Subsidy in the social investment market – part 3

In the first blog in this series I provided an overview of some of the ways that subsidy has been used by in the UK social investment market since the early-2000s, while the second blog looked at some snapshots of what that subsidy has achieved on its own terms.

This blog will consider some of the key questions about the role of subsidy for social investment and the social investment market in the future.

I initially planned to break these down into practical questions (about how particular outcomes are achieved) and ethical questions (about which outcomes and approaches are socially positive) however many of the biggest questions ultimately involve significant overlaps between the two.

What I have done is highlighted some broad questions (which are variations on questions that would be relevant to most attempts to fund social change), some specific questions particularly relevant to subsidising social investment and I’ve rounded off with a philosophical question about when funding becomes subsidy in social investment.

Broad questions:

What are we trying to make happen with subsidy?

As Allia’s Phil Caroe highlighted last year, there are a wide range of perspectives on what ‘social investment’ is and what it’s for.

My first blog suggested the broad aims of public sector agencies in providing subsidy for social investment developed from promoting the idea, to testing it out in practice through to building a market.

But these broad goals are based on the assumption that support for ‘a social investment market’ as a distinct branch of the overall market for finance is either useful to have or possible to create. Others may like the idea in principle but not believe that it is important enough to be (partially) paid for with public or philanthropic money.

Even amongst those who support subsidy for ‘a social investment market’ is the aim:

  • to ensure the largest possible amount of money is made available to do social good?
  • to ensure as many organisations as possible receive investment?
  • to support organisations to help the largest possible number of people?
  • to generate the maximum possible amount of ‘social value’ using an approach such as SROI?

Why subsidise social investment and not something else?

While accepting that different stakeholders may have different aims when providing subsidy, we can use Access as an example. Access’s mission – – is to: “make it easier for charities and social enterprises in England to access the capital they need to grow and increase their impact.”

Clearly the offer to organisations from ‘the social investment market’ is only one factor in determining whether this mission is achieved. For example, many organisations seeking to grow and increase impact might benefit more from business or impact management support that isn’t specifically focused on social investment.

Access, as a social investment-focused organisation, will logically consider how best to achieve its goals via social investment but public sector agencies and philanthropic funders need to consider the usefulness of supporting social investment against other activities they might support.  

Which approaches to subsidy work best in which situations?

My first blog listed four tools – grant funding (and ‘free capital’), tax breaks for investors, guarantees for investors and subordinate investment – that have been used to subsidise social investment.

These tools are not, in themselves, specific ways of providing subsidy – they have been provided both separately and together using a wide range of different models. However there are a range of emerging questions such as:

  • In what situations does grant funding consultancy improve ‘investment readiness’?
  • To what extent do tax breaks or guarantees encourage investment or different kinds of investment?
  • How useful is subordinate investment in ‘crowding in’ more commercial investment – and what kind of investment does it crowd in?

How do we measure the commercial and social impact of subsidy?

Blog two considering the impact of various approaches to subsidising the UK social investment market by looking primarily at the evaluation of different initiatives on their own terms.

So far, no wider attempt has been made to consider either commercial or social impact of subsidy across a range of different programmes or initiatives. It is not clear the extent to which available data would enable the impact of previous activities to be assessed retrospectively. Either way, it may useful to consider what sort of data would need to be collected to enable useful learning about the impact of future programmes.

As discussed above, there are range of aims that might be considered – and there are also potentially complex questions about how to judge the extent to which outcomes or impact is attributable to particular subsidies or subsidised activity.

Specific questions:

Who is being subsidised?

This is a practical question for any form of subsidy but for social investment it is also becomes a wider ethical question. As one example, a disproportionate amount of individual investment is made by middle-aged men living in the south east of England, therefore this demographic are likely to be the biggest beneficiaries of Social Investment Tax Relief (SITR).

In 2012, before the introduction of SITR, Clearly So’s Rod Schwartz highlighted this danger warning that tax breaks: “would only benefit the rich, as only they have meaningful savings to benefit from fiscal incentives.”  

However, this is the tax breaks that such as EIS and SEIS that provide incentives for (mostly) rich investors to invest in early stage mainstream businesses, so the alternative angle is that SITR helps charities and social enterprises to compete for investment from rich people that would otherwise not be deployed for a social purpose.

