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Creating a hub for innovation in societySocial enterprise

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Wray IrwinHead of Centre for Employa-bility & Engagement,Northampton University

Jon Bernstein (chair)Former Deputy Editor, New Statesman

Caroline JulianHead of Research, ResPublica

Jonathan JenkinsCEO, The Social InvestmentBusiness Group

Sophi TranchellManaging Director, Divine Chocolate

Caspar MackayJob titleInvestment Analyst, Big Issue Invest

Peter HolbrookCEO, Social Enterprise UK

Matt RobinsonHead of Strategy & Market Development, Big Society Capital

Nick Hurd MPParliamentary Under-Secretary of State for Civil Society

Rupert EvenettChief Executive, Engaged Investment

Peter IbbetsonChairman of Small Businesses, RBS

Kate MarkeyManaging Director, CAN Invest

Paul RuddickNon-Executive Director,REDS 10

PARTICIPANTS

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6-12 DECEMBER 2013 | NEW STATESMAN | 3

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Growing pains

Can mainstream investors meet this market’s needs? 11

Creating a hub of expertise P6

4 Why the social enterprise movement must sharpen its teethThe sector needs to agitate for a more radical change in attitude, says Sean Worth

5 Social enterprises find mainstream finance elusiveConventional finance is not set up to assess social enterprise effectively, says David Treacher

6 Going for growth: how can we increase investment?Our round-table experts discuss access to finance and how to develop capacity in the market

11 Success requires a complex blend of strategiesThe capital on offer is not necessarily a good fit for social enterprises, says Mark Boleat

12 Thinking outside the boxFour successful social entrepreneurs talk about how they made it work

15 Facts and figuresHow social enterprises differ from other SMEs

The paper in this magazineoriginates from timber that issourced from sustainableforests, responsibly managedto strict environmental, socialand economic standards. The manufacturing mills haveboth FSC and PEFCcertification and also ISO9001and ISO14001 accreditation.

As Britain begins to recover from the financialcrisis, charities and social enterprises areseeking ever-more innovative ways to fundprojects and services which are of benefit tosociety. You only need look to the launch of BigSociety Capital and social impact bonds –which are helping to reduce reoffending rates,improve our health and protect vulnerablechildren – to see just how much benefit thistype of funding has to offer.

Recent government estimates suggest thereare 70,000 social enterprises in the UK,employing a million people. The sector’s

contribution to the economy has been valued atover £24bn. Yet social enterprises claim accessto finance is one of the biggest barriers togrowth that they have.

This supplement explores the obstacles facingthe entrepreneurs, investors and financiers andlooks at the type of infrastructure needed tofacilitate investment.

Our round-table discussion looks at the roleof government in mitigating risks for investorsand financiers – attracting more of them to themarket – and how they can be encouraged to bemore innovative with financial products. l

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First published as a supplement to the New Statesman6-12 December 2013.© New Statesman Ltd. All rightsreserved. Registered as anewspaper in the UK and USA.

This supplement, and other policy reports, can be downloaded from the NS website at newstatesman.com/supplements

The secret to Divine’s success 12

CONTENTS

ARTICLES

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Social enterprise was once touted asthe next big thing in public service reform: an ethos-driven alternativeto hiring private outsourcing firmsthat could transform outdated state

provision. While social enterprise has ex-panded modestly in the public realm, it hasseen only a fraction of the near 50 per centgrowth in public outsourcing contractssince 2010. So what’s holding the sectorback? And how can social enterprise be-come a major force for service delivery, as itsadvocates argue it can.

Because social enterprises compete likebusinesses, but aren’t usually driven by theneed to maximise shareholder value, themovement’s leaders have sold social enter-prise as something of a cuddly alternative tofor-profit provision. They have even beenopenly critical of private firms deliveringpublic services. In doing so, they have onlyfed the view that non-state provision issomehow politically controversial. Thisfeeds the go-slow attitude in governmentto service reform and bolsters the vested in-terests who oppose all outsiders, includingsocial enterprises, delivering state services.

This is exactly why social enterprise re-mains so niche and poorly understood andit’s here that the biggest change in attitudehas to take place. Frankly, the sector needsto start agitating for a much more radical

opening up of government provision.The bulk of public attitude research, in-

cluding my own published earlier this year,shows it’s what people want. The evidenceis that they favour an open field of non-stateproviders being allowed to deliver services,and this view is especially strong among thepoorest service users. People don’t want afree-for-all; they want competition to besternly regulated in the interests of serviceusers, but some polling even shows a ma-jority of current public sector staff want tosee poor services taken over by outsideproviders, including businesses.

What matters most to people are the re-sults, not what sector they are from. How-ever, there is evidence that social enter-prises are favoured over other suppliers insome areas, especially “front-line” provi-sion such as education. This should be thebiggest target for the social enterprise sec-tor. If more people want social enterprisesrunning their services, then the movementshould stop feeding the idea that openingthem up is controversial and start agitating

Why the socialenterprisemovement mustsharpen its teeth

What matters most are theresults, not what sector

they are from

by Sean Worth

The sector needs to start agitating for a change in attitude and a much more radical opening up of government provision

MARKET CHANGE

for more competition – as the evidence isthat they’re well placed to succeed in it.

There will be technical issues to deal withto tackle the problems which place socialenterprises at a disadvantage in public sector markets. These are well known andrange from higher VAT and pensions coststo a bias in outsourcing contracts to largefirms with big balance sheets who aredeemed safer to deal with.

Ultimately, if ministers want a mixedeconomy where social enterprises and char-ities, as well as small business providers, candeliver services, they must intervene morestrongly to make it happen. A mixed econ-omy of provision will take years to evolve,despite the new Social Value Act, whichwill allow commissioners to take the socialprofile of a bidder into account when decid-ing a contract winner. If it is ministerial pol-icy to see the contribution of social enter-prises and others grow, they need to moreactively consider forcing it, as they did withstipulating that a quota of contracts shouldgo to small businesses. This should be for atransition period only until the genuinelymixed market they want emerges.

This need not penalise other sectors asall should grow. Our public sector, as cur-rently configured, simply cannot last. Onone hand, we have all the main politicalparties agreed on curtailing public spend-ing after the 2015 election, while on theother, we are seeing unprecedented de-mands forecast on public services as ourpopulation grows and ages. This will forceservices to get worse unless they are re-formed, and opening them to delivery bythe best possible providers is the least thatshould be done.

