The Catalytic Capital Playbook: How £10M Unlocked £2B in Private Investment

Up next on the SRI 360 podcast. We had a view that there was a business to be built that combined societal values with financial returns. Then we assigned this name to it, which was Impact Investing. We published a report in 2010 that declared this as an emerging asset class and defined Impact Investing as investing with the intent for positive social environmental outcomes. The mission is to increase the amount of capital that's being invested in tackling social challenges in the UK. The crucial part about our approach is that our key KPIs and measures are all about the market as a whole and growing the total impact investment in the UK, rather than just going to be a season impact. I was trying to find this career with a sense of purpose but also measureability and accountability. The reaction that we got when we went out to raise the first fund really embodied that polarized vision was explained to me in a very nice way that if we wanted to have an impact on lowering comparts the country that we should be setting up a foundation and giving away money. And if we wanted to be serious about making returns then we needed to forget the social mission and focus on the financial mission. Unlike the potential of your investments to improve the world and make high performance returns, welcome to Sustainable and Responsible Investing 360. My name is Scott Arnell and each week I sit down with a world class investor to uncover their secrets of profitable ESG, Impact and socially responsible investing. Find out more at sri360.com. Today I've pulled together three of the most compelling conversations we've had on a topic that I think is one of the most important and least understood ideas in impact investing. And that topic is Catalytic Capital. If you're an investor wondering how concessionary money actually works to unlock private capital or if you've heard the term blended finance and wanted to see what it looks like when it's actually executed, this episode is for you. You're going to hear from three people who've been at the center of this. First, Yasemin Saptuk Lamy, who helped define impact investing at JP Morgan. She later ran the catalyst portfolio at British International Investment and is now the head of the investment strategy at Legal and General. She will break down what Catalytic Capital actually is and how it works mechanically. Then Steven Yours, Chief Executive Officer of Better Society Capital, which is the UK's leading social impact investor, which was funded with 600 million pounds from dormant bank accounts and high street banks. And it's one of the most unusual funding stories that you'll ever hear. He'll explain how the UK built the policy infrastructure that literally made this market possible. And finally, I speak with Michelle Giddens, co-founder and chief executive officer of Bridges Fund Management, who sat with Sir Rottel Cohen over a blank piece of paper in 2002 and built a firm that turned 10 million pounds of government Catalytic Capital into over 2 billion pounds in private investment. She'll show you what happens when Catalytic Capital meets world-class execution. Together, these three voices show how Catalytic Capital can unlock private capital and positive financial success at the same time. So stay tuned. And if you want to dive deeper into any of these links to the full episodes that are provided in the show notes on your podcast app or head over to SRI360.com. Please enjoy and as always, thank you for listening. Thank you first and foremost for being a part of this community. But it's driving me crazy that over 83% of you that listen to or watch this show regularly haven't yet subscribed to this show. So can I ask you for a favor before we start today? If you like this show and if you like what we do here and you want to support us, the free and simple way that you can do just that is by hitting the subscribe button or following us on your podcast app. It helps this channel more than you know. Thank you and enjoy this episode. The teaching middle and high school students in Rhode Island give you any insights that have carried over into your leadership roles. Oh yeah, hugely. In fact, when I was interviewing for my first job at JP Morgan, someone said to me, you are joining the trading floor. This can be a tough environment for a woman. What makes you think you can handle it? And I said, try teaching 15 year old's math. Actually, I think this is going to be just fine. This was very early doors and impact investing. And as you say, was somewhat of an extraordinary time in global finance. What was the social finance team? Yes, it was a bit of an experiment. You're right. I had a view that there was a business to be built that combined societal values with financial returns. And then we assigned this name to it, which was impact investing. I remember spending four months discussing whether the word intent should be a part of that definition or not actually. And today, I think it was a crucial decision that we kept it there. Were you trying to accomplish with this social finance team? Well, so the team had three pillars. One was thought leadership, education, building the brand of impact investing. Two was advising clients who wanted to develop their own, either corporate strategies or investment strategies for this type of product. And three was we had a proprietary allocation of $100 million to invest in the emerging asset class itself. And my personal vision in joining this team was I felt we could build a business for JP Morgan. I thought that the pathway would be to move into asset management and develop products that we would then raise capital into. And that would channel private capital into the areas of the world that the SDGs have identified really need access to private capital to drive forward. So that was the vision I had in joining the team. What resistance did you or the team face when you're trying to get this off the ground? I think the biggest challenge was that we were trying to build a part of the business where our starting point were private equity funds and emerging markets. And that was not the bread and butter of JP Morgan's investment bank or asset management at the time. And so one of my lessons is that if you want to do something within an institution, you should not start kind of outside of tenses. And you should start inside the fences where the strength of the institution lies. Because if you start outside, then you've got to get everyone on