Big Society Capital Blog

At Big Society Capital we’ve just published our first ever annual report. The report details what Big Society Capital has done in terms of making wholesale investments, encouraging others to invest alongside us and championing the social investment market more generally.

We believe there is considerable potential for social investment among social enterprises and charities but more needs to be done to grow intermediaries who can offer the right type of financing on terms that make sense.

Regional funds

We are convinced that more regional social investment funds are important to the market’s development, not just to provide support to social investment all around the country, but also to pull-in geographically-focused investors, including individuals and also potential institutional investors such as local authority pension funds. We are hoping to create the first regional social investment fund in the North East of England. We are partnering with the Northern Rock Foundation to capitalise a fund that will invest in social investment finance intermediaries serving the North East. We hope to follow this with the announcement of other regional funds in the future.

Community assets

There is a long-standing history of developing community assets across the UK, with fresh impetus stemming from the rights and powers contained in the 2011 Localism Act. But the enormous potential of community assets could go unmet unless the availability of finance across the various stages of asset development improves.

We are working with leading grant makers and industry experts to investigate how to improve finance for community asset development. Specifically we will examine the potential for a significant new financing facility that would empower communities to take valuable assets all the way from feasibility-testing to final development stages.  We hope to report on progress by the late summer.

Outcomes finance

2012 saw the number of social impact bonds jump from just one to 14. 2013 has continued to see new social impact bonds develop, and there is the prospect of significant outcomes finance demand resulting from the Minister of Justice’s probation reforms and other initiatives such as the government and Big Lottery Fund’s co-commissioning facilities. Also this year, the world’s first social impact bond fund, managed by Bridges Ventures with BSC investment has begun operation. We’re confident there is demand to justify a second outcomes finance fund and room for a second fund manager to manage such a fund. BSC will soon call for a fund manager proposals and offer a cornerstone investment.

Retail funds

Having a suitable retail product for investors is key to opening-up social investment to a mass investor market. A suitable product will be diversified across underlying securities, sufficiently liquid, and eligible for tax wrappers such as ISAs. We are confident that 2013 will see mainstream financial product manufacturers bring suitable retail products to market. For the first time this will mean investors can make low risk social investments into funds with portfolios that could include charity bonds.

Unsecured loans for charities and social enterprises

One product in very short supply but, we believe, in significant demand is unsecured loans for charities and social enterprises. Such products are very useful to provide growth capital for organisations without equity and to provide working capital. BSC is working with a number of intermediaries to get more unsecured lending facilities for social sector organisations structured in an appropriate way. We already have visibility of proposals in our pipeline that would increase availability by such products. We are also working hard to understand the risk profile of this sort of lending and the link between pricing and demand.

We believe that initiatives like the above will address specific gaps in the social investment market and increase the pace of the growth. While there is a long way to go, there is an incredible amount of activity taking place to make the market more accessible both to investors and users of capital alike.

Nick O’Donohoe Chief Executive

Please follow the link below to see Big Society Capital’s Annual Report:

www.bigsocietycapital.com/annualreport

We will be formally marking our 1^st anniversary on May 9^th, when we launch our first ever annual report.

But before then, and before I break out the birthday cake, I thought it worth summarizing some of the things we’re pleased with in our first year in business, and some things we’re impatient for as we look towards our second year.

We’re most pleased that BSC’s capital is already being put to work and making a difference. A few weeks ago we had our first ever portfolio review. It was inspiring to hear about real communities benefitting from their own renewable energy facilities (see our investments in PURE the Clean Planet Trust, or the Community Generation Fund), or interventions now being provided to reduce the risk of young people becoming NEET (see for example our DWP innovation fund investments).

We’re pleased to have made a significant level of investment commitments, now standing at over £50m across 20 different investments, and which will pull-in at least as much again of co-investment from other sources. That’s a lot of extra capital in what is still a small market.

And we’re pleased to have built an organisation that is not just capable of making wholesale social investments, but championing the market more generally.  BSC and our partners have together made significant progress in the last year in social impact methodologies and the tax and regulatory environment governing r social investment.

Looking forward towards year two though, we are impatient. We now have quite a lot of evidence there is considerable potential demand for social investment among charities and social enterprises, but it’s a question of getting the right products at the right price backed by the right investors to make more deals happen.

In year two, as well as increasing our level of investment commitments generally, we will be taking a more proactive stance in specific areas including:

-          Unsecured lending products, as I mentioned at least week’s All-Party Parliamentary Group on social enterprises

-          Community asset financing, which has the potential to transform the ability of communities to own and run valuable local resources

-          Regional investment funds, so we can ensure social investment reaches all parts of the UK

-          Retail investment products, that can start to tap the much deeper pools of capital held by individual investors

We hope to say more about these areas and more on May 9^thwhen we launch our annual report.