The debate over this remains stuck in the1970s, with attempts to bring new providersinto areas like the NHS and education seenas tantamount to reckless “privatisation”.The rational antidote to this view can, fortu-nately, be found in what ordinary people tellus they want from their services – if only ourpoliticians would listen.

The stars are aligning for the social enter-prise sector to really take off. People clearlywant more choice and control over the pub-lic services they use, and social enterprisehas a potentially winning role to play inthat. To get to that point, however, the sec-tor needs to start clamouring much moreaggressively for the change people want.Sean Worth is a former Downing Streetspecial adviser on public services reformand is a visiting fellow of the think tank,Policy Exchange

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The latest estimate by BIS puts thenumber of social enterprises in theUK at 70,000, employing about onemillion people. According to ThePeople’s Business report from Social

Enterprise UK, 48 per cent of social enter-prises sought to raise some form of externalfinance in the past 12 months, twice theproportion of SMEs. However, 39 per centof social enterprises cited access to appro-priate finance as the single largest barrier totheir growth and sustainability.

At the same time, we are seeing an ex-plosion in social investment. BostonConsulting Group’s report The First Bil-lion found a base of just £165m of socialinvestment deals in 2011, but asserted thatdemand could reach £750m in 2015, andaround £1bn the following year.

So why do so many social enterprisesfind it hard to access finance, particularlymainstream finance?

New tools for assessmentPut simply, mainstream finance (bigbanks) is not set up to assess social enter-prise effectively. And social enterprisesare not set up in a way that effectively en-gages mainstream finance.

From a bank’s perspective, we have£32bn of debt in our SME loan book. Oursystems and processes are set up formass-market, well-established, clearlyunderstood business models. Despiterapid growth in social enterprise, this sec-tor remains niche, specialised and differ-ent. Current processes and policies to as-sess credit-worthiness are not always theright tools because returns generated bysocial enterprises are not just monetary;they are also social. Mainstream financeevaluates risks and opportunities basedon financial returns, sustainability of the

organisation and ability to repay. Social returns – the raison d’etre of so-

cial enterprise – cannot be used to informthe decision. Social enterprises heavilyreinvest their cash or reduce price toachieve social returns, and it can be hardto assess the flexibility of this reinvest-ment. Since they must still pass the samefinancial hurdles as any other company toaccess mainstream finance, it is no sur-prise that many struggle, particularlythose below £1m turnover, which ac-counts for 82 per cent of UK social enterprises. Social lenders, such as com-munity development finance institutions(CDFIs) and charities such as the RBS

MicroFinance Fund, go some way tocounteract this – being smaller and moreagile in their decision-making. Fundsavailable through these channels can becompetitively priced as they are oftensupported by government fundingand/or grants.

Helping social enterprises become “investment-ready” is as much of a feature of the access-to-finance debate asthe finance itself. The People’s Businessfound 73 per cent of social enterprisesrated their internal capability as high, butonly 32 per cent rated business capabilityhighly in accessing external finance, suggesting a disconnect between runningthe business vs reaching out for externalfunding.

Why social enterprisesfind mainstreamfinance elusive

Helping social enterprises

become investment ready is as

much of a feature . . . as the

finance itself

by David Treacher

Lack of information In the absence of adequate assessmenttools, an alternative would be to use credi-ble, robust information to facilitate per-formance benchmarking, helping finan-ciers assess risk and return. But there is alack of consistent and coherent informationfrom social enterprises to help investorsmake these comparisons. While initiativessuch as the RBS Social Enterprise 100(SE100) index, or the recently launched So-cial Enterprise Stock Exchange, go someway, it will take time (and a significant in-crease in scale) before these initiatives canbe genuinely useful investor tools.

When it comes to the flow of money intosocial investment, there is not enough dataon risk and return at a portfolio level. This is made worse by a highly fragmented and immature market, with products,providers and investors all relatively new tothe principles of social investment. Again,initiatives are emerging – for example, theEngagedX index, the world’s first financialindex and data platform for social impactinvesting, which is being developed withsupport from RBS and others. But there isstill a long way to go.

Any business needs access to the rightskills, expertise and markets/customers in order to ensure growth and sustainabil-ity. Public, private and third-sectors areworking to help expedite growth and sus-tainability of social enterprise. Every gapand mismatch has an initiative or projectseeking to address it. There are many rea-sons to be hopeful.

David Treacher is managing director, Public Sector & Charities,Corporate Banking, RBS

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Jon Bernstein Ladies and gentlemen,thank you for being here. Let’s go to NickHurd first.

Nick Hurd There is growing recognitionthat this sector is an economic force,employing a lot of people, many of themin difficult places, many who mightotherwise be challenged in the job market.It’s also a space where we’re recognised asbeing a world leader and it’s hugelyrelevant to the big challenges from thegovernment perspective. How do youmeet public demand for better serviceswhen you’ve got a lot less cash? We wantto help social enterprises grow their topline by creating opportunities for revenue,but we’re also very keen to open up newopportunities at the local level, to takeover assets and services. It’s complicatedand requires a culture change.

A large part of what we’re doing is tryingto create conditions for investment tocome in and help. Mainstream capital markets don’t work for this, hence the cre-ation of Big Society Capital, with muchmore money than the market could absorb.In March 2014, we’re following that upwith a tax break for social investment be-cause we want to sweeten the blend be-tween financial return and social return.We’re busy trying to address the funda-

mental challenge which is the flow of cred-ible things to invest in. There are twostreams at work.

One is grants that are designed to nur-ture a pipeline of investment-ready oppor-tunities from start-up through to wherethey can take on £500k of investment, nur-ture entrepreneurial talent and help it on tothe next stage. Then we have “social im-pact bonds”, which are a series of contractsthat are valuable in creating space for gen-uine social innovation and bringing in riskcapital to finance new interventions in of-ten complex areas, so risk is shared ortransferred between commissioners andinvestors. We have 13 or 14 of these bonds,with 13 or 14 in the pipeline. If we can startbuilding an evidence base around new in-terventions and old complex spaces, wecan open up more opportunities.

