BS Bank and the Positive Case for Bridges Ventures

The fact is it cannot. Its size makes that impossible–in fact, the mere anticipation of its arrival will have already distorted market activity as participants position themselves accordingly. We at ClearlySo have been seen as relative purists in this regard, warning about the distortive effects and unintended consequences in a series of blog posts over the past few years. But doctrinal purity has never been our position, and most now appreciate the risks in leaving financial markets totally to themselves. Moreover, ‘market purity’ is not a deity to be worshipped; society has a responsibility to intervene when the positive social impact of the distortions outweigh the negative consequences. In such circumstances, it can be helpful to consider other examples of substantial intervention and how they have fared. We think the case of Bridges Ventures, the social venture capital fund manager, may be a positive case to follow.

Founded in 2002, the firm began with a £40 million venture fund which was the UK’s first large scale, institutionally backed, VC fund that specifically sought to generate social or environmental impact without sacrificing financial returns. The first fund proved a success, a professional team was put in place, and the firm has gone on to raise over £150 million in four different fund vehicles. These include a Social Entrepreneurs Fund, which is more focused on backing scalable social enterprises from a social impact perspective and the Sustainable Property Fund, which focuses on regeneration and environmental sustainability.

The firm was a recipient of a cornerstone investment by the Government of £20 million, which was one of the recommendations of the Social Investment Task Force (SITF), set up in 2000. This Government funding, which was subordinated (took the ‘first loss’ risk) and had a capped return, was matched by equivalent funding from the private sector. Without this boost there is doubt the fund could have been raised. As the SITF’s 2003 report stated, “The availability of this type of matching investment was crucial to attracting private sector investment to a new field, where returns are as yet unproven”.

That this investment was distortive is indisputable, almost by definition. The fact is that the fund would not have come about without the intervention; were things left solely to ‘market forces’. I can attest to that as a previous company in which I was involved (Catalyst Fund Management & Research) tried unsuccessfully to raise a similar fund at a similar time. The conventional investment market was simply not ready. Of course, we did feel envy that the Government funds did not come our way, but who knows if we would have raised the balance. What is beyond doubt is that the Government’s investment into Bridges has been extremely effective. Bridges’ success has led to the creation of the social VC market in the UK. It has proved that professionalism and financial return can go hand in hand. It has engaged institutional backers into the sector–having proven its premise that financial returns and social impact need not be mutually exclusive. And it has done all this for very little money. The Government would have seen its investment returned, plus some capital gain. Since the first fund, Bridges has secured nearly all of its subsequent funding from non-governmental sources. A particularly painful pun is apt: Bridges has been a catalyst for the sector.

What is also crucial and positive about the Bridges case is the absence of ‘mission drift’. It was set up to bring mainstream funds into social impact investing and has done so. Its product diversity should prove a source of operational strength, but it remains exclusively a private equity/VC fund manager.

Its effectiveness on minimal funding (and thus minimal distortion), development of a private sector oriented and sustainable business, and absence of mission drift stands Bridges in stark contrast to some other recipients of far more generous government handouts. Examples abound of recipients of substantial dollops of funding whose effectiveness is far less clear than Bridges and is rarely measured objectively, which do not achieve sustainability (they remain dependent on endowments or further governmental handouts), do not catalyse the private sector and whose missions drift freely, causing ongoing and harmful market distortions.

This mission drift is particularly damaging for the development of a nonsubsidised social investment marketplace. If well resourced and substantial (in size) players, which are not in any way subject to market forces, are forever able to jump into exciting new areas, they absorb resources for which the fledgling private social venture intermediary sector are desperate to secure. This too I know from personal experience!

The Big Society Bank must not become like these institutions (names withheld in the interest of discretion) and should not support them. Its mission is to greatly accelerate the social investment market, but to do so in a way which is Big Society and not Big State. Clearly a thriving market which galvanises substantial private sector investment must be the key. A false market which relies on continued state intervention is obviously not the way forward and is unlikely to be consistent with the Coalition Government’s ideological underpinnings.

I take some comfort from the fact that Sir Ronald Cohen is currently advising the Government on the Big Society Bank project, working with Nick O’Donohoe, whom many expect to be the BSB’s first CEO. Nick was formerly a senior professional with JP Morgan, and has spent many of the last few years active in the development of the social investment sector. Before leaving, he and his bank published a seminal research report entitled, “Impact Investments: An Emerging Asset Class”. Although we challenge some of the conclusions, the work is an excellent contribution to the body of literature in the sector.

Cohen is particularly well-suited to ensure that the BSB stays on track, as he was Chair of the Social Investment Task Force, Founder of Bridges Ventures and had previously built Apax Partners into a world leading private equity fund manager. With his involvement the likelihood is far greater of a ‘mission constrained’ bank that is effective and focused. Under their collective stewardship our cautious optimism continues in the Big Society Bank and its prospects for bringing about a thriving social investment marketplace in the UK.