Venturing into social action

Despite a growth of interest in social enterprise a barrier to it achieving social change on a significant scale remains a lack of capital. However, a new fund for social entrepreneurs is just one of the ways that venture capital guru and social investment champion Sir Ronald Cohen hopes to help the sector start to realise its full potential.

The Bridges Social Entrepreneurs Fund (BSEF) was launched last November by Bridges Ventures. Founded in 2002, Bridges is a private investment company whose founding principle is that all of its funds aim to achieve social goals as well as financial returns. It is backed by private equity companies Apax Partners,3i and Doughty Hanson. Cohen, founding partner and former executive chairman of Apax, is Bridges’ non-executive chair.

Bridges runs two Community Development Venture Funds totalling £115m. These invest equity in ambitious businesses that are located in the most deprived 25 per cent of the country and sustainable businesses whose social impact is intrinsic to what they do, especially in the areas of education, healthcare and the environment.

However, with the BSEF, Bridges hopes to take things a step further. The fund was launched in November 2008 with funding of £4.25m raised from a range of investors including NESTA, the Generation Foundation, Lehman Brothers Foundation Europe, Deutsche Bank and 3i as well as private donors including Cohen himself, Nigel Doughty, Harvey McGrath and the Bridges Ventures team.

BSEF aims to address the funding gap faced by fast growing social enterprises. Cohen pinpoints that what makes BSEF different is that it is the first fund aimed at scaling up social enterprises into substantial organisations – offering up to £1m in investment.

‘It is different from traditional philanthropy because the social enterprise models we want to back have a revenue generation capability consistent with their social mission,’ says Cohen.

‘BSEF aims to bring equity, or quasi-equity, capital to such mission-driven organisations. If a social enterprise wishes to tackle the problem of re-offending, but needs to become an organisation capable of tendering for government contracts, for example, BSEF can inject significant equity investment to support the venture.’

SCALING UP

Specifically, BSEF will invest in social enterprises that have a clear social mission (embedded in their legal structure), the ability to scale up their social impact, a financially sustainable model and a strong management team. Each investment will usually be in the form of equity with a reasonable financial return. BSEF is bound to re-invest any surplus it generates into other social enterprises.

Investees will have access to consulting advice from Monitor Group and help from UnLtd, the foundation for social entrepreneurs, to become investment-ready. BSEF expects to attract parallel funding from other trusts and foundations, and hopes to announce its first investee shortly.

The idea arose from demand for such support from social entrepreneurs seeking sustainability which could not be achieved by relying exclusively on donations. Bridges envisages that some of these social enterprises will be charities with proven products and services wanting to expand their organisation, while others will be social entrepreneurs wishing to establish a new social enterprise. The common feature will be that they are starting immediately rather than spending a number of years raising the funding they require.

Cohen founded Apax Partners in 1972 and is regarded as the father of private equity in Europe. He is a founder director and past chairman of the British Venture Capital Association, and a founder director of the European Venture Capital Association. He has been aware of the need for social investment for some time. However, it was only when he was asked by the then chancellor Gordon Brown in 2000 to chair the Social Investment Taskforce (to examine ways that wealth could be created in the UK’s poorest communities) that he began to look at the area in depth and kindle a passion for the sector.

A NEW GOAL

He stepped down from Apax in2005 and the goal of significantly developing the social investment market was by then one of his driving ambitions.

As well as his Bridges involvement Cohen is chairman of the Commission on Unclaimed Assets (which is considering how to make use of money in the UK’s dormant bank accounts) and a past honorary president of the Community Development Finance Association. He is also anon-executive director of Social Finance, an organisation whose ambition is to transform the ability of third sector organisations to get the capital they need to grow sustainably. Social Finance is one of the most vocal advocates of establishing a social investment bank with funds left dormant in bank and building society accounts for over 15 years (as detailed in the Dormant Bank and Building Society Accounts Act 2008).

Back in 2005, Cohen was quoted as saying that he saw ‘a new wave of social entrepreneurship emerging in the UK’. We are now in a very different economic climate but he retains his optimism. Indeed, he believes that the downturn could provide a boost to the sector.

