Here are the answers to some of the questions you may have about Big Society Capital.
How does Big Society Capital invest?
Big Society Capital invests in two distinct ways:
- Into our social impact investment portfolio: Big Society Capital invests into a set of funds aimed at providing repayable finance to socially impactful organisations across the UK. These are spread across four key investment systems where we believe there is greatest potential for impact; Impact Venture, Social Property, Social Outcomes Partnerships and Social Lending. Read more about our investment approach here.
- Into our treasury portfolio: There is often a time lag between committing capital and its deployment into our core social impact investment strategy. We also need to hold a prudent level of liquid funds for our day-to-day operational requirements. This capital is held in our Treasury Portfolio. Investments in the treasury portfolio align with Big Society Capital’s responsible investment principles and targets managed funds with best-in-class ESG integration and practices.
Read more about how we build our portfolio.
Where (geographically) does Big Society Capital invest?
We invest primarily in funds registered in the UK that provide finance and other support to social sector organisations that primarily benefit people and communities anywhere in the UK.
When investing in funds based outside the UK, we look for there to be investment staff based in the UK, and that their investments benefiting organisations and communities in the UK should be a multiplier of our investment in the fund.
Does Big Society Capital invest directly into social purpose organisations?
Legally, Big Society Capital cannot invest directly into social enterprises, charities and other social purpose organisations. We invest in entities such as fund managers and specialist banks serving the sector that in turn provide finance and support to these organisations.
These entities must be providing finance to “Social Sector Organisations”. Social sector (or third sector) organisations are defined by the Dormant Accounts Act as those that “exist wholly or mainly to provide benefits for society or the environment”. We have interpreted this to include regulated organisations such as charities, Community Interest Companies or Community Benefit Societies, as well as some profit-making companies or enterprises that have a clear social mission. These ventures need to be able to meet the principles set out in our Governance Principles.
How is Big Society Capital funded?
Big Society Capital was set up with funding from two streams:
- English dormant bank accounts: Big Society Capital has so far received £425 million from the Reclaim Fund Ltd which collects dormant bank and building society account monies from UK banks and building societies. After retaining reserves to cover possible future claims, the Reclaim Fund passes the money it receives to The National Lottery Community Fund. The National Lottery Community Fund then allots the money to each of the home countries using a standard government formula. Big Society Capital’s funds are invested via The Oversight Trust – Assets for the Common Good, which has the responsibility for overseeing their governance and ensuring their strategies are in adherence with their mission.
- The four main UK high street banks: Barclays, HSBC, Lloyds Banking Group and NatWest Group each contributed capital in aggregate £200 million as an equity investment.
Read about how Big Society Capital was set up here.
What is Access - the Foundation for Social Investment?
In March 2015, Big Society Capital joined with the Cabinet Office and Big Lottery Fund (now the National Lottery Community Fund), to help launch Access – The Foundation for Social Investment. The aim was to provide a source of finance which combines grant with social investment to make it more accessible to charities, social enterprises and social purpose organisations.
Access targets those most in need of patient and flexible investment through:
- Funding blended finance and enterprise development programmes in England.
- Sharing knowledge and data and translating it into practical insight that others can use.
- Mobilising others who share their goal of making capital work for communities.
What is Good Finance?
In 2017 Big Society Capital worked with Access – The Foundation for Social Investment and the Cabinet Office to launch Good Finance.
Good Finance runs independently to Big Society Capital and aims to help improve access to information on social investment for charities and social enterprises.
Its mission is to be the single trusted source of information on social investment for charities and social enterprises through:
- Improving knowledge on social investment, what it is, what it can be used for and the journey and process it requires.
- Enabling organisations to make informed decisions, based on their needs and situation, not on embedded attitudes.
- Helping connect organisations to the right investors to talk to based on shared values.
Why does Big Society Capital make investments rather than grants?
Making investments is at the heart of our mission, since Big Society Capital was established to grow social impact investing in the UK. Investment isn’t a substitute for grant– and many organisations use both. Instead, it allows organisations that have a suitable business model to access a different, additional source of money to support and grow their impact and allows valuable grant capital to be prioritised where investment may be less suitable.
