Government Policy

Reflections on the Brexit Vote by a Remain Supporter

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I voted “Remain” and felt absolutely right to have done so.  I felt it was right for Britain and that British membership would help ensure the EU survived—this is now threatened and I am concerned about the consequences of the political entropy, which has begun.

Had roughly 650,000 voters shifted, the result would have been different, a swing of 1.9%.  That 51.9% voted to leave is hardly an overwhelming mandate.  What if there had not been so much rain on the day?  What if Jeremy Corbyn had actually tried?  What if EU citizens living (for a long time) in the UK had been allowed to vote?  What if it did not coincide with Glastonbury?  On such small matters often hang the fate of nations—never has this been more true.

Nevertheless, the nation has voted, the rules were clear, the date was known (oddly right in the middle of Euro 2016) for a long time.  What if the home nations had not fared so well?  What if England were thrown out because its fans behaved idiotically?  We can conjecture all we want.  What is done is done.

To those petitioning for a second referendum I say the following:

  • The first was unnecessary—how can we possibly justify a second?
  • How would we feel if Remain won the referendum and the Leave supporters signed the same petition?
  • If we cared so much to ensure an emphatic majority, why did we not argue for this in advance, when we seemed to be massively in the lead?
  • What if we re-run the campaign and Leave wins? What if the result again is close?  Do we keep doing this until we get the “right” result?  What disdain would this not show for the democratic processes we hold so dear?

I do not think we should have held the first referendum, I certainly do not think we should have another.  We lost and the turnout was over 72%.  It is time to face the future and make of it what we can.

The Campaign

The run-up to the vote was appalling, with insincerity, cynicism and negativity in abundance.  However, let us be fair—our campaign was worse.  Having scared Scotland into backing union, and frightened voters out of voting Labour (remember claims that the Labour Party would be “in hock” to Nicola Sturgeon) Cameron felt he should again deploy his fear tactics—this time he failed miserably.  Cameron and Osborne not only lost a vote we should never have had, but they lost it in a bad way.  Had they run a principled, positive campaign they might have actually won—many voters I know voted Leave BECAUSE of the Remain campaign.  So Cameron’s legacy is rightly discredited.  He made a selfish and cowardly decision to call the vote in the first place, he ran a cynical and negative campaign and he lost—that most unforgivable triumvirate of political sins.  Good riddance.

The Leave campaign did also appeal to our basest instincts, with Farage’s poster only the best known of the worst examples of this.  There were racist undertones to much of the Leave campaign, but this was not the entire summary of the Leave argument and accusations of widespread racism are completely out of hand.  Furthermore, to advocate a case for measured immigration or controls on refugees allowed into the UK is a perfectly respectable position.  In the same way that not all critics of Israel are anti-Semites, not all those concerned about immigration are crude xenophobic bigots.

At least, politicians who were genuine and longstanding Euro-sceptics fronted the Leave campaign.  Apart from the more Europhilic and opportunistic ex-mayor, one absolutely cannot accuse Farage, Gove or IDS of inconsistency—at least on Europe.  That Osborne and Cameron (and Corbyn) led the argument to Remain was simply not credible.  Their position lacked passion because frankly, there was none—the electorate saw easily through this paper-thin curtain.  One never felt that those on the Remain side cared quite as much.

The Vote

To anyone who stayed up until the wee hours, the result and its message was clear.  One could describe it as Hartlepool vs. Islington, or Boston vs. Barnes, or any other combination pitting the losers and winners of globalisation and its effects against one another.  That the likely recession will likely inflict more hardship on the less well off than those comfortably enjoying a leafy, liberal London existence was ignored as the less economically fortunate voted in overwhelming numbers to leave.  It’s true that Scotland (overwhelmingly) and Northern Ireland (marginally) also voted to remain, but these are particular cases.  It was wealthy, multi-cultural London against the more fearful and increasingly hopeless elsewhere.

Those who voted to Leave may suffer negative economic consequences, but the sense was that they felt they were going to suffer anyway.  Governments of all stripes have largely ignored them, and the promises of the current Government, which led the Remain campaign, rang hollow with those who have been suffering from this Government’s policies.  This was their only chance to express their anger and they took it.  They are not all racists, xenophobes, ignoramuses or vindictive old people – they are afraid, and perhaps rightly so.  Even if we do not agree with their point of view, we must come to understand it.

