Category Archives: Social Economy

Government Policy, Impact Investing, Innovation, Institutional Investors, Social Economy

Problems for impact investment in Sweden

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Over the last few years at ClearlySo we have been travelling regularly to continental Europe as part of what we do. We have done business on the continent, and have also used these trips to learn about new innovations in impact investment (such as SIINCs from Germany and “90/10 funds” from France) and to identify financial institutions with a developing interest in impact investment. We believe that accessing new pools of capital is of great benefit to our entrepreneurial and impact fund clients looking for investment.

Sweden as a country seemed promising. It is liberal (small “L”), progressive and open to new ways of thinking. In addition, the positive and non-adversarial relationships between business, finance and the government have made Sweden a role model to which other countries aspire. One recent development in this regard is the introduction of a six-hour workday throughout Sweden. This is intended to make Swedes happier, but in a particularly Swedish twist, experts there also believe it will make Sweden more productive. It is already one of the most productive in Europe:  in 2014, per capita GDP was $45,143, significantly higher than the UK ($39,136). This is despite the fact that people in the UK worked 4% more hours each year.

Given such an open-minded, progressive approach, I felt confident that impact investment would be surging in Sweden. Sadly this appears not to be the case, based upon conversations I’ve had with experts. There seem to be few high impact entrepreneurs, at best one or two impact investment funds, very little government involvement and near zero involvement from the mainstream financial sector (although this is true of the UK mainstream as well).

This surprised me. However according to the experts I met, while Swedes are intellectually open to new ideas, they are actually relatively conservative (small “C”) in terms of implementing them. Swedish society already works rather well, and there is a reluctance to tamper. People earn high incomes, income disparity is well below UK/US levels, and taxes are higher, but the public expects and receives much higher quality social services than other European countries. This is in fact part of the problem for impact investment in Sweden: although Swedes cite all sorts of social problems, in fact, the Swedish social compact operates relatively well.

There are also two deep-seated beliefs I encountered which act against impact investing or even philanthropy. First, there is genuine suspicion of mixing the profit motive with social outcomes. I would not describe it as closed-mindedness, but just a wariness of this very Anglo-Saxon idea. This is then amplified by a particularly Swedish aversion to charitable giving. According to the Charities Aid Foundation (2012) Swedes gave 0.16% of GDP to charity. This compares with 0.54% in the UK and 1.44% in the USA. It is in Sweden where we see the clearest distinction between the Anglo-Saxon model of earning/giving and its model of using taxation to fund social welfare expenditure.

Such an environment is not particularly fertile soil for high-impact enterprises or impact investment in general. In fact, along my European journeys, I found that troubled economies were more hospitable to the necessary innovations (maybe out of desperation). In 2007 I journeyed to 10 Balkan countries and found flourishing innovations in places like Serbia and Bosnia as individuals grappled with deeply troubled societies in the aftermath of a brutal civil war.

I know very few Europeans who would trade places with Sweden as a successful economic model. On a recent trip to Stockholm, any slight disappointment I felt in Sweden’s current approach to impact investing was overwhelmed by the beautiful weather, celebrations of Walpurgis Night, May Day and the 70th birthday of King Carl Gustav. Stockholm is very close to paradise on earth. Nevertheless, this is not to say that Sweden is a lost cause from an impact investment perspective – the banks do, for example, raise money for overseas projects (most notably through microfinance). Once Sweden has considered the model and made it relevant to their domestic needs, I have no doubt that impact investment will eventually flourish in Sweden.

Impact Investing, Innovation, Social Economy, Social Entrepreneurship

How arrogance and abundance jeopardise UK impact investment “Leadership”

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The other night I had a thoroughly enjoyable drink with an old friend. Let’s call him James, which is not his real name. James is very familiar with both ClearlySo and impact investment, but has spent most of last year working in India.

We eventually came onto the subject of impact investment more generally. James had been working on quite a few investment transactions whilst in India and was positively raving about some of the innovations he has encountered. When I asked him to compare Indian developments with those in the UK he became quite animated and said, “The problem with the UK is that professionals in this market have become bloody arrogant.”  He felt it could put the UK’s purported leadership at risk.