The last time I looked, there were 12 dif-ferent sectors of social policy involved in the social impact bonds, includingchildcare, drugs and alcohol, homelessnessand adoption. We want to create a hub ofexpertise and knowledge-sharing.

Peter Ibbetson We are the leading highstreet bank in this sector. In terms of whyyou do it, there’ll be a shareholder drivethat says there are commercial reasons; or you do it for corporate social

Going for growth:how can we increase

investment?Access to finance is one of the biggest barriers to growth for social enterprises, but getting advice and hearing of others’

experience can be just as vital in developing long-term capacity

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responsibility (CSR) reasons. The realityis you probably do it for both. There are70,000 social enterprises in the UK,employing about one million people;logically, a quarter of those will bank withour group. The only people we’re going tobe able to rely on to say “this bank is doingthe right thing now” are the customers. Sothat’s a good commercial reason.

You do it through funding, to the extentyou can. RBS has its microfinance fund;that’s moderately small lent to social en-terprises. You do it in commitment fromthe staff – our staff are engaged in social en-terprise support, advice, volunteering. Youdo it in advice and support to bodies whoare engaged in it, so strong support to theCommunity Development Finance Asso-ciation (CDFA) and Social Enterprise UK(SEUK) for example – RBS is a foundingmember of both.

So why isn’t it a lot easier? I was at a din-ner last night, with a guy who’s in privateequity. I said to him: “If a bank lends 100loans, how many do you think could gowrong before the bank’s in trouble?” Theview out in the high street is 15-20, and thisguy said 15. The answer is: just over one.High street banks are just that – high volume, high street lenders – and so theyneed a lot of data to show the money willcome back. Because, if it doesn’t come

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back, the bank will go out of business. At the moment, it is hard to assess social

enterprises – especially smaller ones – inthe mainstream model. A social enterpriseventure is left with three challenges: wheredoes finance come from? How do I find outwhere it is? I think that’s one of the biggestchallenges we have. Third, having foundout where it is, where is the mentoring andadvisory support to help me be successful?

Jon Bernstein Peter Holbrook, help meout with a workable definition of what asocial enterprise is, please.

Peter Holbrook It’s a business where theprimary social purpose isarticulated in its governingrules, and mostly it’scontrolled in the interests ofthe people or the communityit’s there to support.

Jon Bernstein There was areport commissioned by theCabinet Office this year where2 4 per cent of small andmedium-sized enterprises(SMEs) self-identified as socialenterprises. But, actually, only6 per cent had a good match.

Peter Holbrook I think itdepends on how the questionis framed. If you ask: “Do you have a socialrole?”, of course smaller businessesoperating in communities have a socialrole in providing local services, employinglocal people, spending money in the localeconomy. So it’s how the questions areframed. But this discussion will be comingto a conclusion, particularly from aEuropean Commission perspective, andas public awareness grows.

Jonathan Jenkins We’re exhausted by the definition debate. As social investors,if we invest in a private company, we haveto be careful where the benefit is going.Some of the most exciting things I’ve seen are in structures I can’t touch withsocial investment that has government or charitable money in it. I think thatREDS10 was on the edge of what was “social” or not.

Paul Ruddick We were advised to stay as alimited company that makes a profit with a

social purpose. People need to go into thismarket to make money otherwise youwon’t get investment.

We set up REDS10 out of frustration re-garding young Londoners. They were un-employed long term, with no training. Weemploy the young people and subcontractto all the subcontractors for a period oftime. They get two or three years of theirapprenticeship, a trade, a qualification;they can go on to employment. We operatesimilarly to a recruitment company so wehad to set up like that. We spend a lot of ourmoney on training young people or gettingthem to go to work – we have a huge pas-toral support team.

We put in our own money. In the firstyear, no one wanted to look at us, so weraised some venture capital. In the nextround of funding we won the Big VentureChallenge, which gave us £150k, and thatattracted another investor. We’re at a thirdstage of investment raising at the moment,talking to a couple of people around thetable about where we go next. We’reprofit-making now, we’ve been around forthree years, we’ve got a big contract withcontractors, but it’s still not very clear cutwhich route to go down.

I do have an issue with Big Society Capi-tal lending money to intermediaries – theintermediaries then loan it to us at a much

higher rate. And they might want a chunkof equity as well. You think, “well, thatmay not be the best for us.”

Matt Robinson Social enterprises andcharities should get the best financing deal they can get, and if that’s not from social investors, then the socialinvestment market is needed. Cost in themarket is an issue partly because it’s still so small. The predominant channellinking social enterprises with investorsand wholesale money like ours is through fund structures – they’reexpensive, particularly when they arevery small.

We also need to look at otherchannels, which could includegetting mainstream banks in,maybe with a partnership, oruse other ways to help mitigaterisk. Also there’s newer chan-nels like crowd funding, andsome of the things that Fund-ing Circle have done with thebusiness finance partnership.

Kate Markey One of thethings that I’m hearing here is around transparency. Weneed to look at the level ofdeals that are actuallyhappening versus the pipelinethat is being seen by

intermediaries, and what is actually beingturned away and why. It’s critical forpotential investees to understand that. Asa very nascent sector, social investmentfinance intermediaries (SIFIs) need to beable to communicate that.

Jon Bernstein So the wholesalers like BigSociety Capital provide the capital,and then you deal directly with the central organisations.

Kate Markey Absolutely. The sector’sstructure needs to change.

Caspar Mackay One of the things that’scome up is the appropriateness of thefunding. And the types of capital thatsocial investors typically have. We have to conserve our capital to repay ourinvestors. We take more risk thanmainstream banks because we’re muchcloser to the sector, but if one needs to takeon more risk, we need the type of

“We want to create a hub of expertise and

knowledge-sharing” Nick Hurd

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funding that would allow us to do thatand that means we need a tranche of grantfunding that will sit alongside, toeffectively take that first loss. We recentlylaunched a corporate social venture (CSV)fund, for very early-stage businesses, andit’s 50 per cent grant-funded; there will belosses and I suspect they will be quitesignificant. If we’re taking debt-financingfrom an organisation such as RBS, wecannot afford to take those types of risks.

It’s also about the deal size. A deal fromme to do a half a million pounds for tenyears costs the same as me doing one for£50k. You may ask for a six-month fund-ing; I prefer to do it for ten years, and I cando it at a cheaper rate, because I know thatI’m going to get the money back over thatperiod of time and can spread it out. If peo-ple want us to do smaller deals, we needsome revenue support.