We would not have lost confidence in this Government and its predecessor if it had not sought to balance the books on the backs of those least able to afford it and alternatively extracted sacrifices from those best able to afford it.  Instead, it cut marginal tax rates.  The Coalition Government spent billions bailing out the banks due to their mortgage losses – they could have bailed out homeowners.  I could go on.  The indifference was palpable and has been worsening under this Tory majority Government, whose legislative agenda was becoming increasingly right wing and doctrinaire.

In addition, let me not let Europe’s leaders off the hook.  Across the continent, citizens of all EU member states have been restless regarding the EU’s performance and critical of its flaws.  If its leaders had demonstrated courage instead of political calculation and engagement instead of being aloof, they would not today be confronting their own potential extinction, which the UK Brexit vote has made far more likely.  I understand their (EU officials) resentment, anger and fear, but unlike the unemployed in Athens, Madrid and Hartlepool, their inaction and callous indifference has brought it upon themselves.

The Future

I am really sad that the Remain campaign has lost the Brexit vote.  I have argued that Britain should stay in the EU and have been a longstanding supporter of the European model.  That does not mean I have been an uncritical supporter.  For example, I have always opposed a single European currency as well as Britain’s participation in it – this even as a Lib Dem Parliamentary candidate in the 1997 General Election.  It was, at best, premature, at worst, a stupid idea and yet another example of the conceit of politicians (Kohl and Mitterand, as I recall, in this case) over-shadowing the sensible interests of citizens.  I always felt, and still feel, it would destroy the European Union.

Anyway, my side lost the Brexit battle and now we all need to move on.   What is apparent to me is that this vote will be a powerful catalyst for change.  Even though I would have preferred it, a vote to Remain would have encouraged politicians to do nothing.  Safely embedded in the status quo they would have congratulated themselves on their accomplishments, welcomed the good sense of the country in supporting their point of view and carried on much as before.  Nothing will have changed – this is no longer an option.

I am curious indeed, how a UK Government led by Johnson (or maybe May), Gove, Redwood, David Davies, and the like will deliver to those in Hartlepool who supported their position.  The idea that the farthest right wing of the Conservative Party becomes the champion of the downtrodden feels unlikely, but I have seen stranger twists of fate, and if they can deliver, I will cheer.

I take comfort in the fact that in Britain, our far right consists of people like Gove, Davies and even Farage, and are not Norbert Hofer (who nearly became President of Austria) or Marine Le Pen in France.  This is something to be very thankful for.

On the other hand, in the highly probable scenario that these Conservatives fail to deliver for the disenfranchised, we need to find a new leader on the left – someone who can speak to the fears of the fearful and address the aspirations of our nation’s youth, who are despondent at the outcome of Thursday’s vote.

It is encouraging that Jeremy Corbyn looks set to be deposed.  He seems a decent principled man, but he strikes me as an incompetent leader.  By definition, and despite his democratic mandate, if he cannot carry his colleagues in a Parliamentary system of Government he just has to go.  I expect a safe and unimaginative choice but I am hopeful for the best (I am an eternal optimist).

Caroline Lucas is the UK politician I most admire and is the single person with the most credibility to galvanise our country.  However, she is a member of a disorganised party, and, much as I hate to admit it, politics, to be effective, requires a certain ruthlessness that the UK seem unable to muster.  I am not proposing Blairish deviousness, but would welcome, at least, some Clintonesque pragmatism (that of the Bill variety, not Hillary!)

So what can we do in the meantime?

I rarely want to wait for politicians to lead.  My experience has taught me that this can be very disappointing.  In a democracy, which sits alongside a capitalist economic system, we have seen how policy is dramatically tilted in favour of the better off, and are coming to feel some of the consequences of this (e.g. the financial crash, Greece, Brexit).  This will continue until we address the systemic problems).  What shall we do in the meantime?

A friend of mine rang me on Saturday morning and said — “I just woke up this morning and felt like I want to/have to do something.”  She was utterly distressed, like many others, about the outcome and felt she needed to undertake positive action – for herself and for the greater good of the nation.

I think she will.  All across the country, people are waking up this weekend with a sense of, ”oh shit, this really happened—it was not just a bad dream.”  Some will retreat into themselves.  Some will argue about the results and challenge them – with petitions or other blocking actions.  Some will escape, if they are able, to Canada, Norway, wherever.  However, some like my friend realise that this is the time for real action.  The days of kicking problems into the long grass have ended.

