Big Society Capital, United Kingdom

Build Market Infrastructure and Capacity

Overview

Geography: United Kingdom

Toolkit step: Build Market Infrastructure and Capacity

In Brief: Created in 2012 as the culmination of more than a decade of cross-party government efforts in the United Kingdom to strengthen social investment markets, Big Society Capital (BSC) serves as a “wholesaler”, deploying assets to social investment intermediaries. Big Society Capital’s ultimate objective is to provide social-sector organizations with access to new sources of finance and to bolster, in part, an overarching government effort to have more services delivered by voluntary, community and social enterprise organizations. BSC, which will grow to an estimated £600 million (US$ 912 million) in coming years, is also charged more broadly with increasing the awareness of and confidence in social investment by promoting best practices and sharing information, improving links between the social investment and mainstream financial markets, and working with other investors to embed social impact assessment into their investment decision-making process. 

BSC provides important insights for policy-makers looking to the United Kingdom as an example of how to build market infrastructure and capacity, including: 

• Garner consensus and collaboration across parties, political bodies and the public and private sectors to mobilize a unified vision, over time
• Identify a champion who understands and can represent both public and private sector interests
• Develop complementary policies to support the market’s balanced and sustainable growth, covering both the “supply” and “demand” sides of social investment

Policy Goals and Development 

Big Society Capital is the outcome of the UK Government’s focused effort over many years to reach the country’s poorest communities through “social investment”, i.e. investment for social and financial return. The different governments in power have expressed a commitment to social investment going as far back as 1997. However, in April 2000, the grounds shifted; the UK Social Investment Forum, an independent membership association, established a Social Investment Task Force chaired by the prominent UK venture capitalist Sir Ronald Cohen. The Task Force was endorsed by Her Majesty’s Treasury as a formal “observer” and charged with making an “urgent but considered assessment of ways in which the UK could achieve a radical improvement in its capacity to create wealth, economic growth, employment and an improved social fabric…”.¹

The resulting Task Force report² provided recommendations for increasing investment, enterprise and wealth creation within the UK’s poorest areas, and stated that a “wholesale intermediary” specifically focused on the United Kingdom’s community development finance market would be a powerful stimulant to the social sector. These findings triggered more than a decade of government and policy innovation that would ultimately result in the creation of Big Society Capital. Within the UK Cabinet Office, the Office for Civil Society (formerly the Office of the Third Sector), established in 2006, in part supports, guides and administers the government’s interest in social investment.³

Another important milestone in Big Society Capital’s establishment was initiated in 2005 with the government’s creation of the Independent Commission on Unclaimed Assets, also chaired by Sir Ronald, to consider how unclaimed assets (money sitting untouched for over 15 years in dormant bank and building society accounts) could best be used for social benefit. The Commission’s final report in 2007 recommended creating a “social investment bank” that is independent of government and uses reclaimed deposits to act as a wholesaler of capital. The recommendation was memorialized in 2008, when the UK Parliament passed the Dormant Bank and Building Society Accounts Act, formally recognizing a wholesale bank as one of three allowable uses for unclaimed assets. In 2010 the UK Government committed to using all dormant account money available for spending in England to establish a social investment wholesale institution. 

In 2011 Sir Ronald, along with BSC’s Chief Executive Officer Nick O’Donohoe, then the Global Head of Research at JP Morgan, submitted an outline to the government for a “Big Society Bank”, which they developed after substantial consultation with social-sector organizations and in close collaboration with the Cabinet Office. In April 2012, the “Bank”, now known as Big Society Capital, was officially authorized by the UK Financial Services Authority and launched by the Prime Minister.

Policy in Action

Big Society Capital serves as a “wholesaler”, deploying assets to social investment intermediaries, which are organizations that provide appropriate and affordable finance and support to the social sector (i.e. frontline charities, social enterprises and voluntary organisations). For an example of an intermediary, Nesta Investment Management, see the “BSC on the Ground” box in this section. Big Society Capital’s primary objective is to invest in and strengthen these intermediaries, which it does through the usual means of building relationships and a pipeline of deals and conducting due diligence led by an investment team of 10 professionals. Big Society Capital is expected to accrue £600 million (US$ 912 million) over the next five years, including £400 million (US$ 608 million) recovered from unclaimed bank deposits in the United Kingdom and £200 million (US$ 304 million) from Britain’s four largest retail banks, Barclays, HSBC, Lloyds Banking Group and RBS.