Jon Bernstein Rupert, your organisationlooks at and indexes the risk and therewards of social enterprises.

Rupert Evenett Our working hypothesisis what I call “nailing the myth of risk” inthe sector. If you compare socialenterprises with commercial SMEs,startup for startup it doesn’t feel like thefinancial risks or the operating risks arenecessarily higher. You’ve got very goodentrepreneurs in social enterprises, whoare very good at dealing with risk,precisely because they’re good at dealingwith the often quite flaky operational risksand the types of situations a lot of socialenterprises are in. Like-for-like in thefinancial sector, it doesn’t feel like the riskis any greater.

I’m a great believer that data unlocks cap-ital, and what we really need is more datathat says: “This is a market that is reason-ably investable, it’s got reasonable returns,even before you get to the social returns,and when you add in social returns it’s apremium return market for not-bad risk.”Now, that sounds quite attractive.

Sophi Tranchell Divine Chocolate wasincorporated in 1998, and we were set upby Twin Trading, which also previouslyset up Cafédirect. We had investmentfrom The Body Shop, and from ChristianAid, and then from the Department forInternational Development (DfID).Because we had a loan guarantee that wasfrom the Crown we could go through aconventional bank (RBS) and that meant

that we could have a very conventionalrelationship with a commercial bank thatoffered us competitive rates oncommercial tools; we’ve had invoicediscounting, which grows with us as aretail business. That’s been enormouslyhelpful because I haven’t had to spend mytime raising money – I’ve had access tosomething that’s growing with us. We’vealso had access to forward currencybuying at a commercial rate. We paid backthe loan, we paid back the interest, we payVAT on every product we sell, we paycorporation tax.

The idea that Divine Chocolate wasgoing to launch in one of the mostcompetitive markets and mature marketsin the world and survive as a farmer-owned chocolate company was deeplyimplausible. Everybody who invested inthe company wrote it off. Because of thosepeople taking that bet, we’re here today.

Peter Holbrook I’m really keen thatsomeone looks at the loan books over thepast ten or 15 years, to see whether thenature of social enterprises “de-risks”them. When you seek finance intraditional routes, you’re just placed onthe same algorithm as a traditionalbusiness. Anecdotally, we believe socialenterprises and charities pose a lower risk.But we need evidence, and we’re probablyat a point where we can do some reviewsof the loan books from a whole variety offunding mechanisms.

Peter Ibbetson You just said somethingfundamental Peter: social enterprisesdon’t have the same balance sheets as high street businesses. Generally in themarketplace, if you borrow for yourcompany, you give a director’s guarantee;it keeps you very focused on your financialobligations. My experience in the SocialEnterprise Loan Fund was that we neverwent for directors’ guarantees. Parallel tothat, your repayment rate in socialenterprises is higher than you get inmainstream. If somebody could come outand convince us that the risk is better insocial enterprise than the mainstream,that’d be really interesting.

So, where do you get the financial sup-port for social enterprises? For me, itbreaks down into three or four areas. Char-itable stuff, so those that do the £15 amonth thing; and those that, as in Sophi’scase, took a great leap of faith and wrote offthe money because they believed in it. The

next line is personal individuals, crowd-funders. But people generally put moneyin something because it’s getting a return.If you brought out a tax break and said to a40 per cent tax payer “put money into thesocial enterprise into your area, you canoffset that against your income, at 40 percent”, you will get a bundle of people put-ting money in. You can incentivise peopleto do that for their community.

The third area I would go to is govern-ment. What I don’t know is what you value every £1 that government puts in byway of intervention in the context of whatgood it does in the community. From a political perspective, it need not necessar-ily be getting your cash back with a 4 percent return. It may be that we create another 50,000 jobs or we take people offbenefits. Then you get the banks and, asI’ve already said, they currently find this adifficult area to assess.

So there are four ways. You’ve got to lookat each of the components and work outwhat the reason is for each of those.

Nick Hurd We’re trying to buildsomething different. We’re trying toprove the proposition is that you caninvest for social progress and get yourmoney back, with a return. So actuallywe’re trying to construct something that’scompletely different from the mindsetthat you’ve just set out.

Jonathan Jenkins The UK has the mostsupportive enabling environment forsocial investment by a mile. We have a wholesale bank of size; we havesupportive technical assistance inter-vention, so we’ve got the investmentreadiness. The market just needs time, tounderstand where it works best. Katepicked up on “culture”. We needcommissioners to get much morecomfortable with the social impact bondmodels. We need to see a move from thetraditional models to more mission-related investing. It’s time to deliver.Banks putting risk capital to work in thismarket are Deutsche Bank, JP Morgan,Bank of America, Goldman Sachs. Notableby their exception are the UK clearingbanks. It’s our job to give them the dataand the comfort to actually put moremoney to work in the space.

Wray Irwin The bit that gets missed is thatyou can do good and make a profit. But onthe demand side, there is a total lack of

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understanding of how the market works,so transaction costs that investors have toget involved with in terms of duediligence prices a lot out of the market.

There’s also something to address on thesupply side. Is it developing new modelsthat can address some of these issues in thismarket, or are we trying to retrofit main-stream models within the sector? Thereseems to be a bias towards that. So we’relooking at how the two are coming to-gether over the next couple of years in a European research project.

Caroline Julian In terms of “rigour”,intermediaries can play a key role. Ourrecent research on the growth of socialenterprises in church and faith-basedinitiatives shows, it is anuntapped opportunity. Newsocial intermediaries such asResurgo Social Ventures are ina better position to know whowould be worth investing in. Iwonder whether there’s roomfor more partnerships to boostthe growth and really ensurethat we do have some rigorand do reduce that risk.

Matt Robinson For the socialenterprises and charities whohave some track record, theloan books are long enough tolook at eight to ten years ofdata. Maybe they could pull inmore mainstream channels.

Kate Markey For me, these charities areabsolutely the kind of organisations thatwe should be supported to take on sociallending. Use that data to persuade theirboards, who may have issues attached torisk, about how that could transform theirmission and their impact.

