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Analysis: the UK social investment market – after the Gold Rush?

Disquiet emerges over the state of the UK’s pioneering social investment model

Over £100m (€138.3m) of new funding for social investment in the UK was announced last month, just as the UK government delivered its last budget before Parliament dissolved, where it announced a series of measures to boost retail social investment and suggested it would expand the already burgeoning social impact bond market in the country.

It adds to the UK’s status as a “world leader in social investment”, not least for creating the world’s first social investment wholesale finance institution and launching the world’s first social impact bond.

But, while the UK seems to be spearheading a successful social investment movement, there is disquiet at the grassroots, encapsulated recently by a new group named The Alternative Commission on Social Investment*, who released its first report After The Gold Rush, which paints a less rosy picture.

Bluntly, it finds that one of the main reasons for setting up Big Society Capital – to help social sector organisations access repayable finance – is not happening.

“There is no evidence that the creation of ‘the social investment market’ in the UK has made any difference whatsoever to the ability of an averaged-sized social enterprise (turnover £187,000 (€258,510)) to access an affordable £40,000 (€55,278) unsecured loan,” the report concludes.

It says that the Big Society Capital model was not an “evidence-based response to need”, but a “leap of faith based on the notion that there is a commercially sustainable space where market failure overlaps with the possibility of a viable business model”.

These concerns are not new. BSC started in 2011 to great fanfare with an estimated £600m (€829m) in capital. Prime Minister David Cameron personally launched the organisation, proclaiming it as a way for charities and social enterprises, with robust business models, to access repayable finance. But at the time, commentators warned that without grant-funded or semi-commercial support for small and mid-sized organisations, they would be locked out of funding funnelled through the new wholesaler.

However, Nick O’Donohoe, chief executive of Big Society Capital and former head of research at JP Morgan, was firm that the new organisation was focused on hard finance. Speaking to charity publication Third Sector in 2011, he said: “We’re not interested in grants or soft loans. We are an investment institution.”Since then, O’Donohoe has softened his stance. Speaking to David Floyd, author of the Alternative Commission report, last year, he said: “If you’re talking about [investments of] less than £250,000 some part of the investment will always have to be grant….small loans are expensive. The default risk is always going to be reasonably high and there’s a point at which the rate of interest is just inconsistent with the social mission of the enterprise.”

Just a few weeks ago saw the launch of Access: the Foundation for Social Investment, funded with the £100m mentioned above, which may help to address the market failure O’Donohoe suggests through providing grants to organisations through intermediaries, alongside loans from Big Society Capital-backed funds.

But speaking to Responsible Investor, Floyd, managing director of social enterprise Social Spider, warns there is not enough clarity on Access as yet. “There is a degree of confusion of how it will work. There is not much detail and they don’t really know what they are going to do,” says Floyd.

And, it’s not just access to finance that is worrying social sector organisations in the UK. A perception of a hype-fuelled, London-centric sector filled with ex-City ‘suits’ is another barrier. Adding to this, significant amounts of public money and Big Lottery funding has been spent on social investment support, most recently Access, alongside sharp cuts to other public spending on the social sector.

And particularly the voluntary sector has an ideological aversion to social investment encroaching on the public sector, especially through social impact bonds (SIBs). Opposition from unions has been expressed in countries like the US and Australia, but there are concerns in the UK too.

The report warns: “Ministers from the Prime Minister down have implied (or, in some cases, openly stated) that social investment has been fostered by government in order to enable significant numbers of social sector organisations to respond to a situation of reduced public spending. This inevitably creates distrust in a sector where many staff are ideologically or just practically opposed to spending cuts.”

Most importantly, the report highlights a key conundrum for Big Society Capital. Its remit is to “grow the social investment market” – not to help fund social sector organisations. While the two goals can be mutual, they are very different.

Recognising this, the report recommends that the UK government and BSC “avoid treating the development of the social investment market as an end to itself”. And says wider goals of “increasing flows of capital to socially useful investment” should be prioritised over a drive to grow the social investment market for its own sake.

The report was funded by the Esmee Fairbairn Foundation, an early supporter of the social investment movement in the UK, backing the first social impact bond and a number of social investment products since.

Esmée Fairbairn Chief Executive Caroline Mason said the report was “timely and revealing”. 

“Social investment is a wonderful tool but to enable social change we need to improve and develop on its execution,” she said. “If social investment is to help charities and social enterprises improve the quality of people’s lives across the UK, then their voices need to be central in policy, market and product development.”



It is clear that there is a disconnect between a considerable portion of social sector organisations and the social investment sector in the UK. While social investment seems to be working well for large, mainly asset-backed organisations or more commercially focused social enterprises – the success of sustainable and impact investor Bridges Ventures demonstrates this – smaller organisations requiring patient, risk and equity-like finance are struggling.

There is to some extent a culture clash. If even, Sir Thomas Hughes-Hallett, a trustee of committed social investment backer Esmee Fairbairn Foundation, is on the record saying that “social investment is a passing phase that will be forgotten in 15 years”. It shows the level of mistrust from many factions in the UK social sector.But also more pertinently for those organisations wanting to engage with the market there is a gap between the flood of capital and their ability to offer investible social investment products. BSC’s most recent statement on its £36m (€49.4m) in investments so far shows 20% has gone to charities and social enterprises – translating into £7m over three years. Some 31% has gone into charitable property – a secure investment, 20% to help what is described as “critical social investment infrastructure” and 9% to help charities participate in social impact bond delivery.

Positively, this statement also shows that Big Society Capital’s investments have attracted almost double the amount from co-investors – BSC’s £36m, has been matched with £68m (€93.2m) in co-investment. So its goal to “grow the social investment market” seems to be on track and it is crowding in capital.

But, the Alternative Commission on Social Investment contends that this has driven the “emergence of a small market of social investment intermediaries (organisations which get BSC funds to invest in the frontline) aiming to invest large amounts of money in large social sector organisations with high growth potential, supported by a government-funded investment readiness programme”.

*RI’s Senior Reporter Vibeka Mair sat on the Commission.