Of particular note is BSC’s commitment to self-sufficiency and, overtime, delivering a small return to its shareholders. Big Society Capital will make investments with risk and return characteristics comparable to the broader financial market and is not permitted to subsidize the returns of private investors – or, put another way, to take a riskier position than any other investor in the same deal, for the same financial return. In a market where many social-sector business models have been shown to be not financially viable without subsidy, this implies either that business models will change over time – responding to the government’s efforts to deliver further public services through voluntary, community and social enterprise organizations – or that BSC will be restricted to achieving its mission through a relatively narrow universe of investable opportunities. BSC is expected to be catalytic in the provision of cornerstone investment for new funds and intermediaries, subordinate debt and equity, and guarantees.

At the heart of BSC is a relatively complex set of governance arrangements that guarantee the institution’s independence from government. This includes:

• A mechanism to transfer the £400 million (US$ 608 million) in dormant accounts over the next five years through a separate fund.
• The creation of Big Society Trust to represent the interests of dormant assets and to ensure that BSC remains true to its mission. The Trust has its own board on which the government has one seat.
• Big Society Capital itself, with its own separate board and five shareholders: Big Society Trust with 60%, and Barclays, HSBC, Lloyds Banking Group and RBS each with 10% stakes. While the banks have 40% of the shares, they will never have more than 20% of the vote, which helps to preserve BSC’s social purpose.

Big Society Capital is operationally independent but its interests are closely aligned with those of the national government and its push for outcome-based performance in public-service delivery, including by developing vibrant new social ventures in health, welfare, education, criminal justice and other sectors. Because BSC emerged from the UK Cabinet Office, close connections remain between the two institutions, enabling access to the latest thinking on public-service reforms that support BSC’s investment capacity. Big Society Capital has also attracted an exceptionally talented team of professionals precisely because it exists as an innovation in public-private partnership and plays a uniquely high-profile role.

Impact to Date

As of December 2012, BSC had made £55 million (US$ 83.5 million) in investment commitments to five generalist social funds, six social impact bonds and two market infrastructure providers: Clearly So, which brokers relationships between social entrepreneurs raising capital and investors, and the Social Stock Exchange. Big Society Capital’s initial commitments have been matched 1:1 by other private and charitable co-investors.

Policy Recommendations for Scaling Social Innovation

BSC exists thanks to a combination of political will, and the right champion, the right opportunity in the market and conditions specific to the United Kingdom’s political, economic and social environment. While it has been in operation for just one year, its conception and structure provides important lessons to policy-makers outside of the United Kingdom:

Garner consensus and collaboration across parties, political bodies and the public and private sectors to mobilize a unified vision, over time
The United Kingdom has benefited from a long history of public innovation and experimentation in social investment, bridging political administrations. Big Society Capital emerged as a result of this activity, building on the lessons from precursors. One precursor, for example, was the FutureBuilders Fund, which was created in 2003 with £125 million (US$ 190 million) to provide loan financing, grants and professional support to social enterprises and to help them deliver public-service contracts.

Identify a champion who understands and can represent both public and private sector interests
Sir Ronald Cohen has been a constant presence throughout BSC’s development. Sir Ronald’s personal credibility as a highly respected investor and social-sector visionary made him the ideal champion.

Develop complementary policies to support the market’s balanced and sustainable growth, covering both the “supply” and “demand” sides of social investment
Alongside BSC, and to help build a strong pipeline of investible propositions in the social investment market, the Cabinet Office has implemented numerous other policies to bolster the “demand” for capital and investability of social ventures. This includes the Investment and Contract Readiness Fund (also profiled in this report), a £10 million (US$ 15.2 million) grant programme supporting social ventures in obtaining new forms of capital and competing for public-service contracts, and the Social Incubator Fund, another £10 million grant programme for organizations known as incubators that work to make early-stage social ventures viable.

BSC On the Ground

Nesta Investment Management 

Nesta Investment Management LLP (NIM) is a UK private equity fund manager that has raised Nesta Impact Investments 1 (NII-1), a limited partnership investing in innovative social ventures using technology to make a positive impact on the well-being of an ageing population, the education and employability of young people, and the social and environmental sustainability of communities.

In February 2013, NII-1 stood at £17.6 million (US$ 26.7 million) and was capitalized with £8 million (US$ 12.2 million) from its parent, the charity Nesta,  an £8 million (US$ 12.2 million) co-investment from BSC, and £1.6 million (US$ 2.4 million) from Omidyar Network. 

BSC was not the sole cornerstone investor in this example, but it helped NIM refine its investable universe and is expected to be an ongoing source of deal flow. NII-1 reached a first close in October 2012 after just six months of fundraising, a milestone that would not have been attained as quickly without BSC’s support.