Surviving first contact with reality - NSIG project update June 2018

Surviving first contact with reality – NSIG project update June 2018

Paul Halfpenny, Director of the Northern Social Investment Group, talks about overcoming challenges as the NSIG collective test their ”Social Equity Partnership” concept.

We’ve often heard it said that ideas are “ten a penny”. We think that’s a massive overvaluing of ideas! Everyone has ideas and some of them are even great – but the gap which has to be bridged is always the one between “invention” and “innovation” – between the abstractions of the idea and its implementation and contact with reality.

Our “Social Equity Partnership” model is – it seems to us – a great concept, solidly rooted in an understanding of the challenges, obstacles, opportunities and market failures of social investment practice. So we’re grateful to the Connect Fund for the opportunity to continue our work on this model, honing and making progress on proving it. And the process of researching it in action is giving us a clearer idea of its shape and the contribution it can make to more efficient and effective social investment practice across the country – surviving as it has, first contact with reality.

The Concept

Our “Social Equity Partnership” (SEP) model evolved as we have worked over the years with social enterprises either seeking or in receipt of social investment. The SEP rationale is multi-factored, we wanted to:

  • Establish long term relationships with investees to support more detailed knowledge of the investees business;
  • Have “skin in the game” with investees – to utilise risk sharing and partnership in ways which mimic the relationships equity partnerships have with investees;
  • Bring diverse and exceptional skills to our investees’ performance, not just limited to the abilities of one or two advisors;
  • Provide a way for business professionals to mentor social enterprises in a structured, productive fashion, more focussed than simply “joining the board”;
  • Use these interventions to improve the performance of investment with clients, benefitting social investors;
  • Build relationships with clients that are financially sustainable, rather than being based on consultant day rates;
  • Potentially contribute to the development of suitable, sustainable risk capital instruments in the social investment industry.

The model from the mainstream marketplace which inspired – in part – our solution to these issues was the traditional Equity Partnership. We understand the challenges to developing risk capital instruments in the social investment space, and these are well described, most recently for instance in the Flip Finance report on Social Shares. (The challenge of designing suitable risk instruments goes right back to the earliest days of the nascent industry, for instance the consultation process for “Risk Capital Investment Fund for Social Enterprise” in 2007.) We at NSIG, instead of trying to resolve these complex and technical financial issues surrounding risk and return in social enterprise, instead set out to design a model which could bring the operational benefits of an equity partnership to social enterprises.

Contact with Reality

This 2018 phase of the project addresses several issues, many around measuring the effect of the input of the individual professionals and the partnership as a whole. There are also a set of operational issues thrown up by the commitment to creating a model which mimics, and lays the ground work for, a future investment partnerships.  These have included managing information flows within the SEP; commercial sensitivities; selecting and recruiting both clients and advisers; training advisers as SEP representatives; regulation and liability. We’ve recently registered to become CPD accredited, so that our training programme for “Advisers” can attract business professionals looking to support their local social enterprises gain additional CPD credits while doing so.  We’ve produced both an Operational Manual and a Training Manual, both of which can provide the basis for us to scale this project across the country.

Through tackling these challenges we have learned a lot. There are not the resources available at this pilot phase to meet the multiple issues of insurance and liability, so we arrived at the designation of a non-liable “Adviser” for the NSIG representatives who work with investee boards. This has meant that while we might want to mimic the Equity Partnership relationship, this mimicking only takes place when the client is willing to work with us on those terms, as opposed to required by a formal relationship. In a future iteration of the project, if we were to develop an equity fund, or (more likely) partner with an existing SI fund of whatever stripe, the SEP would take a seat at the board of the client as part of the investment package. Then we’ll really be able to see whether this concept has mileage – and we at NSIG will be producing a paper later this summer detailing what that next stage of development could look like.