A frequent criticism of social investment is that it focuses on either larger organisations, those looking to significantly "scale" or, most often, both. This might not be an entirely accurate accusation to throw at what is a broad and multi-disciplinary sector, but there is an element of truth in it. The challenges facing our society are many, deep and ingrained, so it is inevitably beguiling to think that finding great ideas and supporting them to scale rapidly is the most impactful way to deploy social investment. And this is before you consider that the economics of repayable investment work against putting money towards organisations that are relatively small, might have a relatively low-growth outlook and might represent a higher risk.
Factor in the widely held belief that smaller charities and social enterprises are not particularly interested in social investment – or generally not ready for it even if they are – and, yes, the focus of much of the social investment landscape actually has been on "scale" in one way or another.
The problem is that it is not where the vast majority of the voluntary sector resides. So social investment needs to continue to strive to find ways to better serve its target market, even if it represents a significant challenge to do so.
But what does the evidence tell us about the reality of demand and readiness for social investment from smaller organisations? Well, through developments over the past two years we are starting to see a pattern. And it feels ground-breaking.
Earlier this year, Seb Elsworth, chief executive of Access, reported some of the emerging statistics from the Growth Fund, which blends loans from Big Society Capital with grant subsidy from the Big Lottery Fund. In 2017, its first 100 loans had been made to organisations with a median turnover of £300,000 and an average sized investment of £70,000. The modest nature of these amounts was highly noteworthy. So what has happened since then?
In the first nine months of 2018, a further 110 loans have been made. The median turnover of organisations invested in by the fund this year has been even lower, at approximately £220,000. The average size of investment has also fallen, to £58,000. This feels truly remarkable. In response to the availability of smaller-scale loan products, the sector has started to respond and social investment has started to reach into parts of the market previously largely overlooked. Who knows whether this trend will continue, stabilise or reverse as the Growth Fund moves through its remaining years? But it is certainly true that the beliefs and approaches of some investors have fundamentally changed over the past two years, with some saying that they now see great future potential in a market they’d previously thought was impenetrable.
More social investors have stepped up to the challenge, with 15 now delivering investment under the Growth Fund. November saw the creation of the final tranche of funds, with Forward and Nesta among the new investors that will have a chance to reach into this market.
But so much more needs to be done. Proving that there is a strong and growing market for small-scale finance might actually prove to be the easy bit. Securing the ongoing subsidy to facilitate this type of finance in the future needs urgent work now. The imagination and will to develop a much broader range of financial products will need to follow, because unsecured loan finance meets only a part of the unmet demand. As this column has argued before, the lack of quasi-equity products still represents a huge gap in the social investment landscape.
But the immediate lesson of these new numbers is surely that in the equation of social investment supply and demand we shouldn’t make assumptions about the latter on the basis of the market response to narrow developments in the former. The Growth Fund was created on the basis of a premise: build it and the people will come. The premise was untested, but we can now have growing confidence that it is being proven. Social investment can work for all. So it must.
Neil Berry is director of programmes at Access – the Foundation for Social Investment