UK social investor Big Society Capital has announced it is cutting down its target return from 4-6% to just 1%, as the original target was “out of step” with both their mission and the market
In brief
- Following discussions with its shareholders, BSC has cut its target return
- It says this better reflects “the reality of the situation” and is in line with the decline in long-tern UK bond yields
- However, CEO Stephen Muers makes clear this refers to BSC’s overall return after costs, not the return to investors
- Muers remains committed to offering higher returns for private investors who he hopes will become more involved in BSC’s strategies
Big Society Capital recently celebrated its tenth anniversary and told investors that “working with mainstream commercial investors is going to be increasingly part of the future for Big Society Capital”.
At first sight, it therefore seemed surprising that it announced a cut in its target return last week, from a range of 4-6% to a new target of just 1%.
CEO Stephen Muers tells Impact investor “the old target was set at time when interest rates were much higher”.
The Quadrennial Review of BSC, as well as the recent Adebowale Commission, recommended that the organisation should reconsider its return target and “aim for a similar return to the British Business Bank”, which is linked to long-term government debt, currently in the 1.5-2% range.
Muers notes the significant movement there has been in long-term UK bond yields over the lifetime of BSC. A discussion with BSC’s shareholders ensued, a process that Muers says “has taken the best part of a year”.
BSC’s shareholders are The Oversight Trust, a non-profit organisation that oversees the UK dormant bank accounts, and the four leading UK banks, Lloyds, HSBC, Barclays and NatWest.
As a result of these discussions, Muers says it became clear “our original target return rate (4%-6%) is now out of step with both our mission and actual investment practice”. He adds: “It was important to have greater clarity and transparency, and to reflect the reality of the situation.”
BSC’s mission is to build a sustainable, growing and high-impact market and “we needed a target return that was consistent with that mission”.
“Therefore, after consulting with our shareholders, Big Society Capital’s board has decided to revise our target for the net return for BSC as a whole, after costs, of around 1% per annum, measured as a rolling five-year average.”
Muers is not concerned about the timing of this move in the light of dramatically rising UK inflation and interest rates. “My main concern on that front is what effect they are having on the low income households we serve.”
Moreover, Muers stressed to Impact Investor that there will be not any significant change to their investment strategy. “This target is the overall rate of return for BSC after costs. It’s about our own P&L. Our own ‘internal’ rate of return. It very much does not represent the returns which are available to private investors in the funds we operate. These will be across a broad range, but would generally be higher.”
“For example, in most of our social property funds, returns would be in the mid to high single digits, and in some of our venture capital ‘tech for good’ initiatives potentially even higher still.”
Muers went on to stress that “when it comes to the funds where we have co-investors, the returns must be ones that are set by them. The returns which are attractive to the market”.
Muers re-iterated BSC’s “firm commitment to working with private finance to expand the impact investing sector in the UK, and delivering the returns that ambition requires”.