The vote has robbed us all of the ability to keep smiling and pretend things are OK.  Things are not OK and the Brexit vote is forcing us to deal with thorny issues like immigration, inequality, the bankruptcy of Greece, serious strains in the Euro-financial system (in Italy, France and Portugal, just for example), weak financial institutions, an agitated and mischievous Russia and much, much more.

As ever, the only question any of us can answer is, “what am I going to do about it?”

So what are you going to do now?

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.

3D Investing, Impact Investing, Institutional Investors

Incentivising Impact: Should Impact Investors practice what they preach?

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I had the privilege of attending the first ever HCT Group (a high impact enterprise involved in transport) investor day recently. This was the first time the company met with a group of investors, at a time when it was NOT seeking capital, to explain itself and discuss progress against both financial and impact targets.  We expect to have more of these events for our clients in the future, and see it as a useful practice borrowed from the mainstream.

An award was meant to be given to the best question from the audience, but when it turned out to have been asked by Dai Powell, the CEO, the award was given to someone else instead. What was Dai’s question? “Do any of the investors who have backed Impact Investment Funds (IIFs) vary their returns based upon the social impact achieved by the fund managers?”

This sounds a very simple straightforward question but there is actually quite a lot behind it. First of all, readers should know that HCT recently closed a £10 million financing with a range of impact and mainstream investors. ClearlySo advised on this offering, which had several interesting features. The one which is most relevant to this article is that is the interest rate paid by HCT to investors would be reduced if HCT matched or exceeded certain impact targets. This is understandable, as IIFs exist to increase the social impact achieved, as well is to earn a satisfactory financial rate of return. We are aware of a few other notable transactions which also have this feature but it is by and large an exception rather than the rule in impact investment. If we wish to increase the social impact achieved by entrepreneurs then surely it is sensible for the fund managers to put in place incentives to grow that social impact. This is obvious, straightforward and requires no further explanation.

But if we follow the logic then it makes sense for the IIF fund managers also to be similarly incentivised. As by definition they exist to encourage social impact, this would seem obvious. I myself have been at dozens of meetings where entrepreneurs are lectured to by IIF fund managers about the urgent need to measure, demonstrate and increase social impact achieved.  Therefore it is extremely interesting and bizarre to note that none of them face similar pressure.

Not a single case comes to mind of an IIF whose returns to investors are adjusted for the impact achieved.  I cannot think of any funds which Big Society Capital (BSC) has backed which have such a “ratchet”, nor is BSC itself held to account in this way. In the interest of transparency and equanimity I should also confess that we as a leading intermediary face no such ratchet, and we too lecture entrepreneurs on the importance of generating, measuring and increasing the social impact achieved. In fairness to BSC, I should add that our agreements with them require us to report to them about impact.

I think that all of us in impact investing agree that economic incentives are a useful mechanism to adjust organisational behaviour. We recognise this as a matter of principle, we speak out in public on the importance of this issue and we work with entrepreneurs to try to put such incentives in place. For the sector to get to the next level it might be interesting to reward the providers of capital in this fashion as well.

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

Framework Housing and the point of it all

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The past few months have been busy at ClearlySo as we have had the best quarter in our history, closing 15 deals worth over £23 million. We thank our clients, pat ourselves on the back, and brag to our board and our shareholders as well as a number of friends in the marketplace.

In this way I guess we are not that different from other intermediaries. We talk about deal size, target IRRs, transactional complexities, the nature of the investors and the investees. Sadly, we speak too infrequently about impact. This is despite the fact that we are part of the impact investment market.

One investment transaction which brought this home for me was one involving Framework Housing, a housing association based in Nottingham which targets the homeless. As with many of the investment transactions closed this year, this £5.75 million transaction had its complexities.  But it was not the rates of return or the asset-backed nature of the vehicle which I will remember— it was a presentation given by one of their beneficiaries a couple of years ago.

We were asked by Coutts Bank to bring four impact investment opportunities to their High Net Worth clients in Nottingham for an evening of investment pitches, drinks and canapés. Although all the presentations were strong, that of Framework Housing definitely stood out. Chris Senior, who managed the transaction for Framework, gave a brief outline of what they were planning to do and then quickly sat down and introduced one of their tenants— I shall call him “Jimmy”.

