VIEWPOINT – Insights from the front lines

25th May 2016

A Big New Market?

Five years after the launch of Big Society Capital, its first CEO takes stock of what the organization has (and hasn’t) achieved.

By Nick O’Donohoe

Big Society Capital (BSC) originated in the London office of Sir Ronald Cohen, founder of Social Finance UK and then chairman of the UK-based Social Investment Task Force. It was there, in February 2011, that Sir Ronald and I received and accepted an invitation by the UK government to provide a working blueprint for the “world’s first social investment bank” (as the government called it). From that moment until the end of last year, it was my privilege to be CEO of BSC.

BSC represented a bold experiment by the UK government to create an institution that, if it succeeded, would create a new market— a market for social impact investment. This market would help thriving non-profits and social enterprises to scale up. It would change the way that governments commission public services. It would provide new options for socially motivated investors. Most important, it would provide new funding to improve the lives of vulnerable and disadvantaged people.

A defining aspect of BSC was its novel funding structure. The UK government gives the organisation access to money from unclaimed bank accounts—a source that has yielded £850 million (about $1.2 billion) in capital. In addition, the four largest banks in the United Kingdom have committed to investing £200 million (about $280 million) in BSC. With those funds, the organization is developing an ecosystem of intermediaries that will drive the growth of the impact investment market and accelerate the use of innovative financial instruments, such as Social Impact Bonds (SIBs). Despite its official sponsorship, BSC operates independently of the government. It has a mandate to preserve its capital, but it has no obligation to earn a commercial rate of return.

The question of whether the impact investment movement is more a matter of hype than of reality loomed over our work during my five years at BSC. And to be sure, the volume of political rhetoric, consulting work, academic research, and global convening that this movement has created is disproportionate to the amount of money that has actually moved into the impact investment market. But what seems like mere hype is actually a necessary form of pump-priming.

The need to “prime the pump” within a market is a feature of both well-established fields such a s venture capital and infrastructure and relatively new fields such as clean energy, community investment, and micro-finance. In their early stages of development, all of these fields needed financial subsidy, technical assistance, and occasionally a little hype. These kinds of support provide space for effective intermediaries to grow and for investment track records to develop. Some new markets, including impact investment, require government leadership and effective policy making. In most cases, they also require entities that will provide catalytic capital and advocate for market building.

In its first half decade of existence, BSC has aimed to serve those two functions for
the impact investment movement—to act as a capital provider and as a market champion. So how far has BSC gone toward meeting its ambitious objectives? What did we achieve, and what did we learn over the past five years?


Without question, BSC has helped transform the impact investment market in the United Kingdom. In 2011, the country had an embryonic layer of intermediaries that provided investment management and advisory services. Since then, BSC has made more than £500 million (about $700 million) in new funding available to such intermediaries— both through the investment of its own capital and by leveraging the capital of co-investors. As a result, lenders in this market (such as Charity Bank) are better capitalized, investment management companies (such as Bridges and Social Investment Scotland) are managing larger pools of assets, and mainstream financial institutions (such as LGT and Threadneedle) now offer dedicated impact investment products. The number of professionals engaged in impact investment has expanded, and hundreds of frontline organizations have now accessed capital from investors associated with BSC.

The existence of BSC has also encouraged the UK government to go further in its policy support for this new market. The government has created grant programs to help organizations become investment ready. It has introduced the first tax relief program in the world that targets impact investment. And it has worked intensively to enable a greater flow of SIBs and other pay-for-success initiatives.

Today there are more than 30 fully funded and operational SIBs in the United Kingdom— more than in all other countries combined. BSC provided investment for many of those transactions. It also served as a cornerstone investor for the Bridges Social Impact Bond Fund, the world’s first (and so far only) dedicated SIB fund. The beneficiaries of projects funded through these SIB projects include young people who have found employment, homeless people who have received shelter, and prisoners who have successfully reintegrated into their communities.

BSC’s impact extends beyond the United Kingdom. In 2013, the UK government put impact investment on the world agenda at a meeting of the G8 countries. (Since then, the G8 has become the G7.) From that meeting emerged the Global Social Impact Investment Taskforce, which subsequently evolved into the Global Steering Group (GSG). Sir Ronald leads that body, and his efforts have spread the BSC vision worldwide. Just a few years ago, interest in impact investment was limited to the United States and the United Kingdom. Today, mostly thanks to Sir Ronald’s leadership, 14 countries now participate in GSG efforts. BSC has emerged as one of the most visible and influential institutions in this field. Barely a week goes by without a visit to BSC by a delegation from another country. Australia, Canada, Japan, and Portugal are working to create comparable organizations, and leaders in those countries have drawn extensively on the BSC model. BSC, in short, has begun to make a significant difference in the United Kingdom, and it has become a role model for similar efforts in other countries.


Yet within the larger impact investment market, serious challenges persist. Over the past five years, we have derived several critical lessons from our efforts to confront those challenges. Three lessons stand out. First, the impact investment market is still far too small. Relative to the size of the overall capital market, it is a gnat on the back of an elephant. It is here to stay, but it has not yet achieved a significant scale. Fundamentally, that is more a problem of demand than it is of supply. In developing this new market, participants have spent too much time inventing new and often fiendishly complex financial products and not nearly enough time exploring core questions about the beneficiary side of the equation: Who is going to use the money raised through impact investment, and how are they going to use it? For which social issues can investment capital complement traditional philanthropy? Who will ultimately benefit from impact investment products, and how can we measure the real impact of those investments?

Second, the structural changes that impact investment requires will take decades to complete. The forces of inertia are strong in each of the sectors that are essential to making this market work. Investors in the private sector have developed their frameworks of risk and return over 150 years, and getting them to adopt a new paradigm will not happen quickly. Social sector organizations also move slowly, and leaders in that sector understand grant funding far better than they do funding via investment capital. Government officials, meanwhile, are reluctant to embrace alternatives to traditional grant programs: They are used to treating problems instead of preventing them, and the model of paying for outcomes strikes them as difficult and complex. What’s more, budget-cutting pressures all too easily stifle innovation.

Third, participants in this market need to be realistic about return potential. Some impact investors seek both to maximize their risk-adjusted return and to achieve social impact. Optimizing both of those variables at the same time isn’t possible, of course. But these investors are posing an important question: Can our money change lives for the better ?Pursuing a positive answer to that question requires a new kind of investment process—one that focuses on maximizing returns but also embraces governance structures and measurement tools that explicitly recognize social impact. Organizations like the International Finance Corporation have been working in this area for many years, and an increasing number of mainstream investors (such as AXA, Black-Rock, and Zurich Insurance) are seeking to develop new structures and tools as well.

Other investors are prepared to accept lower returns (often called “concessionary returns”) in exchange for real, measurable impact. They are few in number, but they are the true heroes of the impact investment movement. They start by taking an interest in a particular social goal—reducing youth unemployment, for example, or improving education in impoverished countries—and they look for projects that serve that goal. Using tools such as SIBs, they take risk on interventions that governments are wary of supporting directly. They also take risk in markets where traditional investors fear to go, and they provide longer-term and more-patient capital than their traditional counterparts. They explore ways to combine grant capital with investment capital to fund vital research and development. Their capital often funds nonprofit rather than for-profit organizations. The fiduciary structure of today’s investment market makes it hard to find this kind of capital, but concessionary investors will play a crucial part in helping the impact investment movement to flourish.

The emergence of both types of investors shows that this movement is not just hype. It’s too early to say how successful initiatives like BSC will ultimately be. But for half a decade, that organization has helped prime the pump for a promising new market.