Peter Holbrook The Cabinet Office hasbeen doing some fantastic work to movethis agenda forward. But some of the otheroffices like the Department for Business,Innovation and Skills (BIS) need to getwith this programme. BIS allocates tens ofbillions in grant funding. It should openup existing funds to ensure that they aresocial enterprise-proofed. You can’t justlook to one government department toinnovate and create new financial products.

The Social Value Act created a marketthat rewards good social value creation,and government can do more to

strengthen markets that create these typesof outcomes. My mum isn’t particularlysocially liberal, but she would love a socialISA. Better pension fund disclosures,more retail products for smaller investors,so they can invest in their local communi-ties and in the social infrastructure of thiscountry – I think that would resonate withpeople who are fed up with the financialservices industry.

Nick Hurd The market is dominated byspecialists and we are trying to expand therange of people who get involved. Thegood news for Peter’s mum is that, inabout two months, she will be able toinvest in a genuine social ISA.

Social impact bonds have increased

largely because of the Department forWork and Pensions (DWP) innovationfund. When we knocked on the doors ofthe 39 local enterprise partners, we found a really worryingly small percentage wereeven thinking about social enterprise interms of their social inclusion strategy.We’ve engaged with that.

We haven’t really talked enough aboutcapacity to absorb investment within theless mature element of the social enter-prise movement. The National Citizens’Service, which is a £200m market now,could only absorb and scale up because ofthe capacity-building support they had – intheir case from Social Business Trust –

which has brought in pro bono expertisefrom the private sector. There are othermodels out there; it’s a very important partof the landscape. We have lots of social en-terprises; but very few big ones.

Sophi Tranchell Government can makesure that it doesn’t over-regulate unlistedshares because that is going to make thingsmore difficult. These are the people whoare actually prepared to take high risks instartups in the way that doesn’t mean wehave to give directors’ guarantees whenwe’re not going to get any money out of it.I don’t own shares in Divine so whyshould I put my home on the line for the government?

Rupert Evenett On the earlystage stuff, grants and socialinvestments are linked. A keysuccess factor in investmentswe’ve seen is where grantshave been alongside, or in anearlier stage of the investment.

As an industry, we could becollaborative and mutual aboutthis and create a data infra-structure for social investment.Then we can all share eachother’s confidential highlysensitive data in a trusted way,mutually owned and collabo-ratively run, of as well as for thesector – a social enterprise in it-self; that it just nails it.

Jon Bernstein Clearly financial return isrelatively easy to measure. How do youknow you’ve had social return?

Kate Markey Investors see the changecreated for the beneficiaries of the socialenterprise. What change happens? Whatyou can take credit for? What would havehappened anyway?

Caspar Mackay Many organisations areactually not measuring outcomes – theoutcome of apprenticeships is nottraining, it’s employment – sustainedemployment.

Caroline Julian To respond to PeterHolbrook’s point about governmentdepartments, there’s a very interestingrole government can play. Quite a bit ofour research recently has been aboutcommunities that set up co-operatives togenerate their own electricity. One of

ROUND TABLE

“You need financialinstruments as diverse

as the sector” Peter Holbrook

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the key models we’ve found is a jointventure where developers and privatebusinesses have said to a community“own part of our wind farm” or hydro-scheme; or communities have approachedthe developers and said we want to buy Xper cent of your shares and invest that; sothere’s a role for government to facilitatethose partnerships and that growth.

Sophi Tranchell In the alternative energymarket people are investing in the thingthey can see. They’re investing in theirlocal community, not paying for a lot offinance people to get rich.

Peter Holbrook You need financialinstruments that are as diverse as the sector is. We need to be slightly patient but we needto keep our foot firmly on the accelerator and keepinnovating different instru-ments to meet the broadspectrum of social enterpriseslooking for finance.

Jonathan Jenkins Whoevercracks retail wins, and a big partof the solution is data. The so-cial investment communityhas to find a way to feel com-fortable in investing in for-profit or profit-with-purposeorganisations or we’re nevergoing to shift the £600m plusleverage into the market be-cause the current capacity can’t absorb thatdegree of capital.

Matt Robinson At the moment, socialinvestors are predominately governmentand foundations who have invested in lieuof grant making. We will know a lot morein the next couple of weeks about whethertax relief will help crack the retail nut.Then there are pension funds. I suspectthere are some movements led by localauthority groups and they will fit part ofthe capital curve for the long-termclimate. So, crack those three and we couldbe motoring.

Wray Irwin There’s a perception that thisis a niche market of specific organisationsand isn’t for everybody, so the big leap isgetting it into mainstream consciousness.Then addressing that risk perceptionthrough developing better skills in theorganisation, but seeing it as part of amixed portfolio of investment.

Paul Ruddick I run a social enterpriseSME and a private SME and, to me, thesocial enterprise is a much higher risk. Thesocial SME is more complicated; there aredifferent drivers. When raising money onthe social side, you have to go through thiswhole circle of social impact. It absorbstime and resources. I think that needs to berecognised in the early start funding.There needs to be a grant. It’s just adifficult beast.

Kate Markey I go back to my point abouttransparency; data will be absolutelycritical. We’re trying to create somethingnew here; I have a sense that we’re alldesperately rushing. But we’re trying tocreate social change and it’s about creating

a sustainable market. I recognise thebalance of mission and enterprise; I’vecome across some very good people fromthe social sector who are verycommercially driven; hopefully, they arethe ones we’re going to support.

Caspar Mackay Scale is critical. Most ofthe organisations in this sector are sub-scale. What I would like to see is muchcoming more from government onbuilding skills in the organisations. Lots of support comes from outsideorganisations, but as soon as that supportis over, the team moves on and works with someone else and the reality is that

they haven’t built the ability of writingbids or raising finances that they need forthe longer term.

Peter Ibbetson Risk and data are key.When the bank loans money it needs toknow that it will get the money back atsome stage, otherwise its business modelis unsustainable. Unless, of course, youcan genuinely demonstrate (which comesback to the data point) a measurable valuein not getting that money back – that is, thevalue is created or returned in another waybecause your investment is deliveringagainst another objective.

Nick Hurd Post-financial crisis there is ashift in social values towards much

greater interest in the values oforganisations we do businesswith or who employ us. A verysocially responsible generationis coming through. There is asense of movement; move-ments need leadership.