James noted how many of the Brits he met in India (James himself is British) were so full of themselves and their “leadership position” that they were unwilling to learn lessons from some of the very interesting experiments underway elsewhere. James went on to suspect that this was probably happening with regard to other markets as well. His contention was that British impact investment experts were so busy flying all over the world to lecture others about “how wonderfully we do it in the UK” that the British impact investment glitterati were not doing enough learning and listening.

This conversation made me rather uncomfortable. I myself have boasted about UK leadership, which seems to be in our commercial interest (I also think it is true). For decades, the UK has seemed a thought leader, and has developed some exciting models, practices and instruments. In addition, the advent of Big Society Capital (BSC), the first of its kind anywhere to bring substantial funding (£600 million) into the marketplace has been extremely catalytic. In addition, this Conservative Government and its predecessors have thrown substantial resources into impact investment. Tax credits, conferences, new legal structures and a host of subsidies have come rapidly. This creates at least two risks.

First, it has in some ways created a rather comfortable bubble of sorts in the UK market. The influx of funding from BSC hyper-charges the market; encouraging entry by non-UK players and discouraging involvement by UK parties in other markets. The sense that things are happening creates encouragement and goodwill domestically, but very little incentive to get involved in and learn from experiments elsewhere. I have previously commented elsewhere on the surprising lack of meaningful involvement by large UK banks and insurance companies in impact investing compared with those in Europe. Also, experiments like the “90-10 funds” in France are instructive.

This bubble also runs the risk of encouraging artificial behaviour in the UK. Some of this was evident in the government funded Investment and Contract Readiness Fund,  where entrepreneurs in certain instances cheekily saw the subsidy as a way to generate a bit of extra income instead of paying advisers for contract and investment readiness, which was the main intention of the programme. Also the availability of funding from BSC has indeed catalysed the market but runs the risk of getting entrepreneurs too comfortable with sub-market rate capital.  Also, because of legislated restrictions on BSC investments the market might be skewed to favour those impact investment opportunities which meet BSC’s criteria as opposed to those with a greater “profit with purpose” orientation.

On balance, James and I agreed that the UK still had many positive things going for it and that the creativity which exists should continue to hold in a relatively good stead. However arrogance is a risk of which all “global leaders” need to be mindful.

First published in Third Sector in January 2016.

High Impact Businesses, Impact Investing, Institutional Investors, Social Economy

Landmark impact investment transaction for the HCT Group is disproportionately important

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Without intending to do so, I notice that my last three pieces for Third Sector (including this one) are about sector leading high-impact enterprises.  Two months ago, I wrote about the Ethical Property Company (EPC), which announced that they would be undertaking their ninth equity share issue.  Last month I discussed a different ClearlySo client, Justgiving, and how our firm was founded on the pledge to create 100 firms just like it (high-impact with good returns).  This month I am tempting fate a bit as at the time of writing the deal has not yet closed.  But by the beginning of December, HCT will have closed a financing of approximately £10m with a range of social investors including Big Issue Invest, Triodos, FSE Group, Social and Sustainable Capital, City Bridge Trust, Esmée Fairbairn Foundation, The Phone Coop, and HSBC, with ClearlySo as HCT’s financial adviser.  Notably the traditional impact investors and foundations were joined by a commercial bank and a Co-op.  We believe it is the largest growth capital investment in UK impact investment to date.

HCT is a giant in the impact investment sector.  A bus operator founded in 1982 (when Hackney’s local authority bus company was failing), the firm has grown rapidly, with circa 1000 employees, 500+ vehicles and turnover of £45m.  It has continued to grow at 10-20% per annum, even in a slowing UK bus company market, and has emerged as a leader outside of the “Big 6” behemoths.

We began working with the company in 2008 (they were keen to lessen their dependence on mainstream bank lenders – a shrewd move), and assisted them in their £4m+ transaction in 2010.  The 2015 deal is larger and even more complex.  The firm continued to use a mix of senior and junior debt, as well as the “revenue participation” (or quasi-equity) instrument pioneered in the 2010 deal.  The mix of investors was even greater (there were four in the 2010 transaction) and, of vital importance to the sector, investors were able to successfully exit the 2010 deal with strong returns.  The impact investment sector will not grow if the capital going in cannot find its way back to investors – possibly to be recycled into other impact deals.