I also want to say a big ‘thank you’ to our investees, co-investors, partners, boards and staff for all their hard work during year one.  If you can make it to Fleet St today you can be sure of cake (but no champagne!)

Nick O’Donohoe

Chief Executive Officer, Big Society Capital

Today is an important day in the development of the social investment market. The announcement by the Chancellor in his Budget today that he will introduce tax incentives for social investment will be pivotal in encouraging greater numbers of individuals to provide funding to social sector organisations. This investment can help social sector organisations to grow and make a big difference to a large number of society’s most vulnerable. Until now, the lack of appropriate tax incentive has been a barrier to unlocking the potential of these individuals to support social investment.

Big Society Capital is working hard to help address these barriers and spur on the growth of the market. This is why we commissioned, along with the City of London, leading research about the Role of Tax Incentives in Promoting Social Investment (see here) about this very topic.

We have provided some more detail on the reasons and the potential for a tax relief in our blog post below and we look forward to contributing to consultations on what is a big step in the right direction for the social investment market.

Nick O’Donohoe

Chief Executive Officer

Should social sector organisations be treated differently to small businesses when it comes to raising much needed investment? Well, that’s how they are currently treated by the tax system. Existing tax incentive schemes, such as the Enterprise Investment Scheme and Venture Capital Trust scheme, have a good track record of encouraging investment in small growing businesses. But these remain by and large unavailable to investments in social sector organisations. Without resorting to the detail, this is because existing reliefs require investments in equity that large numbers of social sector organisations simply do not have. Even more confusing is that tax relief exists for donations to these organisations – but investments are left out. Given the increasing role that social sector organisations are playing in public services, the lack of tax incentive does not make sense.

This tax relief “gap” highlights a big missed opportunity – to help connect social enterprises with individual investors who can provide the capital they need. New research commissioned by Big Society Capital and the City of London released on the 5th March (see here) for the first time quantifies this opportunity as being £480m – this could go a long way to meeting the capital requirements of social sector organisations forecast to grow to £1bn by 2016.

What social sector organisations are increasingly looking for is risky capital, such as equity-like capital and unsecured debt. Amongst other social investors, Big Society Capital (BSC) is working hard to find innovative ways to meet these needs and aims to commit at least £75m in 2013 to do so. However, it is still unclear where the matched funding needed to accompany BSC’s investments will come from. Further, in an environment where government investment funds and foundation investment funds are becoming scarcer, new sources of funding are increasingly important.

Individuals are the right targets for this type of social investment. Not only do they have a large amount of risky capital to invest, but they have stated a willingness to use their wealth to do good as well as make a financial return. Behavioural studies by IPSOS Mori have reinforced this social appetite across a variety of social investment products. Whilst certain key barriers to their investment are being worn down, such as individuals’ need to see evidence of how their investments’ social outcomes has been addressed by broad sector collaboration on a suite of tools to evidence social impact (see link to http://www.bigsocietycapital.com/social-impact), one important barrier remains. A tax incentive remains critical to individuals’ investment decision-making and a key motivator for 75% of investors. To take advantage of this opportunity, a tax incentive will be essential.

However, the beauty of this case is that current schemes can be used to create a tax incentive with a minimum of fuss. The existing provisions of EIS and VCT schemes can be adapted to incorporate the specific needs of social sector organisations whilst maintaining their overall structure and purpose.

Action now would be very timely. At this early stage of the social investment market’s development, such an incentive could unleash a wave of innovation and scale that could help move the market towards overall sustainability. This could produce a return, not just for a new breed of social investors, but for society at large.

Simon Rowell

Strategy and Market Development

Since it opened in April, Big Society Capital (BSC) has committed £56 million to 20 separate organisations. We have made cornerstone investments in a series of Social Enterprise funds managed by new and existing intermediaries. We have committed to six newly created Social Impact Bonds to fund charities to provide innovative interventions across a range of social issues in a diverse set of locations around the UK.

In addition to its wholesale investment activities, BSC also began its important role as a champion of social investment and as a builder of the infrastructure to support the development of this market.

This included investing in the development of a social stock exchange, providing funding to support the growth of Clearly So, a firm dedicated to helping social organisations raise capital, and collaborating with 14 social investment intermediaries to publish best practice guidelines on defining and measuring social outcomes.