(When) is it justifiable/useful to subsidise ‘the market’?

Across the various programmes and initiatives discussed in blogs one and two – along with some that such as Big Lottery’s Next Steps programme are not listed – over the past 10 years well over £100 million of public funding has gone into paying for activities that support the development of a market for social investment, as opposed to actually being investment into charities and social enterprises.

This includes funding to develop the Social Impact Bond, a grant-funded market for investment readiness consultancy (primarily) through the ICRF and Big Potential programmes and funding for resources such as Good Finance, a website which helps charities and social enterprises to navigate the market.

Big Society Capital recently estimated that there may be as many as 120 intermediaries (60 ‘established’ / 60 ‘emerging’ ) operating within the UK social investment market. It is not clear how many of these are viable businesses without significant subsidy.

How should providers of subsidy prioritise their support for organisations that enable the social investment market function? Whose priorities are most important in this discussion – funders, investors, government, social organisations, citizens?

Given the government-backed subsidy is time-limited, what happens next?

Discussions with Holly Piper from CAFVenturesome and others following my first two blogs highlighted the fact that there is a distinct role for philanthropic supporters in subsidising the social investment market.

While government and Big Lottery backed organisations such as Access can make significant time-limited interventions in the market, philanthropic funders have played a key role in supporting the development of social investment before government became interested and, crucially, will still be there after the government money has gone.

With this mind, it’s important to consider:

  1. whether subsidies are short term interventions to catalyse organisations or activities that will subsequently be viable without subsidy or
  2. Whether subsidies are create models for (or dependency on) subsidies that will need to paid for by somebody else in future

In situations where (b) applies, Access and other publically-backed funders need to consider how their aims for and approaches to subsidy aligned with those of philanthropic organisations (and potentially individuals) who may provide ongoing subsidy in the future.

When does prioritising social returns become subsidy?

When looking at individual investments (rather than wider subsidies for ‘the market’), it is possible to argue that any investment that does not prioritise that highest possible risk adjusted return amounts to subsidy.

If, for example, a multi-millionaire investor has to choose between buying a football club or a spam factory. The investor believes the investment in the spam factory will deliver a significantly greater risk adjusted return but he/she would rather be known as the owner of a football club than a spam factory. Is this investor subsidising their ego at the expense of their bank balance, or are they buying the prestige of owning of a football club?  

There’s not a factual answer to this question – your answer depends on your perspective.

So it also a matter of perspective whether investing for 0-100% financial return on a social investment means that an investment is being ‘subsidised’. Has the money that a public or philanthropic funder ‘loses’ when putting in a grant or guarantee alongside a repayable investment been lost or has it been spent on funding social good?

This issue was raised by Bob Thust on Twitter in response to my first blog.

(Paraphrasing his Tweets) Bob advocates an approach to social investment that starts with what the investee/grantee can afford to repay rather than framing the issue as ‘we need a return on investment so we need subsidy to make it work’, adding that while in practice it may amount to a similar process, we aren’t about making social investment but instead talking about getting the greatest available impact from limited grant funds. .

So for example, if may be possible to provide £50,000 worth of ‘repayable grant’ to two organisations with each of them paying back £25,000 and becoming more socially useful and commercially viable in the process.

The commercial investor sees as two investments that have lost £50,000 each, the funder of social impact sees this as spending £50,000 on supporting two organisations to deliver commercially viable social impact and then having another £50,000 available to invest into another organisation.

For many, this binary view between investment that aspires to be a commercial activity and everything else is a misunderstanding of the ‘market’ for supporting positive social change.

For government and philanthropic funders seeking to generate the greatest possible level of positive social impact in may make sense – at least in theory – to view social ventures on a spectrum of investability.

This is no sense an exhaustive list of the possible questions around subsidy in the UK social investment market or social/impact investment more widely.

Please get in touch to let me know about some of the key ones you think I’ve missed or two feedback on any of the questions and challenges raised in this blog series.

I will now be completing a short report bringing together the thinking from these blogs and a  recent roundtable discussion hosted by Access to scope out some areas related to subsidy that may require further, more in depth research.