Coordinating the efforts of about a dozen players is no easy feat, and the transaction was not without its challenges.  Each impact investor, with great intentions, has their own passionate view on what is absolutely essential – blending this into a single deal is not easy work.  Also, all of us in the impact space are learning as we go.  Mistakes are being made, new concepts are being developed live in the laboratory of the market, and this can be frustrating for all concerned.  But this is a necessary part of the market-building process.

Returning to my original point, the success of companies like HCT, EPC and Justgiving is absolutely essential.  We cannot solve social problems, or offset rapidly shrinking public services expenditure unless we access large mainstream pools of capital.  These pools have polite interest at best in the early stage ventures which get a great deal of attention (also from ClearlySo).  For impact investing to thrive we absolutely must scale those with the potential and desire to do so, and in this way attract the largest financial services firms into becoming substantial impact investors.  They will only invest in significant, established companies in any size.  In my view, there is no higher priority for the impact space and to address the public services deficit.

First published in Third Sector in November 2015.

3D Investing, High Impact Businesses, Impact Investing, Social Economy, Social Entrepreneurship

The aim was to create 100 Justgivings

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Recently I interviewed a candidate for a new role at ClearlySo. During the course of the interview she asked me why it was I came to found ClearlySo, or what was the thinking behind it. She seemed to find the story instructive. It goes a long way to explaining my own personal motivations and the ClearlySo approach, and I thought it would be relevant to share.

After leaving the City, I felt it was important to do something “socially impactful”. I probably spoke in terms of “putting something back” or simply doing something that perhaps my children would be proud of. Roles at UBS, Paribas and Lehman certainly didn’t register on this yardstick. After a few years in conventional VC, I took an early chance, together with some colleagues, to raise impact investment fund in partnership with The Big Issue. This was back in 2000/2001. Our efforts were not successful so I began to hunt around for other ways to make a difference.

In the 1990s I had been quite active in the Liberal Democrat party and even stood as a candidate in the 1997 general election. Fortunately I lost, and realised that party politics was not the best way for me to generate meaningful social impact. Many of my good friends urged me to stop being silly and carry on in the City.  If I felt excessively guilty I should give some/all of my money away. I briefly tried a part-time role at a leading investment bank and realised that was not the way forward for me.

In the mid-2000s I had the opportunity to simultaneously chair a large national charity and a small early stage start-up business. What I found was that the charity, which had only recently considered and then rejected a merger with another organisation, was not wholly to my liking. Although the organisation raises lots of money and had considerable visibility, it was not as focused as I would have liked it to be on the cost-effectiveness of its impact generated. Furthermore, I found myself unable to improve this and other situations despite being Chair. In the end, I resigned.

The early stage start-up business that I had the pleasure and privilege to engage with was Justgiving. With a mere £5-£6 million of angel capital it was able to build the world’s leading online charitable fundraising business and now dominates the sector.  From the start, the two leaders, Zarine Kharas and Anne-Marie Huby, were absolutely focused on making the business successful by controlling costs together with a razor like focus on customer satisfaction. Their theory was that if they could build a successful, well-run business it would generate far more social impact. This is something that is too often neglected in the impact investment and enterprise sector. Unless a business is able to be sustainable, it isn’t really a business. To achieve massive social impact it has to be really great – and Justgiving has facilitated about $3.5bn of flows into the charitable sector. The Body Shop is another excellent example of such a business.  Or to put it another way, social impact and financial success are positively correlated; this is a central tenet of ClearlySo’s worldview.

So in summary, I thought of how I could make a difference and realise that politics, charity and investment banking were not the path for me – Justgiving had shown me the path. ClearlySo was founded with one simple objective – to create 100 Justgivings.

First published in Third Sector in October 2015.

Impact Investing, Institutional Investors, Social Economy

Ex-bankers in “social investment”: Disease or cure?