I think we’re recognised as aworld leader in this area. Theprime minister had lots ofstuff he could have put on theG8 agenda and he put socialinvestment on it. Lots of peo-ple were thinking “What?!”Actually, the response fromother countries has been fan-tastic; they want to learn moreabout this.

Don’t lose sight of the factthat, of the flagship organisations that haveput up the £600m, no taxpayers’ money isinvolved; £400m of it came from dormantbank accounts, handed over voluntarily bythe banks; and £200m of risk capital wasput in by our four biggest banks.

My hope is that they don’t look on it simply as an exercise to keep governmentquiet, but regard it as a laboratory, an opportunity to learn about a new marketand to see the commercial opportunitythat Peter talked about. Or, more laterally,see the possibilities in what organisationslike Lloyd’s are doing, getting their peopleout to communities to learn by sharingtheir own learning, and building capacityin social enterprises. It is about trying tomake something that isn’t dominated bysocial investment geeks but is a widermovement that incorporates all elementsof society.

Jon Bernstein Thanks Nick, and thankyou all very much. l

“I’m a great believer that data unlocks

capital” Rupert Evenett

tROUND TABLE

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Britain has been home to a thrivingentrepreneurial culture since theRomans founded the settlement ofLondinium almost two millenniaago. During this time, the exciting

opportunities opening up to entrepreneurshave changed markedly, with apples re-placed by apps, and wool by widgets.

Less obvious, but equally significant, isthe shift in attitudes towards entrepreneur-ship. More investors today are interested inleveraging capital to change lives as well asgenerate financial returns. As approacheschange, social impact investment is a grow-ing area where the UK can take a lead. Re-cent research by Barclays found that, of theUK’s growing number of small andmedium-sized firms, whether social or not,only 5 per cent seek finance from banks,with 11 per cent preferring to borrow fromfamily and friends! Clearly, alternativefunding sources are vital to financing entre-preneurial growth.

A recent report from Sonen Capital sug-gests that an impact investment portfoliocan now compete with – sometimes out-perform – its traditional asset allocations.Potential investors, from pension funds tocharity foundations, which the City of Lon-don Corporation has spoken to prioritisereceiving near-market returns, although security of return of capital was more im-portant than dizzying double-digit returns.

This is where guarantees, underwriting,or mixed repayable and non-repayable fi-nance can help create suitable finance pack-ages. The growing number of funds emerg-

ing, in part catalysed by Big Society Capi-tal’s wholesale finance, has been a responseto the preference for investors to makelarger-scale investment opportunities. In-vestors also sought evidence of a trackrecord and a clearly defined exit strategyfrom their investments. Any preference fordebt financing would help this. Lastly, in-vestors also needed to know that the ex-pected social returns were tracked and gen-erated, but generally were less concernedabout how impact was measured.

The growing interest from investors wasreflected at the recent Global Impact Invest-ing Network conference held at the Guild-

Success requires a complex blend of strategiesby Mark Boleat

There is a mismatch between the type of capital that is offered by investors and that which is required by most social enterprises

MARKET CHANGE

hall which brought together more than 300interested investors from 35 countries.Deutsche Bank has allocated capital to im-pact activities in 2011, and several othershave created their own impact funds orfunction. Excitingly, demand has comefrom charities such as Scope, Golden LaneHousing and Broadway, which have cre-ated bonds offering new institutional andindividual retail investors fixed rate re-turns of 2-5 per cent. Hopefully, the tax re-lief for social investment expected in nextyear’s Budget, will help further encourageindividual investors, as long as they canaccess the interesting social investmentproducts.

Initiatives are under way to help trackperformance in this sector; a pilot schemecalled EngagedX is developing a perform-ance index of historic deals, with a view togetting closer to being able to identify andeven price the risk of a social investment.The Social Stock Exchange, launched at theG8 conference, shines a light on listed com-panies that measure their impact and de-liver value to society and the environment.

So what is really holding back the market?There is a mismatch between the type ofcapital offered by investors and that neededby most social enterprises. Working capital,which helps them bid for and deliver con-tracts, is in short supply. Only £10m of the£202m of social investment dispersed in2012 was in the form of working capital. Therest is all secured lending against, or for,purchasing an asset. The effect is that socialenterprises miss out on contracts to deliverthe outcomes society so needs.

More fundamental is the potential hesi-tancy about the role of social investment.What kind of services does society wantand need? Do our social enterprises provideand articulate their ability to deliver bene-fits over private-sector mainstream com-petitors? Is it finance that holds them back?Only then should we consider whether social investment is part of the answer.

Growing interest from mainstream in-vestors signals a new financing source,which seeks to create measurable social andfinancial returns. Yet investment is onlyone tool to ensure the sustainable growth ofsocial enterprises. Other resources – peo-ple, buildings and information – all have arole to play in helping to transform our so-ciety and economy for current and futuregenerations. Only then can our entrepre-neurial culture thrive for the years to come.Mark Boleat is policy chairman at the Cityof London Corporation

Traditional investors are looking for near-marketreturns on their investments

11 City of London EDITED CS:Statesman supplements 03/12/2013 11:35 Page 4


For 30 years the Wise Group has beentransforming lives and tackling social, economic and environmental issues incommunities. Its vision is to realise people’s potential, create a fairer societyand contribute towards sustainable eco-nomic growth.

What started as a local project in Glasgow (its headquarters are still there)has developed to deliver services and meetthe needs of communities across Scotlandand the north-east of England. Most of itswork comes from competitive tenderingfor contracts from government depart-ments and agencies.

The group works with public-, private-and third-sector agencies and organisationsto meet shared goals. It also supports other social enterprises by involving them in thedelivery of contracts that can help them fulfil their potential. Partnership working isan essential component of everything itdoes, and it has invested significant re-sources in ensuring that its values are central to its identity. Its belief is that this isrealised through the commitment, capabil-

ities and behaviours of staff. This involves afocus on culture through leadership and individual capacity building as the driversof excellent performance.

In 1983, the Wise Group developed a response to high unemployment in whatwas, at that time, known as the intermedi-ate labour market. This involved retraininglong-term unemployed people in the skillsthat could be used to undertake valuablework in communities. Initially, this in-volved insulating social housing, landscap-ing and environmental improvements. Par-ticipants gained new skills, real workexperience and support with job searching.Since then, it has helped more than 40,000people move off benefits and find employ-ment. Clearly, this has financial benefits forindividuals and families, but customersalso say that paid work has led to increasedself-confidence, and improved health andwellbeing. These factors have an impact on enhancing performance in the workplace.