We also continued to work closely with government and others on providing additional support to help social organisations build capacity and increase their ability to access investment, for example by chairing the Investment and Contract Readiness Fund panel.

In 2013 we believe that, as a result of our establishment, front-line social organisations will begin to notice a real difference in their ability to access capital. There will be more dedicated pools of capital. There will be more social investment professionals to originate and structure transactions. There will be greater standardisation and consistency in Social Impact Bond programmes and more money available to fund charities wishing to participate in these outcome based programmes.

We recognise however that there is much more to do if BSC to succeed in its mandate to develop a fully functional social investment market.

In 2013 we will need to provide additional capital to new and existing social investment intermediaries in a way that allows them to grow and expand their impact. We aim to commit another £75 to 100 million in up to 20 new investments.

We need to proactively develop the infrastructure that supports the social investment market. Identify new intermediaries that can focus on providing social investment capital to specific social sectors such as health or community assets. Develop intermediaries that can focus on specific regions within the UK. Articulate more clearly what a developed social investment market would look like and what gaps need to be filled. Find ways to allow a broader range of smaller investors to access the social investment market.

We need to continue to develop with our partners better measurement of social impact, ensure that it is embedded in our own investment process and work with social organisations to help them develop a more robust evidence base that can illustrate their social value and give them better access to social investment capital.

We need to ensure that we are working with all our stakeholders to champion the development of social investment. Spend more time with front-line organisations. Work with them to help them identify how their organisations can benefit from investment funding. Work more directly with financial institutions and companies to encourage them to channel more of their funds to social investments. Work with government to champion the role of social organisations in government programmes. Ensure that, when social organisations do participate, the social value they create is recognised.

Our mission at BSC is to build a strong and sustainable social investment market. In 2012 we built a solid foundation. Our challenge in 2013 is to accelerate the growth of the market, to persuade more investors to become social investors, to create more specialised intermediaries, to enable more front line organisations to access more funding and to start to create real and tangible impact on our communities.

Nick O’Donohoe

Chief Executive Officer, Big Society Capital

Evidencing social value has become a pressing issue for social sector organisations to enable them to showcase and demonstrate the value they are delivering. This is particularly relevant in the context of increasing payment by results commissioning by government and the Social Value Act 2012 that means public bodies need to consider social value in procurement processes. More broadly it is a way of targeting increasingly scarce resources, including funding and investment, to their most effective use – with a focus on the difference that is being made to the lives of the ultimate beneficiaries. It is also a way in which to be accountable to stakeholders.

Big Society Capital is particularly interested in embedding social value into investment and business processes for two key reasons. Firstly, since as a social investor we invest for both social and financial return, it is essential that we prove, track and measure the difference our money is making to people’s lives.  We have therefore integrated social impact assessment into every stage of our investment due diligence process, and are continuously looking for ways to map, monitor and reward impact. However, as it isn’t enough to simply measure the hours of service delivered, beneficiaries reached or savings to the public purse, we attempt to identify and measure what actually matters. We stress the importance of an outcomes/beneficiary focus and the evidencing of outcomes (both qualitatively and quantitatively), tracking the progress of an organisation or programme against the social mission and including the perspective of the beneficiary when it comes to judging performance.

Secondly, one of BSC’s goals in building the social investment market is to help social investors and investees build a common ground on which to develop and implement complementary social impact strategies. Our approach has been to work collaboratively across the sector to establish best practice amongst SIFIs and provide a standardised taxonomy and set of definitions for outcomes based investing. We need to be careful to acknowledge what we don’t know and cannot measure, instead of prematurely focusing on quantification or benchmarks at this stage. We are trying to build a new market; hence we’re taking a bottom-up, open source approach as we want these resources to be built both by and for the sector. We’re working collaboratively alongside those who have worked for some time in this area including experienced social investors and the social sector itself to come up with this best practice and taxonomy. We have also developed an impact matrix to help intermediaries collate and report on social performance across a variety of frontline organisations and a toolkit for frontline organisations and intermediaries.

Most importantly, BSC wants to help make evidencing social value a core part of the strategy development for front-line organisations themselves to allow them to effectively evidence and communicate  what they are doing. If you exist to make a difference to people’s lives, you need to assess this in order to demonstrate what difference you’re making; the progress you’ve made  against your mission; and how you can continually evolve to improve your activities. Impact assessment isn’t just a reporting tool; it’s a strategic one as well and the sector is well place to be thought leaders in the way this is integrated into business, finance, commissioning and procurement practices.

Caroline Mason

Chief Operating Officer