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Before we talk about a “cure”,   let us first be clear on the disease.  I assume it is the fact that the economy has been run to profit-maximise, without any interest in societal ramifications – financial markets have supported this.  The full cost of this narrow-minded approach has been realised through the financial crisis and its aftermath.  We can spread the blame about if we wish and include governments, regulators and all of us as shareholders and consumers, but the main blame lies with bankers – it their actions were primarily responsible for the pain and suffering on an enormous scale.

Impact investing is about using these same financial markets, without which modern society cannot function, and take into account risk, financial return, and a third dimension: the social, ethical and environmental impact (we use social impact to mean all three) of investments.  At ClearlySo we speak about “3D investing”, where investors make conscious decisions  about these three dimensions and how they relate to each other – and this is becoming more popular by the day.

Who can help investors make these decisions, and explain to entrepreneurs how to seek the most attractive capital with which to expand? I am afraid it is the bankers – at least in part.  We do not have to forgive them for their role in the crisis, but they do have expertise in the financial markets on which we depend to improve our world.  Scientists and politicians built and delivered the atomic bombs that killed tens of thousands of Japanese and have unlimited destructive potential.  Should we absent them from disarmament negotiations because of their complicity?

Bankers understand how financial instruments work.  They know when debt or equity is appropriate for an entrepreneur, or a combination of the two.  They know how to build financial models, how relevant legal documents are structured, or who the likely investors are, and they can advise in negotiations.  We find it substantially easier to raise capital for clients when finance professionals (yes, ex-bankers) are involved.  Ex-bankers not only possess expertise, but also useful contacts, market awareness and speak the language of finance.  To refuse to access these skills because of past misdeeds would be counter-productive and harmful to the entrepreneurs generating impact.

Do bankers deserve the historically outlandish rewards for their skills as intermediaries?  Probably not.  Should we have deified them as some did before the crash?  Certainly not!  However, demonising them is not the answer. In my experience, no sector has a monopoly on saints or scallywags.  I have encountered highly moral senior bankers and scandalously corrupt leaders of charities.

As a society we believe individuals can redeem themselves.  We give prisoners a second chance – why not bankers?  (Note: I have a strong personal interest in this being the case, as an ex-banker myself!)

In immunology, it is not uncommon to inject the body with a bit of a disease in order for the body to develop useful antibodies.  Too much of the disease would be harmful, but what caused the disease can help foster a cure.  I think the same is true in finance.

First Published in Pioneers Post in August 2015.

High Impact Businesses, Impact Investing, Innovation, Institutional Investors, Social Economy

Plums, lemons and measurement

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In recent weeks, a flurry of reports on the performance of impact investments has been posted to my inbox.  Following years of debate, we are finally moving from talk to deals – and from deals to exits — now we are seeing the first analyses of results.

All three recent reports should be commended for their honesty and effort.  With such data and the analysis that has accompanied each report, the work of impact investors has become a little easier.

The first report was entitled The Social Investment Market Through a Data Lens, which was produced for the Social Investment Research Council by EngagedX (an index for impact investments), which sought to consistently measure impact investment performance.  The report is a brave and ambitious attempt to combine into a common framework the results of different investors such as CAF Venturesome, Key Fund and the Social Investment Business. 426 investments had matured and could therefore have their performance measured; the report found that overall impact investors had made a loss of around 9%, while 10% of all these investments were totally written off.

There is an element of mixing apples and pears, as the objectives and approaches of these funds differ. Some of the individual investments made were more impact-orientated, and others less so – these are combined without accounting for this.  There is also nothing which takes time into account as a factor.  For example, if the average investment were held for five years, the average annual loss is only 1.9%; the report does not tell us much about the term over which these investments lost 9.2%, so we cannot make the calculations.  Additionally, the costs of managing the funds were ignored.  Finally, an old venture capitalist adage is that “lemons ripen faster than plums”, so perhaps the investments which had not yet matured will reduce the 9.2% negative figure (or improve the results).

It was a shame more funds did not participate.  Two pioneers, Esmee Fairbairn and Bridges Ventures have spoken informally about their returns, but to my knowledge, have not made such data publicly available. It would be particularly useful to see Bridges’ data; it is by far the sector leader, and its funds target market returns. I suspect the average returns in the study would have increased sharply; so we see that the mix of funds has an excessive impact on the average.  Despite this, it was an excellent first attempt at a tricky subject.

