Social finance: The case for helping the least needy

Conversations with investors, particularly those from a philanthropic background, are often focused on the desire to help those requiring substantial assistance.  The argument goes something like this, “We cannot use our resources to assist those already well on the way to success, better to focus on those really needing our assistance.”

This argument has a certain logic to it, and those with a strong social orientation, in particular those representing charitable foundations, may feel legally or morally compelled to act this way.  A related argument frequently surfaces when foundation investors are asked to participate in structured financings, and assume the riskiest and least remunerative positions.  On occasions they are asked to assume the “first loss”, or take a “capped return”, or sometimes a combination of the two.  A sense of indignation emerges that their capital is being exploited so that those with a market return requirement can profit from social investment transactions they would otherwise not participate in.

I can surely see the point, but would like to suggest a different perspective, one that is based predominantly on the idea of social impact maximisation.  There are times when large financial sums are required and these can only be made available through larger structured transactions—these necessitate access to mainstream players (banks, for example).  By accepting greater risk or lower return, or both, foundation capital can bring in far larger sums than would otherwise be feasible, or are available in the social investment sector.  Society’s needs are so great that even with the £600+ million coming from Big Society Capital, far more is needed.  As mainstream capital still seeks market returns, only social capital or government subsidy can make such deals happen.

An unwillingness to do so just because mainstream investors get their return is akin to “cutting off one’s nose to spite one’s face”.  These foundations would willingly offer grants where 100% loss of funding is assured.  But by using their capital in structured transactions sometimes far more social impact can be generated, AND they might see some return.  Not to do so just because other investors (with very different criteria, beneficiaries and rules) might do well seems odd and reduces social impact generated.

Similarly, by shunning those social enterprises or projects which are close to viable, in favour of the more hopeless, they are reducing both their return and social impact.  Moreover, they are undermining the probability of success of those social enterprises which are just about sustainable, in favour of those which have a very long road still to travel.  And these “nearly there” social enterprises are, by definition, not yet there.  If they fail just near the finish line it is deeply tragic and undermines all the hard work and capital invested by foundations and others which got these social enterprises “nearly there” in the first place.

To get the most out of our money, a critical discipline in today’s capital-starved times, and generate the most social impact, we need to start with the least needy and work our way backwards.  This may seem perverse, but for those who care about substance over form, and making a substantial impact over a huge gesture, it is essential.

First Published in Third Sector in January 2013.