Peter's Blog Post for Business Fights Poverty

Peter Babudu, one of this year's On Purpose Associates, talks about how Start!e will directly address one of the major challenges that impact investors currently face: finding investment-ready social enterprises. Start!e has been set up as an incubator to facilitate the rapid creation of social businesses that protect the environment and reduce poverty, accelerating qualified and viable ideas from conception through financing to sustainable operation. Check out his post for Business Fights Poverty here.

The Big Society Bank has been 'launched' - but what are we still waiting to know?

After a gestation period of more than a decade, the Cabinet Office recently announced that the Big Society Bank - recently rechristened Big Society Capital – had been ‘launched’ .

It would be fair to say that this launch was a media-focused announcement rather than an actual opening for business. EU and FSA approvals are still pending, and the Bank’s holding website itself states: “Big Society Capital is currently in the process of being set up and is not yet open for business”. The major component of the announcement was the unveiling of Big Society Capital’s board of directors and board of trustees – whose membership focuses on various City and Social Finance grandees and a couple of SocEnt and third sector trade-bodies. In June, prior to this announcement, an interim Big Lottery Fund-run £5m ‘Big Society Investment Fund’ had been established, and the recent ‘good and the great’ announcement was topped up by the heralding of a £1m investment in the Private Equity Foundation’s work on NEETs through this interim arrangement.

It’s likely that this buzz of activity will continue over the coming months as the government seeks to bolster the wider ‘big society programme’ by playing up its most solid component. However, underneath this, the answers to a range of key questions remain unclear, and so therefore does assessment of whether Big Society Capital will fulfill its huge potential.

It remains unclear how much money the Bank will eventually have available to it, and the scale of this is obviously crucial in determining its eventual impact. Estimates of the amount of ‘unclaimed assets’ vary but have stretched into the billions. Current estimates sit around £400 million. In addition to this, approximately £200 million will be available to the Bank through Project Merlin, the agreement between the Government and Britain’s major high street banks that followed the bank bailouts of 2007-2008.

Another key key question is the cost of finance. The Project Merlin banks have talked about the £200m being available at commercial interest rates, which would simply duplicate finance that is already available to social enterprise (but too expensive) and go against the whole concept Cohen (who understands this) has been trying to put together.

Scope is another key issue that has yet to be ironed out. Within what geographical reach will its capital be allowed to be deployed, and how will that be policed? For example, what about a solar lighting company (social benefit) that has its operational base in the UK (geographical fit) but manufactures in China and sells in Africa? Does that put it in or out of scope? What sectors will be allowed? How will social impact be measured / distinguished? What prevents a conventional business (such as Unilever or Pepisco) from applying and claiming a social benefit? Will it only be available to organisations with certain types of legal structures, e.g. CICs or Co-ops? What about charities? Or businesses with an embedded social purpose?

A further question is how long it will take the social investment sector to adapt. The Big Society Investment Fund calls for proposals from investment intermediaries who are based in the UK and focused upon England. Assuming that the Bank will take a similar scope, it would be fair to say that there are not many of these currently in existence - Bridges Ventures, Unltd, Venturesome, and new entrants like Merism Capital come to mind. How many will be needed to make this work? How long will it take to create them?

Beyond that, if the funds need to find a home within the SE sector itself, the scale of recent investment does not suggest this will be easy to do. Investments like HCT’s £3m ‘social loan’ to and Cool2Care’s £500k investment from a consortium of Big Issue Invest, Venturesome and CAN Breakthrough are news in the sector because they are - for social enterprise - big and rare. This suggests £600m will be very hard to deploy within the sector without investment in significant capacity building to both expand the sector and to improve investment readiness. While May’s interim proposal for the Big Society Bank did recognise this, it remains to be seen how the institution - which is seemingly being set up to run as a wholesale investment bank - will be able to rise to this challenge.