The second report was called Introducing the Impact of Investment Benchmark and was published by Cambridge Associates and the Global Impact Investing Network.  It concluded that 51 impact investment funds (IIFs) performed at nearly the same level (6.9% internal rate of return vs. 8.1%) as 705 comparable non-impact funds.  The report is excellent and the key points are easy to discern.  Most critically, more than half of the IIFs sampled were African and a third from the US – again, what is in the “fruit basket” can have enormous influence.  Interestingly, first-time funds performed well.

The third report, A Tale of Two Funds: The management and performance of the Futurebuilders-England Fund, is a detailed analysis of Futurebuilders, a fund that provided £145m of loan finance to third sector organisations.  The report is primarily intended to answer the question of how the fund performed and whether this changed in its two phases.  The document is very well written and highly transparent.

For all these reports, and for future ones, the lack of performance data relating to social impact makes sensible comparisons more challenging.  This should also be integrated in the future – as should data on risk. I believe that impact investment funds are lower risk than mainstream funds and that correlation to markets is quite low, and would love to know if this is correct.

On the whole, more impact investment funds need to participate in such exercises.  This is especially true for IIF managers like Bridges, Cheyne Capital and LGTVP, which have higher performance targets than those in the EngagedX study.  We might then all feel better about the outcome of the reports.

First published in Third Sector in

High Impact Businesses, Innovation, Social Economy, Social Entrepreneurship

Impact-oriented finance utilises innovation on many levels—how about bribery?

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At ClearlySo we believe that the main difference between impact investing and the old way of thinking is that the old financial world existed in two dimensions (financial return and risk), whereas the new world exists in three.  Impact, measured from a social, ethical or environmental perspective is a third, often intentional, dimension to the prior two-dimensional world.

Frequently we consider the enterprises into which impact investment is being made and observe with utter amazement, how the entrepreneurs blend conventional enterprise models with beneficial societal outcomes doing well and doing good.  We are especially proud of organisations like Third Space Learning, which reduce the cost of maths tutoring while simultaneously helping educators in India receive decent wages, or Weedingtech, which sells a non-insecticide based device for weed control.

Business model innovation has also been a feature.  Consider the London Early Years Foundation, which runs high-quality nurseries where wealthier parents cross-subsidise those who are less wealthy.  Another illustration is the Ethical Property Company (EPC), which buys and lets commercial property to social change tenants, who receive far better terms than they would in more conventional premises.  EPC’s better terms means that void levels in its premises are substantially lower than in conventional office estates.

Impact-oriented finance has also seen innovation.  Consider the quasi-equity (QE) instrument we assisted HCT Group in raising in 2010.  As a charity, HCT could not offer shares, but required long term risk-oriented capital to finance growth. Impact investors took both conventional bonds and a QE instrument in a £4.2m fundraising.  Those taking the more risky QE instrument received returns that grew with the growth in HCT’s turnover (above a benchmark) – and generated 10+% returns.  Of course, it could have gone the other way and investors (including Bridges Ventures, Big Issue Invest, SIB Group and Rathbone Greenbank) might have received no interest, or even lost capital.

Of course the best known and most celebrated financial innovation concerns the much discussed Social Impact Bond (SIB).  SIBs link payments received by investors to the social outcomes made possible by the underlying investments.  They have initially received substantial subsidies to gain traction but are now taking off globally.  Their genius is not in the structures, which are costly, but in the notion that government should pay for cost-savings which stem from social innovation.  Payment-by-results contracts will certainly become a mainstay of government commissioning.

It is these types of innovation that must now come to the fore.  In such fiscally constrained times, the rule of “what works?” must predominate.  Ideological opposition is melting away and there should be no limit to what is now possible; blue sky thinking is essential.  It can involve enterprises, business models, financial instruments and even the very way we think about societal problems.