Over the past 30 years, the Wise Grouphas improved the insulation in thousandsof houses, helping householders make energy efficiencies and save money on fuelbills. Now it manages home energy advicecentres for the Emery Saving Trust, fuelpoverty projects for local authorities andother green energy work.

Thinkingoutside the boxThese social enterprise stories deftly show how“business” and “social good” can come togetherwhen they eschew traditional corporate socialresponsibility

CASE STUDIES

For the past eight years, the group hasbeen pioneering an approach to reducingreoffending by employing mentors to workwith short-term prolific offenders on release from prison in Scotland. The aim isto help them to reintegrate with their fami-lies and communities as a first step to transforming their lives and changing their behaviour. The majority of the mentors areex-prisoners or ex-offenders.

Laurie Russell, chief executive of theWise Group, says: “Our success is based onhaving committed staff, strong partner-ships with local authorities, housing asso-ciations, community organisations andemployers. We have a reputation for deliv-ering excellent performance and outcomeswith a demonstrable social impact, andhave a proven track record of providing innovative, quality services and solutions.We have delivered contracts for govern-ment at different levels and developed internal quality and governance systemsfor measuring the impact of contracts. Wealso use social return on investment and social accounting to quantify our impact.”thewisegroup.co.uk

Divine is a chocolate company on a mis-sion to deliver a sublime experience tochocolate lovers everywhere, while rais-ing the bar on what it means to trade fairlywith farmers, and do business better.

Back in 1997, a cocoa farmers’ co-opera-tive in Ghana called Kuapa Kokoo (“goodcocoa farmers” in the local Twi) voted at itsAGM to set up a chocolate company to ac-cess a share of the valuable UK chocolatemarket. Twin, an NGO specialising in help-ing smallholder farmers organise and accessthe Fairtrade market who had worked withKuapa Kokoo since 1993, came to the UK tofind potential investors in this new idea – afarmer-owned chocolate company.

Pauline Tiffen, one of the original teamat Twin, remembers: “Emboldened bypulling off Cafédirect and moving intoprofit after three to four years, we packedthe Divine proposition with our most po-litically perfectionist dreams of bringingcocoa farmers closer to consumers, andchanging the way chocolate is both seenand eaten. We were determined to take onthe handful of global chocolate giants.”

Divine – owned by cocoa farmers, made for chocolate lovers

The Wise Group – partnerships for a fairer society

12-14 Case Studies EDITED CS:Statesman supplements 03/12/2013 11:36


This bold vision compelled Anita andGordon Roddick to come on board, and soThe Body Shop, along with Twin, were thefirst shareholders of the Day ChocolateCompany (named after Richard Day whoplayed a great part in helping the co-op setup), which was established as a limitedcompany in 1998, with the additional sup-port of Christian Aid and Comic Relief. Aunique piece of developmental finance sup-port from the Department for InternationalDevelopment, which guaranteed a bankloan, enabled Kuapa Kokoo to own 33 percent of the business, a first for cocoa farmers.

The company was established “to im-prove the livelihood of smallholder cocoaproducers in West Africa by establishing itsown dynamic branded proposition in theUK chocolate market, putting it higher upthe value chain”. Building the brand waskey to added value and a brand agency wascommissioned to find the right name,launched as the Divine Fairtrade bar.

The first managing director was SophiTranchell, a young marketeer burning witha desire to see social justice at the heart ofbusiness. In 2006, The Body Shop, stayingtrue to its vision to see cocoa farmers em-powered and benefiting from their busi-ness, handed over all its shares in the com-pany to Kuapa, making it the largestshareholder with 45 per cent of the busi-ness. On 1 January 2007, Day Chocolatechanged its name to Divine Chocolate Ltdto more closely align the company with thebrand. That year Divine handed over thefirst profit dividend to the farmers.

While Divine Chocolate has been grow-ing past the £7m point, Kuapa Kokoo hasbeen flourishing, growing its membershipto 65,000 and investing hundreds of thousands of pounds of Fairtrade premiumand Divine dividend in its farmers,

improving their living standards, andgrowing their business.

Owning their own chocolate company,with representatives on the Divine board,has delivered more than additional incometo the farmers. They have a direct influenceon how the company is run, and have beenable to use their company share as collateralto attract loans at preferential rates. Theyhave also been able to gain a stronger voiceand influence in the industry.

Divine Chocolate is proud to have mobilised consumers, and catalysed realchange in the world of chocolate – creating amarket and a supply chain that encouragedCadbury’s to convert its Dairy Milk brand toFairtrade, soon followed by Nestlé (KitKat)and Mars (Maltesers). Divine has broughtsocial enterprise into the mainstream, prov-ing the commercial viability of businessmodels with money and decision-makingin the hands of the many, not the few. Thecompany aims to further increase availabil-ity in the UK and grow worldwide (there is asister company in the US, and distributionin Canada, Europe, Asia and Australia).divinechocolate.com

In September 1987, Margaret Thatchertook her famous “walk in the wilderness”on the site of the former Head Wrightsonsteelworks in Thornaby, Stockton-on-Tees. Some two years previously, a smallcommunity project called Thornaby Im-passe had been established to support theyoung local men affected by the steel-works closure back into employment. In1989, the name changed to Five Lamps,recognising a prominent local landmark

and meeting place. Now, still based nearly400 yards from the spot where MrsThatcher was iconically photographed,Five Lamps has developed into one of themost successful social enterprises in theNorth of England.

The initial focus on the Thornaby com-munity has been succeeded by a truly regional footprint. Five Lamps’ range of social, economic and financial inclusionprojects and programmes now spans thearea from Berwick to South Yorkshire andimpacts on some 25,000 people each year.

The Five Lamps service portfolio is con-tinuously evolving. Management is alwayslooking to meet need identified in the organisation’s work in the most disadvan-taged communities. Current services in-clude providing unsecured personal loansto individuals unable to access affordablecredit or mainstream financial services;support for the long-term unemployed andfor families with complex needs; businessstart-up mentoring and coaching; youthservices; managing a regional loan fund tobring houses up to a decent standard; providing access to finance schemes for new businesses; energy savings advice; supporting pre-release prisoners;delivering a MyBnk franchise to promotefinancial literacy in schools and refurbish-ing empty properties in County Durhamand Darlington.

