www.bigsocietycapital.com/annualreport

http://socialenterprise.guardian.co.uk/social-enterprise-network/2013/may/09/big-society-capital-social-enterprise-intermediaries

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

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

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

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

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

This market update marks a new phase for us. After 6 months operation, we are getting a clearer picture about the opportunities that exist for the social investment market. We can increasingly compare this picture with the investment proposals we’ve received to date. Not surprisingly, some gaps are emerging – and we want to put our capital to work to fill some of these gaps.

We are particularly excited about health, ageing and personal care as a sector – or more accurately a series of sectors – that charities and social enterprises can do really well in. There are large changes afoot here. The transfer of c. £65bn of annual NHS spend into the hands of local, clinician-led commissioning groups will give newfound scope to improve health and care outcomes across preventative, community and acute services. BSC thinks there is every chance new clinical commission groups will look for the sort of innovative, value-driven, and community-based services that charities and social enterprises excel in providing. The growing uptake of personal budgets in social care, and the prospect of more outcomes-based drug and alcohol rehabilitation services, are further grounds for optimism.  Given these changes, we are actively seeking ideas for how to channel more social investment towards these sectors.

Community assets and enterprises is another potentially large market for social investment. It’s also a chance for social investment to make a tangible and visible difference to the proverbial men and women of the Clapham omnibus – by helping them take ownership and control of their library, pub, shop, renewable energy generator or even local transport service. There are some important changes afoot: statutory agencies are divesting their assets quickly, sometimes in multiple blocks; and new community rights are now in place to help communities ‘mark’ assets they deem valuable before any future sale.  Getting more social investment to flow into community assets and enterprises won’t be straightforward – we realize not all community ‘assets’ are assets as such, many being transferred in poor repair and with poor environmental performance, and we know financing feasibility work will continue to require grants and perhaps community share issues. But again we’re confident enough to want to see specific investment ideas focused on community assets and enterprises.

Also today, we have clarified our position on affordable housing. We are particularly looking for housing development concepts which currently suffer from an inability to raise capital, but once proven, could go onto access more mainstream capital. So ideas about how to get the smallest housing associations ‘developing’, more community-led developments off-the-ground and more empty-homes re-developed, will be particularly interesting to us.

Finally, we are calling for more investment ideas in outcomes finance. Many readers will know of our cornerstone commitment into the first Results Fund, and that we’re working in partnership with Bridges Ventures to establish the fund. But payment-by-results markets are now developing at such speed that we are looking for additional ideas to address the resulting need for capital.

That’s a summary of some of the areas where BSC is particularly interested in proposals right now. However, it’s also a very, very partial description of the full range of opportunities available for social investment. We hope to regularly issue updates where we spot opportunities and where there are gaps in our pipeline. And at any time, we continue to welcome applications across the full range of social issues that we believe this growing market can help to tackle.

Matt Robinson

Head of Strategy and Market Development, Big Society Capital

All the intermediaries we support are required under statute to use our funding to invest in “third sector organisations”.

But how should third sector or social sector organisations be defined? The statute which governs the establishment of BSC defines them as organisations that “exist wholly or mainly to provide benefits for society or the environment” This definition includes regulated social sector organisations such as charities, Community Interest Companies or Community Benefit Societies. But should it also include companies or enterprises that have legal forms that allow them to earn profits and distribute dividends?

First and foremost we will seek to ensure that the vast majority of the investments made by the intermediaries we support will go to regulated social sector organisations. We believe, however, that it would be wrong to completely exclude companies that seek to create significant social value but have organised themselves as for-profit companies.

We will therefore permit some of the intermediaries and vehicles we invest in to provide funding to for-profit companies under the following criteria:

1. The Objects of the company set out that it is primarily concerned with providing benefit to society;
2. The company  ensures that any surpluses are principally used to achieve social objectives and payments to shareholders are capped;
3. There is a constitutional or contractual lock on its Social Objects, dividend policy and an “asset-lock”;
4. Remuneration levels reflect social sector organisation norms and are disclosed in line with the accounting requirements for charities; and
5. In the event of a change of ownership, it will take steps to preserve the mission as that of a social sector  organisation.

These criteria are explained in more detail in the Governance Agreement.