Jimmy read from a prepared script about his experience as a homeless person. While his hands shook he told of his life before he came into contact with the people at Framework and how, through their attentions, his life had been transformed. For anybody in the audience, there could not have been a more powerful way to understand the true nature of what Framework does for its clients. It saves and transforms lives. When I came back to the office I related the story to colleagues. We agreed that, almost irrespective of whatever else we did, if we were able to succeed in helping Framework, the year will have been worthwhile.

Many organisations do an excellent job of estimating and reporting on the impact they generate. For intermediary organisations like ClearlySo there is less opportunity to directly engender impact. The social impact facilitated is via the charities and enterprises we help. Thus there is a tendency to capture the essence of the impact generated by talking about the deals done and money raised. The assumption is that there is some correlation between the impact investment secured and the positive social value generated. This may be the case and I believe it is the case, but there is a risk in breaking the connection between capital raised and impact generated.

Financial intermediation in the mainstream economy also began with noble ends. Banks raised funds for entrepreneurial organisations which endeavoured to build great companies. When it worked, the social value was measured in the jobs created and the prosperity achieved. As time went on, the purpose of enterprise became increasingly disconnected from the sums raised, and the sums raised became the purpose in and of themselves. Some of this purposeless and pointless financial market activity contributed to the crash of 2008. If we are to avoid this in the impact investment sector we must remain vigilantly attentive to strengthening and reinforcing the links between financial inputs and impact outputs.  Otherwise we miss the point of what we do and why we are doing it.

First Published in Third Sector in December 2015.

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.

High Impact Businesses, Impact Investing, Social Entrepreneurship

The Ethical Property Company announces its 9th Equity Issue

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Recently, the Ethical Property Company (EPC) announced that they would be undertaking their ninth equity share issue.  This is an astonishing achievement for a firm in impact investment and seems almost unnoticed by the normal sector commentators.  Below I will explore why, but first it is worth discussing some of the things that are unusual about EPC.

Very few high-impact businesses  undertake share issues. EPC has completed four share issues since 2001 and has raised more than £12 million since its first issue. These have occurred in the UK where the company already has nearly 1,400 shareholders.  AIM-listed Good Energy Group PLC is another company that has been able to attract UK shareholders, as has Cafe Direct, they are still exceptions.

EPC has also expanded its model outside of the UK. Four share issues have been undertaken in Europe (in France and Belgium) and the company has explored expansion opportunities in Australia as well. Such international expansion by UK impact-oriented firms is also rare.

EPC’s activities are rather straightforward. The company purchases commercial office buildings and lets them to “social change tenants”. These tenants are charged levels of rent which are below the market and given more favourable and flexible terms. In addition, the firm runs the buildings in a more tenant-oriented fashion and endeavours to achieve high environmental standards.

Such premises are in particularly high demand  as charities and impact-oriented tenants are seeing grant income squeezed, prompting a search for cost-savings. As a result, demand for EPC’s services is rising.  Whilst gross rental yields on the firm’s properties may be slightly lower than commercial landlords, EPC is able to enjoy lower voids, thereby boosting income.

The model the company has developed has enabled it to be profitable every year since it was founded in 1998, and it has paid a dividend every year since 2001.  It has increased its net asset value and it just announced updated valuation figures as well as a potential unrealised gain it may achieve on one of its existing properties near the Old Street roundabout.

Of course, there are still obstacles EPC needs to overcome;  shareholders are able to trade their shares through Ethex, but liquidity is indeed limited;   as a property company it did suffer in the immediate aftermath of the financial crisis. Furthermore, its tenants face obvious levels of uncertainty due to government budget cuts.

None of this explains the point I alluded to right at the outset, which is why this has been relatively unnoticed and as a firm within the sector its activities are frequently unremarked upon, but there are three factors which may be important.

Firstly, the firm is based in Oxford. Although Oxford is not far from London, it is my contention that London-based firms receive a disproportionate share of the attention in the impact investment sector. Secondly, the firm has been around for 17 years and in my opinion there is a strong bias in the UK market towards businesses that are new and exciting.  A track record of 17 years may be interesting, but EPC is hardly new. Finally, EPC is a firm that has concentrated on providing services to clients rather than communicating what it hopes to achieve. Even in the impact investment arena we still live in a world where steak is less noticed than “sizzle”.

First published in Third Sector in September 2015.

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