The CEO, Graeme Oram, joined the or-ganisation in 2002 and says, “We offer aparticularly diverse range of services whichare becoming increasingly integrated. Ourcustomers are able to use any of our servicesto access others. This is particularly the casefor our financial inclusion customers.What bank can you go to where you mightfind support to turn a hobby into a businessor progress into your first job for 15 years orachieve your first formal educational quali-fication? We are driven to create possibili-ties and change lives.”

The success that Five Lamps has enjoyedhas been predicated on a long-term strate-gic shift from grant-reliance to earned income from contracts and, more recently,from being able to finance initiatives fromits own balance sheet. From being 100 percent reliant on grants in 2002, the organisa-tion was 98 per cent funded by earned income by 2009.

Contract performance and growth wereparticularly strong but management waskeen to better demonstrate the impact thatFive Lamps made on its customers’ lives.

Five Lamps – tackling financial exclusion



Graeme Oram explains, “We featured inthe initial RBS SE100 Growth Index in 2010, but were amazed that only a handfulof organisations in that list achieved a fullscore for impact measurement. We com-mitted, there and then, to produce social ac-counts and were delighted that we wereshortlisted in 2011 and won the RBS SE100Impact Champion in 2012. Social account-ing has transformed our business in somany ways.”

The economic impact of Five Lamps isstrong. This year, nearly 2,000 people willleave benefits into jobs and business start-ups; financially excluded individuals willreceive over 15,000 loans totalling nearly£6m, enabling money to be recycled in localcommunities; the first phase of 35 refur-bishments of empty homes will create localjobs as well as placements and tasters foryoung people and most programmes willstrip away barriers to economic inclusion.

Graeme recognises the challenges thatsocial enterprises face as they seek growthto scale, “Too many social enterprises areunable to access finance at the point ofgrowth or may be too one-dimensional tospread risk. We are working in a periodwhere our services are needed more thanever, yet there are fewer, typically biggercontracts, that social enterprises can bid for.

“We are fiercely ambitious. We havebuilt what I believe to be a unique serviceportfolio. We have built a positive corpo-rate CV – IIP Gold; Best Companies 2011and 2012; Impact Champion 2012; Ernst &

Young ‘Social Entrepreneur of the Year’North 2013 and recently shortlisted for Local Enterprise Agency of the Year; butmost importantly we have built a team ofbrilliant people committed to changinglives. We seek to be brilliant partners.”fivelamps.org.uk

Wavelength was created five years agowith the goal of changing the world for thebetter through business. Wavelength isactive now in Europe and the US andworks with ambitious business leaders,entrepreneurs and social innovators fromacross sectors to build their knowledge,insights, resilience, connectivity and networks.

In the UK, Wavelength runs a member-ship club called Connect which each yearbrings together 120 leaders from some ofthe country’s most successful brands, suchas Dyson, Rolls-Royce, Sainsbury’s andJohn Lewis and a wide range of social enter-prise CEOs and founders from across thecountry. The business operates a cross-subsidy model and, although they pay less,the social enterprise leaders are not in theroom as supplicants but as equals.

One of the three founders is Liam Black,one of the UK’s best known social enter-prise leaders. He has founded and led somedozen social businesses including JamieOliver’s Fifteen which, with the celebritychef, he grew into a global brand.

Says Liam: “I made so many mistakeswhen I was starting and scaling enterprises.One big reason for me to create Wavelengthwas to offer social entrepreneurs access tothe world-class quality of leadership learn-ing and connectivity which is taken forgranted in the higher echelons of the privatesector. There is a leadership deficit in thesocial enterprise world and, if it is to come out of the margins, we need leaderswho know how to create fantastic customerservice, how to attract and retain great talent, how to maintain innovation at scale.This is best learned by looking at howworld-class businesses actually do it, not by reading books or attending conferencesto listen to gurus. So we bring entrepre-neurs, innovators and business leadersfrom all over the world – India, Silicon Valley, and Nairobi – to provoke, teach and partner.

“We try through Wavelength to helpthem fast track their learning and make thepartnerships which can take them from local player to market leader.”

Liam believes that scalable social innova-tion is more likely to happen in the messyoften uncharted territory between sectors,and part of Wavelength’s mission is to con-vince business leaders that they must go farbeyond traditional models of corporate social responsibility. And they go to somelengths to do this – having, for example,taken over 50 leaders to Bangladesh to seefirst-hand what the Nobel Peace Prize lau-reate Muhammad Yunus is learning in hissocial business partnerships with multina-tionals such as Danone.

“Whatever you call it – shared value, cor-porate social innovation – big companieswill have to move on from the binary viewof a world in which here there is ‘business’and over there ‘social good’. But this is hugeleap for leaders in their mid-forties whohave been formed by business schools and acorporate culture which has as, Yunus putsit, a one-eyed view of the world and humanity. Through Wavelength, we aretrying to help create that generation of leaders which the world so badly needs tofind new ways of creating wealth whichdoes not destroy the environment and create inequality.

“We believe in experiential learning,”says Liam, “in leaders learning from leadersand the power that lays in bringing peopletogether whose paths would never cross inday-to-day business.”www.thesamewavelength.com

CASE STUDIES

Wavelength – access toworld-class leadership

Leaders meet Muhammad Yunus in Bangladesh


38%

22%

22%

31%

2011 2015 2016

165m

750m

1bn

Social Enterprises

SME’s

38% 26% 14% 9% 7%

12% 19% 21% 26% 22%

Band 1 2 3 4 5

Most deprived Least deprived

Where social enterprises work: by level of deprivation compared to SMEs

Social enterprises have seen more increases in turnover than SMEs in the last 12 months

Decrease Increase

Social Enterprises

SME’s

Predicted growth of the social enterpriseinvestment market

39%9%

17%BAME

SME’s

Social Enterprises

Female LeadersMale Only Directors

19%49%

7%BAME

Leaders of social enterprises come from more diverse communities than

those of traditional SMEs

(BAME: Black, Asian, minority ethnic)


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15 Infographics EDITED CS:Statesman supplements 03/12/2013 11:37 Page 22

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