Introducing iX

By Stephanie Denamps

With the expansion of the social enterprise sector comes the need for social finance: designated capital that is earmarked for particular projects where the financial returns must be measured alongside the social benefit. This capital needs to be patient (returns will be made in the long term), flexible and innovative (returns are hard to grasp and measure) and most probably has to accept below commercial rates of return. Fortunately, such pools of capital are already coming together and the interest they get is on the rise. There are social business angel networks connecting high net worth individuals and other philanthropists with flourishing social enterprises (ClearlySo being the largest one in Europe). There are intermediary social finance funds such as Bridges Ventures, UnLtd and Venturesome that lend money to social enterprises expecting a long-term financial return. The Big Society Bank (or Big Society Capital, as it’s now called) will gather funds from dormant bank accounts to fuel these intermediaries and ultimately to spur social business activity. Loans and social impact bonds are the most common instruments so far, but the sector is relentlessly on the lookout for the next financial product that can align social and financial returns.

Alongside all that, there has been a related initiative taking place at a larger scale: a worldwide social impact stock exchange. The iX is in fact the first Impact Investment Exchange Board, developed and launched in collaboration with the Stock Exchange of Mauritius (SEM). A couple of weeks ago, some of the On Purpose Associates attended an event, organized by the ICAEW (Institute of Chartered Accountants in England and Wales) and hosted by Nexii, to introduce the founders of the first approved and regulated stock exchange dedicated to social enterprises. During the presentation we learned about the key benefits of this platform. For the social enterprises that get listed, it brings great visibility, credibility and access to new sources of capital. For social investors, it’s a visible, accessible and trusted pool of social enterprises. To both sides it guarantees the time and cost efficiency of an organised exchange. The Mauritius stock exchange itself is recognised by its good international standards and regulations, advantageous listing fees and absence of tax on capital gains and dividends. Multi-currency trading (Euros, British Pounds and US Dollars) also means that currency risk is reduced. Finally, this project nicely fits the sustainability aims of the island.

Without questioning the need for and the merit of this initiative, it’s worth highlighting a few concerns that arose as the presentation unfolded and the audience raised questions.

Size: The projections so far are to have 15 listings by the time it launches in September 2011 and up to 35 within 18 months. This is really a drop in the ocean when we think of the number of social enterprises aspiring to grow and needing access to dedicated capital. The truth is that the entry requirements are prohibitive for smaller organisations. There is a US$3700 entry fee plus an annual fee varying with the size of market capitalisation. To be eligible, the organisations must have a least one year of published financial statements, over 100 shareholders or over 10% of public debt holders. Most importantly, they must have over US$700 thousand of capitalised market value (or public debt).

Social Impact: Although a condition for entry (and yearly renewal) is primacy of the intent to generate positive social or environmental impact, each organisation is free to demonstrate its mission and impact as it chooses. There are no standardised metrics of social impact or common indicators that gets reflected live for all enterprises at it does for the share price. Instead, once they are listed all organisations become comparable mainly by their financial attractiveness, and the impact side of things runs the risk of falling behind the scenes. Admittedly, reflecting live social impact in a stock exchange way would be very difficult. It is not even granted that all organisations could convey the impact they generate using the same metrics. Therefore, it will rely on the investors to do the proper background check and reading the lengthier reports that the enterprises are required to submit at the time of their listing and the subsequent performance reports. This is not unrealistic, but one must be aware that this is how it works and not expect otherwise.

Other similar platforms: There are other trading marketplaces being developed to bring investors and enterprises together effectively and reduce transaction costs for impact investing. Some people may have heard of Pradeep Jethi’s Social Stock Exchange (SSE) to be launched in the UK, and there are already an Asian Impact Investment Exchange (IIX) founded in 2009, which will eventually seek to attract dual listings from social enterprises outside Asia, and Brazilian and Portuguese initiatives. Although they may all be addressing the same issue and appear to be redundant, there is an argument for the need of multiple social stock exchanges. Just as for the traditional securities market, most social enterprises and investors will likely prefer to engage in platforms that are in their proximity, both geographically and culturally. Therefore, each social stock exchange will be stimulating their regional activity to start with.

The iX may not be perfect as it stands and it may not be the solution that fits all social enterprises or all groups trying to support them, but it is A solution. It certainly has room to exist and a role to play in the promotion and aggregation of social enterprises. It’s still in its nascent phase and needs to be seen as a long-term project, as most things are in this sector. We need to adopt the patient approach if we want to ensure a sustainable growth of social businesses and social investment, and we must absolutely not succumb to the preference for perfection, speed, volume or short-term gains. Who knows, in the future this may be the alternative to the current financial system and its unruly market crises.