Category Archives: Innovation

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.

Government Policy, Impact Investing, Innovation

Impact investment and the environment….strange bedfellows, why?

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Recently ClearlySo has seen a flurry of environmentally related deals. A couple of weeks ago we helped the firm Upside Energy to close an investment round of £545k. Upside Energy creates a Virtual Energy Store™ by aggregating unused energy from devices owned by households and small business sites that inherently store energy, to sell balancing services to grid operators which helps reduce the need to turn on the older, most polluting and expensive power stations during peak demand times More recently we supported the fundraising of a company called Switchee.  Switchee’s product reduces energy usage which saves tenants in affordable housing money on their utility bills, and the data helps social landlords better manage damp, maintenance and repairs in their properties, thereby fighting fuel poverty. These two transactions, previous deals closed and several in the pipeline have coincided with Earth Day, which took place on 22 April. Earth Day is often credited for launching the modern environmental movement. My ClearlySo colleague Lindsay Smart has written an extensive blog piece in honour of Earth Day.

This juxtaposition of events comes at a very interesting time in the UK impact investment space. For reasons that are hard to explain, and even if I could would lie well beyond the word limit of this column, the “mainstream” UK impact investment community and environmental investment community has always remained separate and aloof from one another. For us at ClearlySo this is rather bizarre. Many of our investor clients seem to care a great deal about environmental matters. These include water pollution, air pollution, global warming, sustainable fishing and forestry and a host of other related issues, which impact all of us. Also, matters environmental have always had a disproportionately negative social impact on the world’s poorest—so the social and environmental impact spheres are closely linked. To say this isn’t really part of the impact investment movement is not only odd but self-defeating, particularly as this represents a considerable portion of available investment opportunities. Moreover, the metrics for understanding environmental impacts are more highly developed, better understood and more widely utilised at the present time. It seems rather arbitrary to push the environment to the impact investment side-lines. Our view has been that if investors value particular impacts, so do we.

Some of this may be institutional in nature. Environmentally conscious investing came onto the scene prior to what we now describe as impact investing and perhaps there was little interest in embracing this new movement. Similarly the Green Investment Bank was launched well before Big Society Capital, which was the impact investment sector’s broadly equivalent institution.  Thus a central government initiated split of sorts may have been created. The apparent assault by this Conservative Government on many aspects of renewable energy funding, in contrast to its persistent praise of impact investment has also furthered this divide.

Nevertheless, we will continue to argue that these two activities are part of a much bigger single picture. It is reminiscent of what we always saw as flawed thinking, that impact investment is an asset class, perhaps cleantech investment is another and maybe micro-finance and social housing are a third and fourth. In our view those are merely different facets of a world where impact is becoming important in all investing.  We see the world shifting from investing in a two-dimensional way, where only risk and return are measured and considered, to a world we have long advocated of 3-D or three-dimensional investment. It is bringing impact to all investment that is our true mission.

Government Policy, Impact Investing, Innovation

SIINCs are SIBs 2.0……and likely to be far more successful

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At ClearlySo we have never been very enamoured of SIBs. They have always seemed an expensive and labour-intensive instrument, and not of good value to our clients, which is the fundamental test.

On the other hand they have been very intensively supported by government and leading players in the impact investment space. To some extent this proves the point about their lack of fundamental appeal. Surely an innovation so intensively supported would have progressed much more rapidly by this point.

This in no way undermines the monumental contribution they have made to how we think about the possibilities in impact investment. One breakthrough of SIBs, much to the credit of their creator, Social Finance, is that they secured payment by governments to investors based on social impacts achieved. This was an amazing accomplishment.

Fundamentally the problem that needs addressing is one of externalities. When enterprises generate high social impact as a by-product of what they do, society benefits. These benefits could be in the form of governmental expenditure which will no longer be necessary or things we simply enjoy for free, such as clean drinking water. The challenge has been how to capture the benefits of those positive externalities.

SIBs are a complicated way of achieving this, because they require a set of agreements between commissioners, investors, providers, impact verifiers and potentially others along the way. Securing agreement by so many parties is difficult and time-consuming.  There are also fees at several levels. We have consistently argued for using the tax code to “tilt” in favour of enterprises generating positive social externalities as a more efficient mechanism. Such arguments have hitherto fallen on deaf ears.

Social Impact Incentives (SIINCs) are a positive innovation and a logical next step beyond SIBs. Originated by Roots of Impact, a German organisation, SIINCs have been developed in cooperation with the Swiss Agency for Development & Cooperation with a test on high impact enterprises in Latin America. In simple terms, a direct payment is made by an organisation such as a foundation or development agency (“outcomes payer”) to an organisation generating social impact. The need for an independent verifier of outcomes/impact on customers/beneficiaries remains but this is the only necessary complexity. Roots of Impact argue in a recent paper that the SIINC model is highly flexible and adaptable and doesn’t require any agreement except from the outcome payer and the enterprise. The payment increases the revenues of the enterprise and therefore the profitability of the enterprise is enhanced.  Even an agreement with the investor may therefore prove unnecessary, and in any event can be quite a separate/unlinked discussion.

The brilliance of the SIINC model is that it facilitates payments by those who care about positive externalities directly to the enterprise thereby changing their business model. This is a simple, straightforward bilateral agreement, which addresses the inherent complexity of SIBs. The added cost for an independent verifier of impact should be more than offset by the cost savings achieved to governments, for example. As more positive externalities are captured this way capital markets will adapt to the new (payments-enhanced) business models of these high impact enterprises.

