DEVELOPING IMPACT FINANCE BIG SOCIETY CAPITAL

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1 DEVELOPING IMPACT FINANCE BIG SOCIETY CAPITAL Cliff June 2018

2 Homes for Good BIG SOCIETY CAPITAL We are an independent financial institution with a social mission, set up to help charities & social enterprises find the right kind of repayable finance they need to do more of their great work. IMPROVING PEOPLE S LIVES Our aim is to improve the lives of people by connecting investment to charities and social enterprises that are creating social change.

3 BIG SOCIETY CAPITAL: TWO ROLES Burley Gate Community Shop

4 BIG SOCIETY CAPITAL TIMELINE Year Step 2000 Social Investment Taskforce led by Treasury and Sir Ronald Cohen 2005 Independent Commission on Unclaimed Assets 2007 Commission on Unclaimed Assets Social Investment Bank plan 2008 Dormant Bank & BS Accounts Act 3 uses of funds 2009 Government consultation on social investment wholesale bank 2010 General election PM commits all funds to social wholesaler 2011 Sir Ronald offers to advise Govt to develop a Big Society Bank 2012 Launch by Prime Minister, regulatory approval, Merlin bank deal 2013 New CIO, new investment model; social sector engagement lead 2014 Three year strategy participation, innovation, scale, sme finance 2015 First impact report; Access created with blended funds; transparency 2016 New ceo; goodfinance.org.uk; getinformed; state aid extended 2017 Mission clarified; strategy change; institutional interest; first billion social enterprises funded; 15 countries creating wholesalers

5 BIG SOCIETY CAPITAL FUNDING AND TERMS 400m from Dormant Accounts: - 15 year dormancy threshold - vigorous efforts to find lost customers - customers able to recover at any time - Reclaim Fund agency holds back capital on actuarial calculation - 35m additional funds recently committed 200m from high street banks: - 50m each by way of equity shares - minority control set by articles - 4 to 5.5% IRR expectation Key rules: - wholesale only - coinvestment expectation - no grants Build a market, not be the market CLARE: supporting elders

6 Our work as a market champion We act as a champion, increasing the use of social investment and building understanding with charities, social enterprises and investors. Social issue led programs Goodfinance.org.uk Social impact bonds Transparency Practical impact management Charity Bonds Pensions for purpose Social investment tax relief Social venture funds

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8 Progress on impact & reporting

9 Progress on building the ecosystem 6x increase in risk capital flows in social investment Access created to provide small loans to small charities and social enterprises 71% of investments in the 50% most deprived areas 3 countries have already replicated BSC, with several more soon 8x increase in social investment intermediaries with over 50m under management 1.25 billion available to charities and social enterprises 20% pa is the rate of expansion of Social investment Goodfinance.org.uk the online guide to social investment 82% of social sector agencies say they feel they understand social finance charities and social enterprises have used BSC finance It recycles! 2.40 of co-investment for every 1 of BSC 9

10 BSC commitments have increased product diversity BSC committed investments Secured debt Unsecured debt Charity Bonds SIB s Equity Com. shar es Property BSC significant role in establishing/ expanding Social Investment Market (outstanding investments) Secured debt Unsecured debt Charity Bonds S I B s E q ui ty Com. shares Property No. of orgs

11 The pattern of investment deals to date

12 The Current Size of the UK Market: to December ,300m value of social investments outstanding at the end of % of social investment is channelled to charities and social enterprises with an asset lock 4000 charities and social enterprises currently benefit from social investment 705m of deals offered to around 1100 charities and social enterprises in % average annual growth rate over 3 years. Social investment has grown c3x in value since

13 The social investor butterfly

14 THE DEVELOPMENT OF BIG SOCIETY CAPITAL Shared Lives

15 Our initial strategy A portfolio balanced in impact, risk and return across: Innovation - in new social ventures and in social investment products Participation - public engagement in social investment SME lending - straightforward loans to charities and social enterprises Scale - areas like housing and energy that can scale up Our new strategy With 5 years of learning from experience, and a wide range of social investment opportunities through 63 deals into 45 social investment funds, social banks and arrangers, we are now able to focus our efforts for greater impact. Our new strategy sets out our plan to: Make it easier for more people and organisations to use social investment and access the wide range of funds that are now available. Work with partners to focus on areas where social investment could be a big part of the solution.

16 Making it easier to use social investment We will support the existing funds that we have invested and work with partners to build understanding of social investment. 75 Deals into social investment funds covering a full range of opportunities & methods Goodfinance.org.uk is a collaborative platform to help social mission organisations to decide whether social investment is right for them, and if so how to go about it Access is a joint initiative to provide blended grant and investment, plus capacity building, for smaller loans into smaller organisations We actively manage our portfolio to build capacity, sustainability, and quality, including through the Building Blocks system, staff training, and regular portfolio reviews

17 Where we are putting our next efforts We will work with partners to put our next efforts on areas where social investment could be a big part of the solution. Our three themes are: Providing homes for people in need Supporting communities to improve lives Early action to prevent problems Note that half our current investments are in these areas, the other half covering the full range of social investment opportunities

18 What worked well and what didn t? Like any start up, BSC has learned from experience and changed model in response. What worked? 1. Pool of capital attracted momentum, talent, further capital 2. Engagement activities 3. Strong partnerships in social sector and government 4. Development of a practical, useable impact system 5. Time and resilience to allow cultural and practical change in social sector 6. Agility, responding to challenges 7. Respected pioneer who didn t give up Sir Ronald Cohen 8. Luck! What didn t work? 1. Deployment much slower than expected: govt austerity, social sector culture and practical change 2. Institutional investors not coinvesting until very recently 3. Large scale capital deployed only into social property & clean energy 4. Affordability: many social ventures need concessionary or blended finance, BSC not permitted to provide this so created Access 5. Adviser/arranger model struggles 6. Government procurement progress much slower than expected 7. Mandate and regulatory boundaries too tight