‘There is a greater need for social investment and many more people interested in getting into the field,’ says Cohen. ‘Some have made enough money working for financial institutions and they want to put something back.’

However, the difficulty is that government finance is currently very stretched at exactly the time when it needs to be playing an enabling role to get a market in social investment off the ground.

‘This is where we have a frustrating time. Government is in favour of these initiatives but the commitment to provide funding and the tax incentives required is slow in coming. It is one thing thinking it’s a good idea and another thing signing on the dotted line. It just needs to be given the highest priority in dealing with the social consequences of the crisis.’

Another major challenge for the sector identified by Cohen is defining and measuring social impact. However, he does feel that there have been developments in this tricky area.

MEASURING IMPACT

‘Big strides have been made in social impact measurement,’ he says. ‘At Bridges we have worked very hard and made progress in identifying metrics which every portfolio company has to track in order to calculate the multiplier of economic activity generated by an investment.’

He feels that research has focused too much on trying to find a single measure for social return equivalent to the internal rate of return for finance.

‘It still seems elusive but any self-respecting social organisation should have one or more performance measurement metrics as, increasingly, raising capital will depend on proving you are doing a good job.’

With such extensive experience of, and commitment to, social investment it is fascinating to hear what Cohen thinks when asked what other emerging areas we should look out for.

‘Keep an eye on the money,’ he says. ‘Follow where additional capital is flowing into social enterprises and successfully making a greater impact.

‘However, if only the same amount of capital flows as is flowing today, we will not see significant change. The reason behind setting up Social Finance and establishing a social investment bank is to attract capital from the markets by utilising financial and social sector expertise to direct funds where they can make maximum impact.

‘It is not like mainstream venture capital and private equity where financial return attracts the money. You need an organisation to act as a pump. There are plenty of potential investors who have asocial conscience and who would accept a lower rate of return as long as their capital was being used for a purpose they support, but they need an organisation to make the capital market mechanisms work.

‘Ultimately, unless there is a greater supply of money, the social sector won’t be able to cope with the problems that the downturn is creating.’

POLITICAL ACTION

Generally, Cohen echoes the enthusiasm for social investment that he has voiced over the last decade.

‘Following the crisis, it is going to become obvious that you either change the capitalist system to include greater social action, or leave it to governments to raise taxation and redistribute wealth and income.

‘The second route stifles growth in the economy because it reduces incentives for hard work and risk taking. Some governments will give in to populist pressure to increase tax rates, which actually raises less tax at the end of the day than levying reasonable taxes on a faster growing economy.

‘But most governments may come to the conclusion that the only way out of the crisis, and sailing between deflation and inflation, is along the path of growth. This will require strong entrepreneurial incentives for business and governments will have to endow the social sector with the means to do social aspects of the job.’

Cohen sees a general cross party consensus in developing the market for social investment.

‘It is not about party politics, but a policy issue that Labour, the Conservatives and Liberals are all taking very seriously. It is about the lives of people, the structure and cohesion of society and the social and economic efficacy of the capitalist system, which all parties espouse.’

Former communities secretary Hazel Blears’ comments in summer 2009 suggesting tougher regulation on forcing banks to reinvest in disadvantaged communities, based on the Community Reinvestment Act in the United States, has echoes of the debate around banks being encouraged to release unclaimed assets and is something the Social Investment Taskforce has focused on.

While recognising that Blears has now moved on and her statements reflect the current negative populist sentiment towards the banks, Cohen insists it is a central issue.

‘When we wrote the Commission on Unclaimed Assets Report in 2000 we said that if in seven years we hadn’t made progress without legislation, we would need it. Despite the fact that banks do have a social conscience, have supported Bridges and been generous with their time in helping the companies we have invested in, I believe we are only going to increase significantly the flow of banking finance into deprived areas through this type of legislation.’

And is there an opportunity here for banks to try and regain some public favour?

‘I think the United States experience suggests that banks have gained some goodwill through their CRA activities but they have also discovered that they can do valuable business in poorer areas.’

This article first appeared in Good Deals 2009: The Social Investment Almanack. 

FIND OUT MORE

bridgesventures.com

enterprising-communities.org.uk

unclaimedassets.org.uk