board. And there's, you know, moving someone eight steps out of their comfort zone is a hard thing to achieve. If you try to pull someone, leave them one step out of their comfort zone, they may follow you. And I think the biggest challenge, it was just, it was a sector, a product, energy, geography that wasn't really aligned to the core principles of the bank. And this is post the financial crisis when all banks were kind of, you know, batting down the hatches, but really focusing in on their strength areas. Let's talk now about your move to the CDC group, which is now known as the British International Investment, or maybe even better known as BII. So for listeners who aren't familiar, could you break down BII's mission and its theory of change and draw the big picture of how that entity operates? So British International Investment is an institution that has a 75 year history and has been investing on behalf of the UK government into different countries abroad. And the current geographic scope is Africa and Asia. So while I was there for six years, that's where we were working. And the spirit of that is the funding comes out of the UK government's aid budget, but every investment that we would make needed to earn a return financially, but also have an impact thesis for sustainability, inclusion, or productivity. It was investing across private markets, so private credit, private equity, or fund structures and investing in infrastructure, corporates, and financials as far as sectors go. Why did you make the switch to go there from Omidiar Network? Well, I had been advising them since 2013 on this kind of experimental portfolio, which they had been working to build. It was, if you invested with more uncertainty, so things that were maybe first time funds start up, but also new platforms or new sectors that didn't exist. So you didn't have a trap record to look at. If you took that kind of risk, could you potentially be extra, have extra impact and be even more catalytic than kind of main portfolio investments could be? So I've been advising them on this portfolio from 2013 and in 2018, they recruited ACIO to oversee that portfolio. And so I joined us. It was deputy CIO of the firm, CIO of that portfolio. It was really exciting for me because I've seen it since the origin. Their aspiration was to really institutionalize the approach, grow the portfolio. And I think I took it from about 300 million when I joined. It was about 1.6 billion when I left. We gave it a name. It didn't have a brand at the time I joined. We called it the catalyst portfolio to find its purpose, expanded it from purely funds investing to all products that we were investing with, expanded it from just a few geographies to all of geographies where we were investing and all of us. also our operating model had been kind of a team sitting alongside the main investments team and we made it something that was much more integrated for the firm as a whole. I'm going to pick your brain a little bit on the II because I think it relates to everything you're doing now because it's an interesting place. If I understand it right, the II targets a modest annual return. I think it's something like 2%. And then the returns are supposed to be reinvested for maximum impact and the idea is that this allows it to be self-sustaining. If I've got that right, explain that to me because that's a completely different model for most investment firms and how does that modest return target fundamentally change the investment approach and the time horizons? It is exactly as you say a very unique context in which to be investing. It's a very low return hurdle for most investors and I think the premises all the way back from its founding days do good without losing money is the tagline of one of the founders. The return hurdle is effectively set at what our operating cost ratio was. So it was literally do good without losing money. I'm particularly curious about the sector focus at the II. What factors determined which sectors you would focus on and how did you identify these sectors that offered both meaningful impact potential and sufficient financial returns? Everyone says they want to do this but you did it. So how did you do that? I would say that rather than sectors it was much more about the business models. So you can look at the agricultural sector for example and you can have successful business models that meet both your impact in financial pieces and you can have very unsuccessful models. So it was to me it was much more about the individual company structure, what they were trying to achieve and how they were doing it. Thinking about things like solar irrigation pumps. So like any product you have to develop a pump, you have to buy inputs to create the pump, you have to manufacture the pump and then you have to distribute the pump. So there's a whole kind of value chain that you need to cover the costs for and then you need to set a price that also earns a profit. So what if you do that and you identify that the price you need to charge doesn't fit the affordability lens of the consumer base that you're targeting. The farmers who would actually benefit from using this pump can't afford the price it would cost you to produce and earn a margin. An institution like BII can think about that by tapping into some concessional finance that can be available in the development finance space for climate mitigating or adaptation investments. And so by combining some more commercial capital with some more concessional capital you can actually think about how to bring that story together. But the thing that we did in this case that was quite exciting was we thought about using carbon credits as a revenue stream to augment with the customer pace. We didn't really know. This is where that risk appetite comes into play. We didn't really know what the market would be for those carbon credits. And so we chose we said you know we have the risk appetite to underwrite what that could be an experiment with it. We used the right kind of funding to do that which is the kinetic funding which there's more information on our website. And then we were able to reduce the price for the farmers so that they could buy the pump. And I don't know actually today where that has gone exactly since now been a little while since I left. You've been very vocal about catalytic capital as a lever for mobilizing private investment into the emerging markets. And you've also been vocal about the role that institutions should play to crowd in additional private