There is an old adage in business that bad times create good opportunities. And during a period when investors are seeking to buy-up cheap assets, is it possible that the global crisis could be a springboard for the expansion and creation of social enterprises?
This is the hope that sits behind the just launched Bridges Social Entrepreneurs Fund. Initial donations to the fund include sums from Al Gore’s Generation Foundation for green and ethical businesses. Other substantial gifts come from Sir Ronald Cohen and his Apax Foundation. In total, early donations add up to around £4.25m.
Sir Ronald’s gift is particularly interesting. He is the founder of Apax Partners, one of the world’s largest private equity firms. Apax has over £10bn under management, with a wide variety of investments and portfolio companies, including a joint venture with South African healthcare company [Netcare] to run General Healthcare. General Healthcare is the largest private healthcare business in the UK, whose associate companies run Independent Sector Treatment Centres on contract to the NHS. Apax is advised by some of Britain’s leading politicians, including Lord Warner, the former minister for health service reform.
Sir Ronald is also a close associate of Gordon Brown and undertook for the then Chancellor of the Exchequer a review of [financial services’ companies ‘orphan assets’]. The review proposed the creation of a social investment fund, which would, in part, finance the expansion of social enterprises. This recognised the difficulties social enterprises have in raising capital, given the necessary absence of equity funding.
Although applications for funding to the social entrepreneurs fund is open to new starts, loans will typically be in the region of half a million pounds – so will usually be made to established social enterprises that are seeking to expand or diversify.
Another of the Brown reviews examined social exclusion, the recommendations from which led to the establishment of the Bridges venture capital funds. Earlier Bridges Ventures funds that are seeking to marry achieving a social and financial return were backed by investments from Barclays Bank, local government pension funds and the Co-operative Bank, which provided £10m.
Now Bridges has moved beyond investing for social benefits to the more specific aim of strengthening the social enterprise sector. The new fund, says Bridges, aims to provide ‘equity-like’ funding for social enterprises. While the capital will be funded as loans and be repaid, Bridges will be a patient investor, satisfied with a modest return.
There are also practical difficulties for a business model that is over-dependent on loan capital. Firstly, banks are unwilling to lend to a business that does not put up a significant level of its own funds and in the current financial climate banks are both more reluctant and less able to lend. Secondly, there is a shortage of social enterprise ‘business angels’ that are willing to fulfil the role that gives many small privately-owned companies the power to lift-off – which is based on injections of equity capital. Other venture capital sources are also unavailable to social enterprises, for the same reason.
Moreover, there is a well-founded fear of over-borrowing. Many companies that borrowed heavily in times of economic strength – and these include property development companies and private equity firms, that now run many social care homes as well as a range of other public and private services – face extreme difficulty in renewing finance arrangements. This is likely to lead to a significant number of closures in these sectors.
Another aspect of the over-borrowing danger is that of control. Ultimately any business that cannot repay its debts may have to pass over ownership and control to the lending institutions. This has happened frequently, for example with [the cross-channel rail link]. The last thing that the social enterprise sector wants is to find itself turned into a private company that is owned by its banks.
As Sir Ronald said, the current environment is one in which social enterprises are needed more than ever. “The paradox is that it is at times like these when venture philanthopy is most needed, but many people’s philanthopic foundations are suffering big investment losses,” he told the Financial Times in an interview. “We are going into a very serious recession and a lot of people are going to be hurt. I think the social enterprise sector has a big role to play alongside government.”
Bridges’ Social Entrepreneurs Fund aims to generate returns on investments, but these returns are intended, at least initially, to be reinvested in other social enterprises to enable the fund to grow in size. Backing comes from some of the largest investment houses, including Deutsche Bank and 3i (a quoted private equity company). It is also backed by individual investors who generated large profits from their holdings in hedge funds and and private equity firms. Another investor is the Lehman Brothers Foundation Europe, which has survived the collapse of the sponsoring bank.
The initiative is also backed by the Government’s National Endowment for Science, Technology and the Arts (NESTA). Its chief executive, Jonathan Kestenbaum, says: “We believe the fund will change the landscape for investment in social enterprises. In particular, the blend of public, private and institutional capital will have radical implications for the field.”
This is undoubtedly good news for the very largest social enterprises, such as Jamie Oliver’s Fifteen Foundation, the Big Issue, Cafe Direct and the Eden Project, which will have access to the type of funds needed for them to make further progress. It is unlikely to have much impact, though, on smaller social enterprises that have more modest demands. Calls to the Social Enterprise Coalition asking for its opinion on the new fund were not returned.
Bridges’ fund is therefore important. But no one should be misled into thinking that it resolves the challenge of finding ways to channel large quantities of investment capital into the co-operative, mutual and social enterprise sectors.