Lessons Learned from Establishing the World’s First Social Investment Bank

Nick O’Donohoe is Chief Executive Officer of Big Society Capital, the world’s first social investment bank. Before helping to set-up Big Society Capital, Nick was a member of the Executive Committee of JP Morgan Chase where he was responsible for supervising the firm’s Social Finance Group and led research studies on Microfinance and Impact Investing as an Asset Class.

Earlier this summer the Prime Minister launched the G8 Social Impact Investment Forum at an event in London in the lead up to the Enniskillen summit. In this context I was asked about the practical policy lessons I could share from establishing Big Society Capital. For others interested in how to create similar initiatives, I’d say there are six key learnings: three from before our formal launch and three learnt after the launch.

Before launch

  1. These types of initiatives take a long time. In the Big Society Capital case it took thirteen years from the establishment of the Social Investment Task Force to the launch of Big Society Capital. Hopefully if any other government does something similar they can do it more quickly but they should not underestimate how long it takes to pass enabling legislation, to find a way to provide capital and to set up an operating vehicle. A particular challenge that could have been problematic – but in the end was not – was having to work with more than one Government. Big Society Capital was an idea created by the Labour Government and executed in the end by the Coalition government. Securing broad cross-party political support is essential in executing this type of initiative.
  2. Visionary leadership is critical. It is not just about one person, although in our case Sir Ronald Cohen was the person who drove this idea from the very beginning. It also requires leadership from others, particularly stakeholders in the social sector. If they don’t see the value of the initiative and are not prepared to support the benefits of social investment, it will never happen.
  3. Getting governance right is crucial. It is critical to be independent from politicians in terms of day-to-day decision making and it is critical that the mission is secured in a formal way. In the case of Big Society Capital, we have done this through the Big Society Trust. If you don’t have that then the organisation becomes vulnerable to changes in the responsible Minister and changes in Government or to the personal agendas of the executive team and operating company board. It will never be able to develop a consistent track record to evidence the benefits of social investment unless it is allowed to operate unhindered for an extended period of time.

After launch

  1. The creation of Big Society Capital alone is not the answer. The British Government recognises that although we are an important part of the ecosystem, we are not the only part. A whole raft of other initiatives is needed, to support both the demand and supply side. Investors need to be encouraged to provide capital, just as social organisations and social entrepreneurs need to be encouraged to access this capital. Our government has attempted to do the latter by supporting investment readiness, incubating early stage social enterprises, enabling the Social Value Act, community right to bid and to challenge and by creating the Outcomes Fund to top-up finance for Social Impact Bond proposals. Specifically to attract capital to the sector HMTreasury will shortly introduce a tax incentive for social investment. On-going policy support in these and other areas over a number of years are critical if a robust market is to be developed.
  2. Definition is important. We need to more clearly segment the social impact investment market and also define more specifically what should count as a social enterprise. For example at Big Society Capital we are supporting community development, providing access to new funding for charities through loans and Social Impact Bonds, and  trying to provide equity and other risk capital to social entrepreneurs to develop profit with purpose companies. All of these are very different types of investment that require different ratios of grants and commercial capital, have very different risk profiles and appeal to very different groups of investors. Yet they are all grouped under the title “Social Investment”. So too is personal lending or microfinance which we don’t do, but others may. We need to make these distinctions clearer when we talk about the world of social impact investment. We also know, from research from the National Council for Voluntary Organisations (NCVO), that 26% of small and medium sized enterprises (SMEs) in the UK define themselves as “social” but clearly they are not all generating, reporting or measuring social value in a way that would make them eligible for social investors. We may all think we would “know one when we see one” but if we want policy or tax support, or want major UK companies to support social enterprises in their supply chain or banks to increase lending to them, we are going to have provide more definition. That definition, in my view, will need to be driven by a specific legal form or golden share which guarantees a lock on social mission and also allows capital providers to earn a reasonable return consistent with the risks they are taking.
  3. Most social investment requires subsidy, and subsidy should not be a dirty word. The enterprises we invest in typically lack scale, carry levels of risk that are disproportionate to the financial return, provide goods or services in markets or to clients where the margins are too thin, rarely provide any visibility on exits and often have capped returns to shareholders. All of these factors mean that developing and growing a robust social investment market will almost always mean finding ways of combining grants and investment capital or introducing other subsidies. This could for example be through tax relief or partnership with grant making organisations such as the Big Lottery Fund.

Finally, I should stress the importance of action over words. The social impact investing field is attracting a significant amount of attention particularly from politicians and policymakers. This is a good thing but it needs to be tempered by a degree of reality. Participants need to ensure that they are focused on getting transactions done and finding ways of getting funding to frontline organisations so that these organisations can deliver results. Less talking and more risk taking should be our objective. Only real transactions will give us the evidence we need, both financial and social, which can allow social impact investments to grow and achieve the social change which we all believe to be possible.