Big Hopes for Big Society Capital

Tomorrow marks the day that the Social Investment industry comes of age. Big Society Capital will be launched at 10am at the London Stock Exchange in Paternoster Square, where pavements are freshly scrubbed following the recent eviction of the Occupy protests.

This location choice is the latest quality move of an institution that is being shaped to do something special. It has been a pleasure to watch, over the last 12 months, the creation of this emergent ‘social investment bank’. With origins in the Commission for Unclaimed Assets, and latterly the Government’s excellent ‘Social Investment Strategy’, helped by clarity over strategy and recruitment, and some iconic early investments, a pattern is emerging. Big Society Capital knows what it is here to do, and is prepared to be rigorous and independent minded as it goes about doing it.

In the short term, the biggest difficulty they are likely to face (other than the challenging nature of their whole brief) is that people do not understand what they are there for. This opens it to the risk that the easiest path for the fourth estate is to administer another enjoyable kicking to the ‘Big Society agenda’ and jump back aboard the news-cycle circus as it moves on. Such is the whirligig, it may be too much to hope that even the more thoughtful members of the fourth estate might notice that something quite interesting is going on here.

But, on the off chance that anyone is researching, here is an attempt from within the social investment market but from outside Big Society Capital to explain what it is, and why it is important.

Big Society Capital will not lend money to charities, as mistakenly declared by the Prime Minister in 2011. This would be illegal under the terms of the 2008 Dormant Accounts Act. Nor will it give grants. Crucially, it is established to be independent of government.

As we will be told no doubt by the press release, they are a wholesaler of social investment capital. This means that:

  1. Their funds must be repaid – and they expect to make a net return of around 5%
  2. They will only invest into intermediaries – funds, products or entities that themselves make allocation decisions or structure products.
  3. They will only invest alongside others – where possible, where their capital provides no more than 20-25% of the total investment sum.
  4. They seek the maximum possible social return for this invested capital. Figuring out how this ‘social return’ is to be measured is an early challenge they face.
  5. They operate this approximately £600 million of capital (£400m of which comes from dormant bank accounts and £200m of which comes from certain UK banks as part of the ‘Merlin agreement’ with government)

By now, most normal people’s eyes have glazed over – they do not understand what most of this means, and why should they? It is industry jargon. It sounds boring.

But there is more to it than that.

In the generation prior to 2008, business and financial markets focussed on the narrow goal of maximising financial returns to shareholders in a vacuum. Social responsibilities were outsourced to government and charities picked up the pieces. But the data showed that inequalities increased dramatically during this time. This in turn led to certain social problems increasing rapidly. Yet orthodoxy suggested that anyone who stewarded capital that sought a positive social outcome must invest their capital in these markets, where a by-product of its use was to increase inequality … all so that the income from that capital might be given away for their social purpose. So these assets were being used – in part – to create the problem that they sought to address. Madness.

In response, a growing number of individuals and institutions have been trying to find ways that enable our capital – our firepower – to be deployed for our social or charitable purpose. This is called ‘social investment’, or ‘positive deployment’ or ‘impact investing’.

The truth is that it is hard to do. The world says that it is naïve. There is no public capital market for social investment. There are barely any advisors, and only embryonic track record. There are few intermediaries, and few products in which to invest. This makes Social Investment a risky, unproven thing to get involved in – not an attractive proposition to the trustee of a pension fund or charitable endowment. Embrace the madness or break the law.

On the other hand, there is a significant advisor industry with a vested interest in retaining the status quo, and plenty of track record amongst operators of conventional, profit maximising capital. Done properly, this is risk-free for trustees and boards of directors.

Breaking this deadlock is the point of Big Society Capital – addressing the question of whether it is possible to operate investment capital for social, as well as financial, goals. Their mission is to catalyse the creation of a functioning social investment marketplace – a place where investment capital will come and invest for social, as well as financial outcomes.

This is a fabulous brief. Combined with its firepower and the excellent team that is being assembled,  the story of Big Society Capital is set to be a fascinating and deeply hopeful one. Let’s hope its reported that way.

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