership is about doing the right thing, not just the easiest thing. It is obvious that there is a serious mismatch between the BSC’s supply and the social sector’s demand, which creates a strategic problem. If the current return expectations are retained, BSC’s ability to work with many of the best social sector organisations will be severely constrained. It will only be able to fund ‘safe’ social investments, where intervention to address market failure is less needed. The alternative is to respond to the market lessons of the first year by gaining agreement from the powers that be to a tweak in the mandate – admittedly a conversation that might hold risks as well as offer opportunities. For example, were the £600m divided into different pots with different return expectations, the potential for responsive and collaborative approaches to the demand side might be transformed. 
We all know that the end game is to show ‘big capital’ that social investments can make a return, and thus blaze the trail for a massive capital inflow for civil society organisations. And we all know that if we cannot demonstrate this then social investment will always remain a tiny niche. 
But “I know that half my research and development budget will be wasted, I just don’t know which half”. Perhaps those in the R&D lab at BSC need to be allowed the same freedom as those in the R&D lab of any sensible established business – and be given permission to lose a bit of money. One way of doing this would be to carve out a ‘first loss’ pot to enable the intermediary businesses to scale sufficiently to hire teams and get to a financially sustainable point with capacity to properly manage investments. Perhaps such a pot could be provided by Big Lottery Fund.
Ultimately, proving the point with some of £600m whilst stimulating the whole market may be preferable to using all £600m to stimulate the parts of the market which are already the most viable.