Social investment: A call to alms

The UK’s new social investment bank wants established GPs to set up socially-oriented funds – and it’s keen to provide cornerstone funding to make it happen

One of the key decisions taken when the UK government set up Big Society Capital, the first social investment bank of its kind, was that it would provide finance through intermediaries rather than backing social enterprises directly. 

The long-term aim of BSC is to develop a sustainable social investment market. And at the heart of its approach is an idea that has long been championed by its soon-to-be-departing chairman Sir Ronald Cohen (who in a previous life was the founder of Apax Partners): that this is one area where supply will create its own demand. 

In other words, by creating more products in which people are willing to invest, BSC will increase the pool of interested investors (as, it hopes, will a new tax relief for investors announced in the government’s March budget, which BSC thinks could attract almost £500 million in extra investment).
The decision that BSC would operate on a wholesale basis was partly a practical one, says chief executive Nick O’Donohoe. “If we had to deal with every front-line organisation, big and small, we’d need literally hundreds of people and offices around the country.” 

However, it also reflects the fact that this intermediary layer is currently tiny: there are only a small number of community development finance institutions, most of which are sub-scale. “The [thinking] was that if you just plonked down beside them a much larger better-capitalised organisation, that organisation would dominate and distort the market, and the broader market would never grow,” says O’Donohoe.

What this means in practice is that BSC is actively looking for GPs to manage capital on its behalf. Of the 20 investments made so far, around half have been in funds run by third-party managers. One notable example is the Social Outcomes Fund, which was set up by the Government to invest in its new social impact bonds and will be managed by Bridges Ventures, a UK firm that specialises in social impact investing. BSC is the cornerstone investor in that fund – and it’s also made big commitments to new vehicles managed by LGT and NESTA.

But while firms like Bridges are the obvious choices to manage these vehicles, O’Donohoe hopes they won’t be the only ones.

“There is a group of dedicated social investment managers [like Bridges] and of course we’ll be backing them in the future. But there’s no reason why an established private equity firm couldn’t come to us with an idea to invest in health mutuals or whatever – probably not because they think it will make a huge difference to their P&L, but because they see a social value in using the skills they have to enter that market. And there’s no reason why we couldn’t provide cornerstone funding, provided the fund was focused on social enterprises.”

“We’ve had a couple of these already and we’re working on a couple now – but they tend to be smaller firms. We’d love big established fund managers to come to us [with new ideas for funds]. We’d love to see that happening.”

So if you’re a GP who thinks they can make a difference with a fund that backs social enterprises in health mutuals, or education, or community asset purchases, or regeneration, you know who to call.