SIINCs are a brilliant innovation, a next step in the thinking prompted by SIBs and I congratulate Bjoern Struwer, Christina Moehrle and Rory Tews (all from Roots of Impact) in conceiving this innovation.

My only concern is that as a non-Anglo-Saxon innovation it will fail to get the attention it deserves.

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, 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, Innovation

Tax credits are not the answer

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My inbox is overflowing with analysis of last week’s budget and its benefits for the impact investment sector—in particular plans to create a Social Impact VCT (SIVCT).  Following the announcement, the sector praised the Chancellor for these proposals, which are only the most recent of many which this Government and its predecessor have implemented since the early noughties.  The first was Community Investment Tax Relief (CITR), originally proposed by the Social Investment Task Force (SITF) but the pace of goodies just keeps flowing.  Social Investment Tax Relief felt like it was proposed just yesterday—my records show it was first floated in early 2013 and implemented last summer.

It is great for the impact investment sector to be getting so much attention.  One cannot doubt the goodwill of politicians in levelling the playing field with the mainstream, and all these initiatives create a favourable back-drop for those of us involved in intermediating capital to organisations which generate high social impact.  This is indisputably helpful in our conversations at ClearlySo with the HNWIs at the core of our angel investment activity.

But I warn against expectations that this will bring about a sudden boom.  Observers who wish the sector to grow faster (frankly, I think it is growing pretty fast already), or who think such funds will solve a meaningful portion of the social problems facing British society today will be disappointed.

I have read many studies which summarise investor’s views that tax credits would encourage them to invest in a particular way, but little evidence that they actually do.  They lower the cost of investment for the wealthy with available liquid assets, but I contend they rarely change the amounts invested.

Perhaps we should consider, by example, what the VCT instrument has done for UK venture capital investing, which seems the most appropriate comparator for the SIVCT.  VCTs were introduced in 1995 to encourage entrepreneurialism in Britain and made far more attractive in subsequent years.  During this time most venture funds have performed abysmally (based on BVCA data).  In fact, they seemed to have turned negative right after the launch of VCTs!  One might not want to suggest causality, but there is an argument that the new fund inflows might only have inflated prices, thereby depressing returns.  During this period venture leaders such as 3i and Apax Partners left and drifted into much larger deals.  VCTs have thus not transformed the venture VC industry—and they will not transform impact investing.

If tax credits are not the answer, what might be?  Perhaps an analysis of the five original recommendations of the SITF provides some guidance.  CITR (a tax credit) has been disappointing.  Disclosure by banks and greater latitude for foundations has had practically no impact.  CDFIs are progressing patchily but only with a large subsidy.  The sole big win was Bridges Ventures, now a thriving impact investments firm—the beneficiary of the recommendation to “set up Community Development Venture Funds”.  The Government invested £20m (half the fund) on a first loss/capped return basis!  This meant the fund could lose half its value before investors suffered any loss and was critical in getting early support for this novel concept.  Bridges has since thrived.

So enough of tax credits which are unlikely to draw in more capital.  Money for first-loss guarantees will cost less and be far more effective in galvanising the sector because it deals with the key issue investors really face—the perception of high risk due to the novelty of impact funds.

First published in Third Sector in April 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.

High Impact Businesses, Impact Investing, Innovation, Social Economy

Crowdfunding gaining traction in the UK and USA

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In the USA, the “Jumpstart Our Business Start-ups (JOBS)” Bill was passed in the Congress, the acronym of which cleverly links liberalisation of capital markets with boosting jobs growth.  Significantly the act is designed to give a boost to IPO activity, the issue of new shares onto the stock market, which has been a traditional source of funding for young companies.  This market has been dormant of late and the JOBS Act is designed to make this easier by releasing young companies from some of the many regulatory burdens in place in the USA—thereby freeing them to raise equity capital more easily.  The theory is that with more capital will lead to more business activity and jobs will follow.  With banks also under pressure to boost capital ratios, and the dampening effect this has had on lending, equity funding can be an important alternative to support economic activity.  Online crowdfunding platforms are expected to make substantial use of this newer, freer regime.

In the UK, crowdfunding has also been growing in popularity.  According to the BBC, Exeter-based Crowdcube has raised over £2.5m to fund UK businesses – including itself. The link to jobs has also been noted.  The company says that these investments have led to the creation of 320 jobs.  In addition to job creation, crowdfunding has played an important role in filling some of the gaps created by the drastic reductions in UK public spending.  One example of this is a recent endeavour by Spacehive, the new community development crowdfunding platform, which helped a community centre in Wales secure desperately needed top-up funding to begin construction on a community centre in Glyncoch.  Had they been unable to use Spacehive for the final £30-40k, a project which took years to design, develop and fund-raise for, would have been abandoned (the deadline for full funding was 31 March, 2012).  Spacehive helped Glyncoch raise the needed final sums, with the assistance of well-followed Tweeters such as Stephen Frye.

Crowdcube and Spacehive are not alone.  There are many others in development, and a few more which already exist like Buzzbnk, which helps connects people and projects online.  One of the newer crowdfunding platforms, supporters are also able to use the site to offer non-financial forms of assistance to the causes they support.  Of course, the dominant “granddaddy” site of this type is Justgiving, which recently sent customers an announcement that over £1 billion has been raised via the website for UK charities.  Justgiving expanded early into the US market and is now extending its reach into other geographies.

The bottom line is that crowdfunding is a hot new area, and that the UK, with its relatively liberal legal and regulatory structure and many creative and successful crowdfunding endeavours is a leader in this area.  If you have not explored how to use crowdfunding to achieve your aims, it’s time to start!

First Published in Third Sector in April 2012.