Last week’s Stephen Muers, Big Society Capital’s chief executive, outlined more detail about the organisation’s response to the Adebowale Commission on social investment.  

Alongside championing calls for more subsidy into blended finance structures, he announced that BSC has amended its target rate of return from 4-6% to around 1% after costs, measured over a rolling five-year average.  

Stephen stresses that this is less a fundamental change to how BSC invests and more a reflection of the reality of their investment practice over the last ten years. He explains that there are many other factors impacting on the cost of capital for social enterprises and that the sector shouldn’t expect to see dramatic changes as a result.  

Stephen is right to downplay it. It is a helpful clarification of BSC’s economic model. However, the reduction in the advertised cost of capital will have very little impact in itself on the ability of social investment providers, in whom BSC invest, to be able to offer the sort of enterprise centric finance which the Adebowale Commission has rightly called for.  

For a social investment provider to be able to offer patient flexible unsecured investments of c. £50k, which SEUK data typically suggests an average social enterprise needs, they might expect to lose around 25% of their capital. They also need to be able to support relatively high transaction costs both at the time of the investment and on an on-going basis through the life of the investment.  

A slight reduction in the price of their wholesale capital will not make the difference in their ability to be able to offer this finance. Moving from 5% to 1% won’t cover the losses or transaction costs for a social investment provider. They need a package of finance which can tolerate this market reality, including significant amounts of subsidy to blend with their capital to make such a fund stack up. 

That’s why Stephen’s call for more subsidy for blended finance is so important. And this is the year to make that case as we head towards the Government’s consultation on the future use of dormant assets. It’s a once in a decade opportunity. We know that creating the right blend means that capital can flow to social enterprises working in some of the most deprived places and communities in the country, helping them to create jobs and provide vital services where they are most needed. This is a compelling offer to Government as the strategy for levelling up takes shape. This is the story which deserves our focus over the coming months.