Building a Social Investment Market by Design

The work of the Social Innovation Fund should provide inspiration to governments looking to drive social investment at home.

When it comes to social—or impact—investment, the UK government is seen as a world leader. Building on groundwork laid by the last Labour administration, and driven by a desire to enable innovative nonprofits to provide better and cheaper public services, the Conservative-Liberal Democrat coalition government has been determinedly putting in place enabling forces; the most well-known is Big Society Capital. This wholesale bank is mandated to develop a sustainable social investment market, and it has £600 million in capital from disused bank accounts and bailed-out banks. The money will be invested in social investment finance intermediaries—the private organisations that will put up the capital for Social Impact Bonds, or SIBs (pioneered in the UK, and now replicated in New York City by Mayor Bloomberg), and other pay-for-success models.

So the supply side of social investment looks healthy in the UK. But what about the demand side? Any market depends as much on a pipeline of great entrepreneurs seeking investment as it does on a supply of capital. Although the UK has a well-established, passionate, and innovative nonprofit sector, research shows that it 1) lacks the necessary scale or appetite to take on repayable finance, and 2) lacks the robust impact measures needed to persuade investors to fund it.

Compared to the “big bet” it made on Big Society Capital, the UK government has put precious little into building the demand side of the market: the innovators it wants to deliver these public services, financed by social investment. At Impetus Trust, we use venture philanthropy to build the scale, capacity, and outcome measurement skills of brilliant nonprofits, and we see investment readiness as an indicator of success.

We also track examples of best practice around the world and have followed the US’s Social Innovation Fund (SIF) since its inception. Our recent briefing paper argues that, through its innovative funding model, the SIF is building investment-readiness in the US nonprofit sector, despite not having a mandate to do so. We show that the UK government could use elements of the SIF’s models to drive investment-readiness and deliver much better value for taxpayers.

The SIF model—in which grants are given via intermediaries to nonprofits on the frontline, with government money leveraged 1:3—is truly innovative in the context of government grantmaking. It also provides expertise in scaling and capacity building to the front line—something government officials simply can’t. The UK government does provide “capacity-building” grants to nonprofits, but there is no evidence that these are spent in ways that build long-term resilience and reduced dependence on grants.

SIF’s demand that beneficiaries show their deepening impact is unique, and they provide a route to the kind of outcome measurement that gives investors confidence of social and financial return. The SIF’s funding also outstrips the amount that the UK is putting into the demand side of the social investment market (discounting the millions spent on “building the sector’s capacity” over the years). In the US, $150 million of federal money has been matched by $350 million of state and private money, providing phenomenal value for taxpayers and building the fundraising capacity of local nonprofits.

Paul Carttar, the SIF’s first director, told Impetus that the SIF model has garnered significant attention in Washington, DC, and that federal departments with more significant budgets are interested in replicating the Fund’s features with their nonprofit grant recipients.

Our conclusion is that, as a by-product of its desire to drive social innovation, the SIF model may well drive a class of investment-hungry and, crucially, investment-ready nonprofits. The focus on building the resilience of a whole organisation, deepening social impact, and evidencing this will create sophisticated nonprofits that can specify the outcomes they produce and match these to commercial opportunities in the public or private sector. For attractive propositions, the investment is likely to appear without the government needing to massively stoke the supply side.

Impetus is recommending that the UK government builds on the US experience, and consolidates some of its disparate grant streams into one fund with the explicit goal of driving long-term sustainability and investment-readiness. This should be distributed via intermediaries with a track record of doing just this and should require that they match fund. This way of funding is far more likely to identify social innovators with a scalable model and a desire to take on investment as they grow. If Big Society Capital’s money is to be put to use in the way it was intended, the UK government needs to work harder—and smarter—to ensure that the right organizations are ready.

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  • what about this program?

  • BY Edward Harkins

    ON February 11, 2013 08:06 AM

    It is probably unarguable that there are problems of scaleability and measurement for social investment in the UK .

    This article is, however, possibly too sanguine about the supply side.  It is also, of course, only partial in its reflection of the UK scene. The whole concept of the Big Society and its attendants is far more controversial and contentious than perhaps is portrayed here. Indeed, for many commentators and stakeholders, the credibility of the entire ‘Big Society’ concept is rapidly declining in parallel with the impact of the UK Coalition Govt’s deeply inequitable reforms to the welfare system, and the progressive withdrawal of funding for the voluntary and community sector organisations that populate the ‘Third Sector’.

    The so-called Social Investment Bonds are one aspect of the high profile, top-down and precipitate promotion of newly invented systems and vehicles that are almost wholly untested - and sometimes promoted from some odd and opaque perspectives. Another example of this type of approach is the public-funded Work Programme for getting people back into employment. That was handed over to external contractors - mostly private sector. The recent findings of Parliament’s House Of Commons select committees have been that that programme has proved a costly failure (complete with public alarm over the private individuals’ gain at taxpayers’ great expense facilitated by that programme - whilst the intended beneficiaries were miserably failed).

    There is a real and present danger that the UK Coalition Govt is subverting the true values and drivers that make the social enterprise sector legitimate and capable of sustainability. These depend on the sector’s ability to draw on voluntarism and the consensus of civic, business and political legitimacy that it is located within. One aspect of this subverting is it seems that to even just raise these issues courts the risk of being castigated as being ‘anti-enterprise’ or ‘anti-business’ or anti-progress.

    We need beware in the UK, but especially in England, that there is not emerging a cadre or level of mutually reinforcing leading practitioners and policy makers who have a perspective that is becoming quite disjointed, and even alienated, from what is actually happening among the real activists, volunteers and entrepreneurs on the front line.

    Just a couple of snippets of more recent evidence from the UK ‘front line’ can be had at these links:


  • Hi Edward

    I do think its interesting that there is so little debate on whether SI is a legitimate route to finance public services - but this might reflect lack of public interest in these questions, beyond a headline ‘don’t privatise public services’ feeling.

    I agree its more complex than this brief post - but think it is legitimate to raise the questions of why government funding to build vol sec capacity is so generally ineffective, and how top change this. Involvement in SI might be an outcome of better scale-up efforts. There are lots of question marks over SI, but only the private sector will benefit from a voluntary sector so lacking in capacity it cannot participate. Moe charities involved might guard against your cadres.

    Rohan - yes the ICRF is a government effort to build investment-readiness. But we feel the sums involved are insufficient, and the programme not focussed enough on impact measurement and management.

  • BY Edward Harkins

    ON February 13, 2013 05:49 AM

    Jenny it is, of course, ‘legitimate’ that you raise debate on this whole theme, indeed it’s commendable that you do. My concern is over the lack of debate about SI as a legitimate route to finance public service and again I think I agree with your looking beyond the headline ‘don’t privatise public services’ .However, the lack of trust and transparency around the UK Coalition Govt’s true intentions IMO are why many UK activists and commentators feel unwilling to do that looking beyond).

    The seemingly arbitrary, top-down, nature of policy-making and the questionable implementation of policy by the UK Coalition is further muddying the waters - the senior Court’s decision just this week against the Coalition’s Work Programme rules are just the latest example of faulted policy delivery and implementation.

    It would be good if others felt encouraged to offer there contributions here and elsewhere on this important theme. After all it is a truism in social enterprise that whilst perhaps just one of us does not have all the solutions, many of us combining in mutual endeavour are far more likely to come up with those solutions!

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