Consider one such thought experiment:

What if we had bribed Iraqi citizens or its leaders to depose Saddam Hussein instead of using weaponry to defeat him?  The estimated official cost to the US of the war is around $815 billion (subsequent estimates by the Congressional Budget Office and the Nobel Laureate Joseph Stiglitz suggest the full impact was between $2-3 trillion).  This amounts to $24k for every single Iraqi (or $120k at $3 trillion!), in comparison with GDP per person of $6,863 per annum. This excludes the military cost to other nations and does not consider the extraordinary damage and suffering of the Iraqi people. One might argue that the cost of war is never known until after the fact, which is true; however, on 16 March 2003 Dick Cheney was asked on national television about the approaching war and he estimated that it would cost $100 billion.  Just this was equivalent to $3,852 per person at the time when GDP per person was $1,373 in Iraq. By using that money to persuade Iraqis, war could have been averted and costs in a purely economic sense (not even taking into account the damage, destruction and death caused) would have been sharply reduced.

If just the UK had used its far lower cost for the Afghan War of £37 billion to bribe Afghanis, or even their leaders, to do the things we wanted, this would have amounted to £1,600 per person, well above the current level of GDP per person of £436. Again this does not take into account the military costs to other combatants, including the USA ($686bn), or the devastation of Afghanistan.  When the figures are so compelling there must be a strong moral argument to consider such an innovation even if one might be a bit queasy about some of the underlying issues and despite the obvious technical and tactical issues involved.

The above is not to argue for Western imperialism or our right to impose “our” geopolitical preferences on others.  But from our own (selfish) perspective, we might have: a) had a better chance of achieving our goals, and b) saved a fortune, with this approach.  Furthermore, not to have gone to war would have avoided unspeakable suffering on the part of Iraqis and saved thousands of lives.

There are precedents for bringing behavioural persuasion into the public realm.  The “nudge” unit, established by the Coalition Government, did precisely this.  Here too, there was concern about the “nanny state”, but again in these times it is unwise to disregard any aspect of innovation.

We see cases of “bribes” being used to achieve social outcomes every day.  On 8 June 2015 the Independent reported on the Peacemaker Fellowship, which could also be described as targeted bribes to those most likely to commit offences not to shoot people.  This programme, operating in Richmond, California, follows on from similar programmes in Boston and Chicago.

I accept that there have to be limits, and important moral issues need addressing, but these are incredibly challenging times, and our failure to face up to these questions involves an active moral choice as well, even if we pretend to ignore it.  Opting to go to war because one finds bribery morally dubious is a very tricky argument to make.

We are just at the beginning of what we can do when we use financial innovation for positive outcomes.  I intend only to challenge a few shibboleths and get some creative juices flowing – as always, I look forward to further discussions.

First published by Pioneers Post in June 2015.

Government Policy, Impact Investing, Innovation, Social Economy

The French are progressing very well on impact investment

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Much is written about the UK’s leadership in the impact investment field – indeed, I have on many occasions mentioned this and spoken of the need to “maintain this lead”, “protect our dominance” and so on. This is not nationalism but self-interest.  As ClearlySo is one of the leading UK-based intermediaries operating solely in impact investment, we have a great deal riding on UK leadership.

Progress in the UK does continue, due largely to government-backed initiatives and the rapid entry of angel investors. To this is added the sometimes grudging/sometimes enthusiastic participation of large corporations and financial institutions.  This all creates progress and growth – about which we are delighted.  On the other hand, I sometimes fear that this leadership verges on arrogance, exacerbated by the fundamental advantage which comes from English being the global language of impact investing.

This linguistic dilemma was again manifest when the G8 Social Investment Taskforce reports were released; both the German and French versions were released and then promptly ignored by many of us Anglo Saxons whose language skills are not up to deciphering these documents.  They were subsequently released with English translations – what is clear is that the French, in particular, have been quietly making enormous progress.

The most eye-catching figure is that the size of the French market is estimated to be approximately €1.8 billion.  This compares with published figures for the UK of a few hundred million pounds.  Even when I adjust for the different approaches in calculating the two figures, there is only one conclusion to reach – the French market is larger.  In terms of structural flexibility and pure innovation, the British market is probably still well ahead, but it is smaller.

Both have a large, state-initiated catalyst – Big Society Capital in the UK and Banque Publique d’Investissements in France (with €500m). The French also have a very large ethical bank, Credit Cooperatif, which unlike the troubled Co-op Bank in the UK, has remained profitable, successful and cooperatively-owned.  But the main difference is the active engagement of the country’s large mainstream financial institutions.