We recognise from our extensive consultations with those directly involved in social investment that there is a divergence of opinion. There are those who would like to define social enterprise and social purpose companies broadly particularly because they believe that that is the only way to attract the type of risk capital needed to support and encourage early stage investment in start-up enterprises.  Others believe that Big Society Capital funding should only benefit organisations that fit into a regulatory category that ensures oversight and specific legal constraints.

Our proposed governance rules seek to find a middle ground that ensures that regulated social sector organisations can attract funding more easily from investment intermediaries but also that enterprises that are set up and managed principally for social purpose can obtain the type of capital that they need to grow and maximise their impact on our communities.

Nick O’Donohoe

Chief Executive Officer, Big Society Capital

Big Society Capital (BSC) was an idea that was first raised over ten years ago. The government launched its formal social investment strategy just over a year ago. Since then a blueprint has been developed, EU State Aid exemptions and FSA authorisations have been obtained. The government and bank shareholders have done extensive due diligence. Today BSC is a financial institution with real offices, real employees and a committed and high calibre board. It has a capital base that will increase to £600 million over the next four years and it stands ready to fulfil its mandate to grow the social investment market in the UK. It will aim to provide a broad range of investment opportunities to individuals and institutions. It will seek to connect social organisations to financial markets and to revolutionise the funding alternatives available to them. Most importantly it will provide new investment capital specifically focused on improving lives and supporting communities around the country.

The launch of BSC comes at an exciting time for the social investment market. Over the last twelve months there have been new initiatives and new money made available – by mainstream banks, foundations and other financial institutions; by the  Cabinet Office and the Department for Work and Pensions; and by the Big Lottery Fund. The number of Community Interest Companies (CIC) – entities set-up with a clear social mission and a legal commitment to use their surpluses predominantly in support of that mission – has grown to 6,000 and are proliferating at a rate of close to 200 new enterprises a month. It is now estimated that a third of new enterprise start-ups are socially motivated.

The activity has not just been confined to the UK.  Recent research by JP Morgan suggests that governments across the UK, US, Europe and Australia have made over $5 billion available to promote social investment over the last three years, almost half of which was announced in 2011. Major international institutions are endorsing social impact investing as an emerging asset class. The concept of Social Impact Bonds, a revolutionary financing vehicle which allows private investors to fund important social interventions and earn a return based on actual social outcomes and which originated here in the UK, are being picked up around the world.

The EU is also on board. Over 800 people assembled in Brussels last November to listen to President Barosso and Commissioner Barnier launch the Social Business Initiative which lists 11 separate actions to improve access to funding, increase the visibility of social entrepreneurship, and improve the legal and regulatory environment for social businesses. Initiatives include a new Euro 90 million fund and special priority for investments in social enterprises in the next EU budget round.

The launch of BSC is an opportunity to accelerate the pace of change, to move beyond research and rhetoric and beyond aspiration for a new way of investing and a new asset class. The truth is that, despite all the activity and the good intentions, too little money is making it to the front line.

If the market is to grow, a number of things need to happen – there needs to be more investment readiness support, better means of measuring and reporting social impact, greater financial sophistication in the sector generally and, perhaps most importantly, a more open and realistic attitude towards risk-taking among all the stakeholders in this market.

Mainstream investors and trustees need to challenge received wisdom when it comes to their fiduciary responsibilities by demanding that their advisers and managers show them more social investment opportunities. Foundations need to use the new flexibility granted them by the Charity Commission and allocate at least a proportion of their endowments to social investment funds. Government and Local Authority commissioners need to be quicker to adopt payment by results and need to take risk in awarding more contracts to social enterprises. The fact that organisations with a social purpose can bring benefits that large privately owned government contractors cannot needs to be reflected.  Financial institutions, particularly banks, need to create more specialised and dedicated pools of funds to support local community and social enterprises. The Treasury needs to follow up on its commitment in the budget to address the financial barriers to social enterprise and ideally to do so through appropriate tax incentives.

It is more than a decade since the Social Investment Task Force recommended building an infrastructure for social investment in the UK.  Today the UK is at the forefront of the global social impact investing movement.  Let us not miss this opportunity. Now needs to be the time when this leadership drives real transactions and starts to make a real difference to frontline social enterprises and to the lives of people in our society.

Nick O’Donohoe

Chief Executive Officer, Big Society Capital