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Growing the Social Investment Market - the Government's strategy

 

On 14th February 2011, the Cabinet Office published their strategy for growing the social investment market. This paper sets out the government's vision for using social investment to improve society, and a strategy for how they hope to achieve this goal. This includes their goals for the Big Society Bank, which they believe will be an important catalyst for increasing the amount of private capital available to support social entrepreneurs.

Growing the Social Investment Market: A Vision and Strategy April 2011

Introduction

On 14th February 2011, the Cabinet Office published their strategy for growing the social investment market. This paper sets out the government's vision for using social investment to improve society, and a strategy for how they hope to achieve this goal. This includes their goals for the Big Society Bank, which they believe will be an important catalyst for increasing the amount of private capital available to support social entrepreneurs.

Background

This strategy is part of the government's plans around strengthening civil society, devolution and public service reform.

Part of their public sector reform is to further break up public sector suppliers and encourage a wider diversity of providers. They argue that this will give more choice and control to service users.

The government want social ventures to take up new opportunities presented by this. Their strategy for the social investment market is aimed at making it easier for social entrepreneurs to access capital and advice to do this.

The Strategy

Social ventures
The strategy looks at the role, the government believes, social ventures and social entrepreneurs play in finding innovative solutions to social problems by combining social missions with sustainable business models. Their definition of social ventures ranges from small charitable and community start-ups right through to the largest and longest-established social enterprises. They span a variety of market sectors; business models and legal structures and can include community organisations, charities, social enterprises and social firms.


Social investment market
The strategy identifies a lack of capital as holding social ventures back. It proposes a new ‘pillar of finance for social ventures' - including the creation of a new "asset class" of social investment to connect social ventures with mainstream capital, which they suggest will allow them to grow more dynamically.

What the strategy means

In the strategy, the Government sets out, what it believes its vision will mean for different stakeholders:

• For individual social ventures, the government's strategy could mean that they have access to a larger pool of social investment and be able to access investment products tailored to all stages of growth and replication
• For the social venture sector as a whole, this could see an expansion in its size and dynamism
• For other voluntary, community and social enterprise (VCSE) organisations, the strategy potentially offers the opportunity for VCSE organisations to consider social investment to help them make their activities sustainable in the long term.
• For charitable foundations, the strategy could open up new opportunities to unlock their reserves of capital for social investment, investing with confidence on the basis of both clearer Charity Commission guidance and a developing investment track record from the market.
• For ‘high net worth' individuals and philanthropists, the strategy could result in increasing access to a ‘third pot' for their assets, separate from purely commercial investment and complementary to charitable giving.
• For mainstream banking institutions, the strategy is an opportunity to accelerate the growth of the social investment market by dedicating resources to originate, structure and distribute a new class of investment products.
• For other financial services firms and intermediaries, the strategy will expect them to invest a greater proportion of their assets and their clients' assets in social investments, while building the resources and expertise necessary to research and evaluate the opportunities presented by this new class of assets.
• For central government departments, local authorities and the wider public sector, the strategy could bring new opportunities for better procurement of goods and public services.

A framework for action in the investment market
The strategy outlines 6 areas of activity in the government's framework for action. These areas for action range from broad enabling reforms on public services and localism, to setting up the Big Society Bank.

1. Public service reform - providing new opportunities for social ventures
2. Tax investment - various incentives already exist but the government are exploring future options. They argue that the lowering of the main rate of corporation tax to 24%, over four years, and the lowering of the small profits rate to 20%, in April 2011, will serve to encourage some social ventures that make a profit
3. Creating the right business environment - it suggests that this can be achieved in a number of ways including: providing clear guidance for charitable investments, reducing bureaucratic burden on small organisations, simplifying tax for small businesses, establishing first phase of Local Enterprise Partnerships, doubling the amount of rate relief available for small firms for one year and the government's intention for 25% of new government contracts to be awarded to SMEs.
4. A need for social ventures to access better business support- much support is available, but in reality many social ventures struggle to access this support and there is low awareness amongst most professional services/business capability providers of the needs of social ventures. Therefore, the government aim to make access to this support easier to find, improve the sustainability of the business capability services, encourage pro-bono support and build a network of mentors.
5. Better Market infrastructure - providing wider-ranging and more freely available market analysis and research, as well as the creation of a single web portal or gateway. The portal would be aimed at helping social ventures to connect with the right sources of finance
6. Financing and championing through the Big Society Bank

The Big Society Bank

The Bank's mission will be to catalyse the growth of a sustainable social investment market, with the aim of making it easier for social ventures to access the finance and advice they need - at all stages of their development. Drawing on responses to the 2009 consultation on a ‘Social Investment Wholesale Bank' the Government say that the principles of this bank will be:

• Independence from government -the Bank is expected to be a private sector body, independent of government but with a ‘locked-in' social mission, responding flexibly to the needs of the market.
• Acting as a ‘wholesaler' in accordance with the Dormant Bank and Building Society Accounts Act 2008. This means that it will not invest directly in individual, front-line social ventures.
• Transparency - the Big Society Bank will need clear and transparent reporting arrangements.
• Self-sufficiency - the Bank needs to be financially self-sufficient

The largest UK banks will support the establishment of the Big Society Bank by injecting £200 million of capital. It will also be funded with money released through the dormant accounts scheme, (the Co-operative Financial Services (CFS) have set up a Reclaim Fund to enable the release of dormant accounts money). It is estimated that, in the first year, the Reclaim Fund will release in the region of £60-100 million of surplus money, with the first release likely to take place in mid-2011.

The Big Society Bank is intended to do two main things:

• act as wholesale investor - investing in funds for front-line social ventures, funds for intermediaries, and funds for new market vehicles and infrastructure; and
• be a champion of the social investment market

In order to accelerate the growth of the market, the government expect the Big Society Bank to focus its investment activity in three main areas

1. Investment funds for front-line social ventures
2. Investment funds for social venture intermediaries - these are likely to focus on supporting the viability and sustainability of intermediaries themselves.
3. Investment funds to develop new investment vehicles and to build market infrastructure

Next Steps

The Government have said that their next steps are to work with leading individuals, as well as with intermediaries and other key players in the social investment market.

In this they want to map out which parts of the framework for action should be taken forward by the Big Society Bank, and which by wider government in concert with others.

They also want to identify, within each area of the framework, which interventions should be prioritised; and what the business model, capital structure and governance arrangements of the Big Society Bank should be in order to ensure that its operations are sustainable.

 

Stacy Pritchard
April 2011

 

 

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