Nearly all have actively-managed impact funds; their sums exceed €300m.  Much of this is due to the widely-known “90/10” funds, where 90% is invested conventionally, and 10% in strictly defined enterprise sociale. Banks are required to offer these products to individual customers and the uptake has been impressive.  Even on the institutional side there has been progress, without state intervention.  AXA Investment Managers created an €200m Impact fund of funds, and reports are that this innovation has generated considerable third party client interest (disclosure: I was on its Board from 2004-2010).

I am not intending to establish the basis for an inferiority complex or pander to nationalistic instincts.  The point is rather that we all have a great deal to learn from other countries.  As each nation develops its own path for creating markets where social impact becomes a third dimension to investing, there is no basis for arrogance.

I am reminded of a trip I made to Ontario for the first “Toronto Social Entrepreneurship Summit”.  One was made to believe the Canadian impact investment market was just about to be created there in the province of Ontario. Later that trip, I journeyed to the province of Quebec and found it had been going on for decades.  They just didn’t talk about it as much and few Anglo Saxons read their French papers on the subject.

First published in Third Sector in April 2015.

Government Policy, Impact Investing, Social Economy

Which national party is best for Impact Investment?

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There are roughly six weeks to go to the General Election so it seems appropriate to offer an opinion on the policies of the different national parties from the perspective of the impact investment (II) sector and those who care about policies which maximise social impact.

The Coalition Government has been exceptionally supportive and its actions have been the envy of II proponents all over the world.  Rarely will I meet someone from another country who does not gush with envy.  For this I credit the Conservative Party which has dominated thinking in this area and whose Big Society Programme has meticulously informed their policies and strategy.

What has emerged is a joined-up torrent of policy which has dramatically moved the market forward and has made the UK the widely-recognised global leader.  Most significant among these have been the establishment of Big Society Capital (BSC) and a host of support programmes to grow the intermediary sector and facilitate the development of enterprises whose focus is social impact, including the ICRF and Mutual Support Programme.  Social investment Tax Relief is one of the more recent positive developments, and the G8 Social Investment Task Force (SITF) have received a great deal of attention, but I believe that less celebrated initiatives, such as the publication of a “Unit Cost Database”, are equally important.  The Social Value Act, which entrenches the need to take social value into account, has been recently enacted, but it was a private members bill, rather than action of the Conservatives.  The Tories did accelerate the process begun under Labour which encouraged spinouts from the NHS into enterprises which target social impact.

The Liberal Democrats, despite being members of the Coalition, get little credit from me for this work and have played no apparent role in any of these initiatives.  Furthermore, I cannot discover any significant commitment to II or initiatives mentioning “social enterprise” in recent policy documents or the 2010 manifesto—they are eerily silent about II.  My own personal enquiries of Lib Dem officials were not responded to, despite ClearlySo’s role in the markets.  All three other national parties were more forthcoming.  This was particularly embarrassing as I am still a card-carrying member of the party!!

Observers must not forget, however, the central role played by Labour in the importance of II in the UK today.  It was Chancellor Gordon Brown who initiated the SITF which set the ball rolling, and it was Labour which conceived the idea which eventually became BSC.  In addition, CICs developed under Labour, UnLtd, the key funder of early stage organisations, was founded under Labour, and Futurebuilders was also a Labour initiative.  Those who might worry about Labour’s continuing its support for II are misplaced, and Chi Onwurah, who shadows the Minister for Civil Society, seems engaged and keen.  And let’s not forget that Ed Miliband, who could be the next PM, was a strong and effective proponent for the sector.

I have had the privilege of being personally engaged with Caroline Lucas MP, the sole Green MP, and can report that there could not be a more effective champion of the concept.  Policy documents on the Green Party website contain many references to the values of the II sector, without mentioning some of the more prevalent buzzwords.  Nevertheless, I believe the Green Party would act as a significant voice in support of socially impactful enterprises and their values are fundamentally in sync.