A grant maker gives away their capital for good; while an investor expects to invest in an enterprise that can generate a return through its business model, meaning also that their capital can be recycled and used again. By investing, every £1 that Big Society Capital lends can be recycled and used 6 or 7 times by social enterprises, charities and other partners.
Why does Big Society Capital need to generate a return on its investments?
Big Society Capital was set up to be a sustainable investor that would not be dependent on future granting of assets. Therefore, we seek to generate a sustainable financial return from our investments alongside positive social impact, so that we can continue recycling our capital for future investees. That way Big Society Capital can deliver its mission to grow social impact investing into the long term and serve future generations.
How are Big Society Capital’s investments priced?
When we invest into a fund, we look for proposals that can raise substantial capital from other investors to increase the amount of capital channelled towards enterprises tackling social issues. This is because many of the problems these social investment funds seek to address need many multiples of the amount of capital Big Society Capital has. As a result, we rarely “set the price” for investments.
When we invest into a fund or intermediary, we consider various factors in assessing whether the proposed return is appropriate for the risk and impact. These include the extent to which a fund can create deep social impact, and the return required by co-investors.
Of course, the ‘price of capital’ means much more to most enterprises than simply the headline rate of return. It can include the duration, patience, and flexibility of the investment.
Why is there a range of returns across our portfolio?
Social impact investing happens across a wide spectrum and supports a range of different market segments including social property, impact venture, and social outcomes partnerships. With Big Society Capital’s mandate to support this diverse investment ecosystem, we invest across this range – which means that in any given segment the risk, returns and impact we are seeking can vary widely.
In some areas, such as those involving some element of grant funding, our original expected returns could be between 2-4%, whereas in our impact venture investments that are high risk, high impact, we will be looking for much higher returns reflecting the returns generated by these high growth businesses, the high risks of early stage investing, and it is the level that other investors are willing to commit to grow the segment.
What determines the cost of an investment for an organisation?
Organisations are likely to be obtaining finance from intermediaries like social impact fund managers and banks – who are investing money on behalf of these ultimate investors.
The cost of taking an investment for a charity or social enterprise will depend on factors including what type of product they are offering, how long investors will have to wait to receive a return on their investment, how likely they are to get their money back.
If you are a social enterprise, charity or mission-driven organisation looking for further information about how much social impact investment might cost your organisation – head to the Good Finance Cost of Capital calculator.
Can Big Society Capital provide cheaper capital?
We agree that low cost, flexible and subsidised capital is critical for many social sector organisations. That’s why we took a leading role in supporting the creation of Access - The Foundation for Social Investment; to provide a source of blended finance which combines grant with our investment to make it more accessible.
However, we also have a wider remit - to grow the amount of capital invested into social impact as well as increasing its reach among social sector organisations. The reason for this is that our funds are tiny when compared to the scale of the social problems in the UK.
Therefore, we believe that the best use of our capital is to build a wider market for investment for social impact. We believe that this will help generate tens of billions, rather than tens of millions, for the sector. This approach is already paying off; we started with £625 million of initial capital and together with partners, have now made £2.6 billion of investment into more than 2,000 social enterprises and charities.
Why does Big Society Capital support organisations that are not structured as social enterprises?
Social enterprises and growing investment in them are absolutely at the heart of Big Society Capital’s mission. We share their focus on social impact and so the majority of our investments are in social enterprises or charities. However, we recognise that organisations with other legal structures can also deliver social impact and therefore tend to focus more on the mission, values and impact intent demonstrated by our investees, rather than their legal form. To-date, we have invested in various legal entities; from charities and companies with shares, to community interest companies and co-ops.
Does Big Society Capital have a target rate of return?
There is a common mistaken assumption that Big Society Capital has a “target rate of return” for individual investments that drives market rates. In fact, it is the other way round, since the return rates of the funds we support are in practice determined by what enterprises and other investors will accept. Since the social investment market has successfully grown bringing in other investors, our capital is now less than 10% of the market. As a result, Big Society Capital could not influence the rate other investors will accept, and in any case should not do so as offering ‘reduced’ rates would simply undercut other investors. To reflect this, in 2022 Big Society Capital’s board revised its overall target for net return, after costs, to 1% per annum averaged over five years. As this reflects the net result of our existing investment practice, it won’t lead to any cascade of change to the cost of capital affecting enterprises.