19 GSGII WORKING GROUP: IMPACT INVESTMENT WHOLESALERS Cliff Prior May 2018

20 Impact Investing Wholesaler Working Group: Agency Global Steering Group Argentina Australia Canada European Investment Fund Impact Management Project India Israel Japan MaRS (research & analysis) MacArthur Foundation Netherlands OECD Portugal South Africa South Korea United Kingdom UNDP People Amit Bhatia, Krisztina Tora Maria Laura Tinelli Sally McCutcheon Ilse Treurnicht Ulrich Grabenwarter, Silvia Manca Clara Barby Rajiv Lall Gila Norich, Leehe Skuler Masataka Uo Duncan Farthing Nichol Debra Schwartz Bjorn Vennema Karen Wilson Filipe Almeida, Joao Machado Susan de Witt Prof Chul Woo Moon Alex Begg, Cliff Prior (Chair) David Galipeau Key In operation About to launch Planning Advice and support Research and analysis With deep thanks to the MacArthur and McConnell Foundations for research funds, and to the Rockefeller Foundation for hosting the intensive workshop Additional countries are now approaching the group including Brazil and of course: Spain

21 WHY HAVE AN IMPACT INVESTMENT WHOLESALER? The challenges facing society are growing. Governments and philanthropy are struggling. The financial system is poorly aligned to solving these problems and faces lack of trust. Impactful enterprises struggle to raise the capital they need to deliver at scale. As a result, people remain excluded and in disadvantage. There are some serious market gaps including:- > origination > long term capital > mispricing of risk > misaligned incentives > secondary market gaps > scale and complexity > viability of intermediaries > opaque investment terms > poor navigation The good news is that we have a growing number of investors that are seeking opportunities and products which are trusted and deliver positive impact. Impact intermediaries are developing. Impact finance can put fuel in the tank of the growing movement of impact enterprises. Technology and innovation is creating new opportunities. Impact focused agencies can help people step forward and out of disadvantage. However this is not yet operating as scale, nor fast enough to meet the challenges. Impact investment wholesalers can speed up the development of impact ecosystems. We need to move now, to grasp the momentum of investors and enterprises at this critical point of opportunity.

22 A GSG WORKING GROUP IS FINALISING A REPORT ON IMPACT INVESTMENT WHOLESALERS Creating and running impact investment wholesalers Definitions The value created Case studies Options for capitalisation Framework for appropriate choices for each country WHAT IS AN IMPACT INVESTING WHOLESALER? An impact investment wholesaler is dedicated to > achieving measurable positive impact on people and planet, > by providing catalytic financing to funds, other intermediaries and enterprises, > drawing in additional capital, and > supporting the development of the impact ecosystem KEY CHARACTERISTICS OF IMPACT INVESTING WHOLESALERS Focuses on goals, adjusting its theory of change and practice as it learns Puts the social issue first and designs financial engineering to suit Provides investment capital, through funds, other intermediaries and enterprises Develops its market beyond its own investments Upholds a high standard of ethical impact focused practice Measures, manages and reports its impact eg utilising the Impact Management Convention and may have a number of other roles depending on country circumstances

23 WHAT CAN WHOLESALE IMPACT INVESTOR DO? Build capacity & scale of intermediaries that meet the needs of impact enterprises A pool of capital which can leverage in additional investment at multiple levels Uses market wide perspective to take stock of the landscape, strategically allocate resources, and create new instruments and models Long term leading a shift in culture in tackling society s problems Provide confidence to enterprise and intermediary layers Self-sufficient, independent, sector agnostic, allowing agility Trilingual conversations with coinvestors, intermediaries, front line organisations Act as knowledge aggregator and partner around the breadth and depth of complex social issues and impact finance Be embedded in and ecosystem with capability to spread best practice Build a diverse & resilient market, rather than being a monopoly CREATING MULTIPLE IMPACTS Contributing to deep impact in underserved areas and themes, at the front line Developing the market which will engender further deep impact at the front line Being committed for the long term to deep impact, both at wholesaler and front line levels, so that the capacity built through investment sustains and grows impact for the long term, improving endurance risk Helping impact enterprises to reach the stage where mainstream funds can invest

24 MAPPING WHOLESALE IMPACT INVESTORS VIA IMPACT MANAGEMENT PROJECT Should there be a D for dedicated column? Institutional investment fund Mainstream impact Fund Wholesale Impact Investor

25 Dimensions Imperative/goals Drivers Barriers Theory of change Source Geography Sector remit Deployment Type of institution Coinvestment Returns Investment tools Country culture Intermediation Impact management Talent Regulatory position Governance Detail What are you trying to achieve? Who s pushing? Who are your allies? Who s blocking? What unblocks? How will you achieve your goal? Where will the capital come from? Geographic scope of investment Thematic or generic? Which organisations? Wholesale, fund of funds, direct, development bank What expectations? What expectation? Why? Which will be most relevant? What s expected? What s allowed? What is realistic? What approach? Who decides? How do you aggregate? Getting skills/commitment needed? Financial markets regulation? What is demanded? desired?

26 Social enterprises can improve people s lives Social impact investment can boost the capacity of social enterprises Impact investment wholesalers can speed up the development of social impact investment Creating a market development agency builds an effective and lasting ecosystem

27 Shared Lives