In summary, the sector has little to fear from either a Tory or Labour-led government in May.  Were the Greens in a coalition, this would add to the sector’s voice.  There is little evidence of Lib Dem enthusiasm but they are certainly not fundamentally opposed.

First published in Third Sector in February 2015.

Government Policy, High Impact Businesses, Impact Investing, Innovation, Social Economy

All Government Contracts Should Go to Companies Focused on Social Impact

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The title is overstated, but there are strong arguments why most contracts ought to be awarded preferentially to bidders who operate primarily for social impact (PSIs).  Jon Cruddas, who is helping write Labour’s Election Manifesto, is to make this point in an upcoming book, reported on by The Telegraph entitled ‘The Common Good in an Age of Austerity’.  This position is based on a hard-edged, practical position that puts taxpayers first.

Governments have a depressingly poor track record in negotiating with purely for profit companies (PFPs).  The Private Finance Initiative (PFI), which brought commercial capital into public services, has been widely judged a disaster, with profit transferred to the private sector, but risk retained by the state.  From aircraft carriers to databases government negotiators have failed to impress.

The most recent scandal involved £16.6bn of bids for alternative energy provision.  Recently, the Guardian quoted Margaret Hodge, Chair of the Public Accounts Committee, in saying, “Yet again, the consumer has been left to pick up the bill for poorly conceived and managed contracts”.  This is similar to a previous report by this committee which was highly critical of G4S, Atos, Serco and Capita.  Serco and G4S were also the subject of an investigation by the Serious Fraud Office.

But let’s not unfairly demonise PFPs.  They have a legal responsibility to act in shareholders’ interests and to maximise profits. In negotiating with governments, PFPs structure contracts to their advantage – they have no legal obligation to act otherwise. We shouldn’t be surprised by this – it’s perverse to expect otherwise! It’s even more perverse that despite this PFPs are awarded nearly all contracts.

Why not award most contracts to PSIs?  Their raison d’etre is about social impact – and their constitutional documents reinforce this. Their approach is not about maximising profit, but about charging fairly and looking after beneficiaries.  Often they are innovative in their approach and genuinely care about the outcomes they achieve—their key stakeholders are beneficiaries, not shareholders.

If contracts with PSIs were priced too low, the taxpayer would get good value for money and PSIs gain painful lessons.  If too high, then PSI’s extra surpluses grow enabling more social impact – again the taxpayer wins.  Given this win-win “game” it’s astonishing PSIs don’t win all contracts.

One issue is scale.  There is no denying that private sector providers are larger.  Commissioners must be able to establish that PSIs can do the work – but this should be the only test. Instead, civil servants put in place pointless hurdles that have the effect of eliminating PSIs from the competition.

This was evident in the MoJ’s recent initiative-turned-fiasco “Transforming Rehabilitation”.  PSIs were told they could play a large role in the programme and the impact investment sector, led by Big Society Capital, helped some PSI-led consortia to qualify despite the unfairly tilted playing field.  Some well-run and large PSIs were involved such as Catch 22, Turning Point and Changing Lives.   In the end, all the contracts are led by PFPs, although some PSI “bid candy” also featured.  This was cynical and Chris Grayling and the MoJ were rightly excoriated by Antony Hilton.

A key issue was the need for parent company guarantees to ensure contract fulfilment, and the sums involved (£13-£74 million) meant few PSIs qualified.  But let’s unpack this criteria.  The parent companies that offered such guarantees are lowly rated – in each case far lower than RBS before the crisis began, leading to a state rescue.  How good a “guarantee” is this really? And SEUK research on PSIs found they are actually less likely to go under than private firms over the past 30 years.  People tend to value what PSIs do and work to rescue them if they encounter difficulties – would G4S be protected in a similar way if it encountered difficulties?

The lobbying efforts of large companies help put in place criteria that made bid processes complex which they then have an advantage in winning.  Don’t taxpayers’ interests demand we take the benefits PSIs offer into account? The Social Value Act was meant to help ensure this—it doesn’t.

Government ministers and civil servants are either lazy, illogical or excessively influenced by business, not to weight these factors more heavily in favour of PSIs—let us hope it is laziness, which can be most easily addressed.

First published on Pioneers Post in February 2015.