capital. For listeners who aren't familiar with the concept could you explain what catalytic capital is and why it matters so much in mobilizing private finance. So catalytic capital to me is capital that will step into a space others want as you said just a moment ago. And that can be an environment where for example BII used catalyst funding to back a platform called MedAxis where it was the sole funder of MedAxis in fact founded MedAxis and developed the platform to provide volume guarantees in pharmaceutical development to help encourage manufacturing companies for example to develop lower cost products. So they would lower the cost if we would guarantee an offtake that we would buy at a certain price. So that was the volume guarantee model. And BII was the sole funder of that with catalyst because it was a model that was trying to bridge what was a non-profit world with a kind of commercial world. And we didn't know whether it would work. But there's another model of catalytic capital where you can use it to incentivize institutional investors to coming alongside development funds. So for example if there were a portfolio of assets that BII was originating let's say loans into financial institutions in Africa. From my currency to legal in general it would be hard for me to take exposure to that directly. But if BII put catalytic capital junior to my capital and I could be senior to that perhaps that would give me the credit enhancement to get the credit rating of an investment grade asset and that could then be potentially eligible for me. So there's that kind of catalysm as well. Where are you bringing institutional investors in at the same time by helping to kind of manage their exposure? When you were attempting to crown in private capital who were your primary targets. I really liked working with institutional investors where there was a third party validated reason why they needed some kind of catalytic capital. Because at the end of the day catalytic capital is a subsidy. You're taking less return over here and giving it to you know it's government funds taking less return and giving it to commercial funds. So why would you do that? It never felt comfortable to do it because somebody said they needed it because anyone can say that. Right? But if someone said well my regulator says I need X, my credit rating agency says I need Y. Therefore this is what will make this product work for my portfolio. That felt more validated from a third party standpoint right? And so to me that felt like a more comfortable place to be. And so that meant yes it could be insurance companies like legal in general who's under a salvincy UK regime. It's very strict and clear about what the guidelines are that we need to invest against. It could be pension funds but having that validation of a third party model or boundaries was really important to me. Before you said you weren't sacrificing anything between returns and impact but in this case you're admitting that you need a subsidy in order to actually attract private capital. How do you feel about that? Why is that if there's really no trade off? So I think the way we found it was there was no trade off of the assets that BII was investing in. And within the constraints that BII I needed to meet. But the constraints of an institutional investor that is managing pension fund assets and operating under a regulatory like salvincy two or salvincy UK the premise is very different because what I'm looking at here the universe of assets. If the universe of assets from the current seat I'm in is a foot wide right? The BII universe would be maybe a centimeter of that foot or an inch if you want to stay in the imperial system. It's a really narrow slice of the product set. And the benchmark for BII right? And I said we didn't sacrifice returns for impact that was against the 2% return hurdle. Whereas here the return hurdle is very different. Pension funds have these extraordinarily long-term time horizons with long-dated liability stretching decades out into the future. How does that long-term perspective shape your approach when you're considering things like climate risk and how do you connect this to LNG's broader climate strategy? So we have a decarbonization objective which is to decarbonize by half from my 2019 baseline by 2030. I would say we're making really good progress against that. I think we've achieved about 30 percentage points. So we've kind of done 30. We've got 20 to go if you want to look at it that way. What I would say is what we've done is the easy work. So you know rotating to find yeah the carbon efficiencies in the existing portfolio. What I think we could do from here is finding opportunities where we can support either carbon positive or even it's always hard to talk about this because by carbon positive I mean negative. What we want to do is have more of an allocation to assets that will improve our carbon emissions intensity in the book. We more importantly actually have a real world impact on the lives of the people whose pensions were managing and other kind of stakeholders and beneficiaries around them. What's the difference in your approach to the new investment positions that you take on and the due diligence process behind that versus the strategy you take with existing positions and the impact that we're seeing. they have through perhaps active engagement? - I think in existing positions, we have probably more of a monitoring approach in terms of seeing the contributions of those assets to our carbon emissions intensity and then taking actions based on a combination of the carbon emissions intensity, but also the risk, the return, and the capital intensity, lots of other factors, right? It's one of a set of factors. And I think that's important to consider for everything in the portfolio. So we have kind of a minimum standard of understanding the carbon emissions intensity of every asset and knowing what the picture looks like to make sure that the whole picture moves in the right direction. And then when it comes to originating new assets, there's also kind of a minimum standard, right? And we have an exclusion's list that we operate with. But in addition to that, we will proactively source assets that meet the new investment strategy that we might want to develop around natural capital, for example, or we've done that for nature's whoops and been really, I think, at the front edge of that new product space. We have an appetite to be leader in the space. Of course, when we do those things, it still needs to fit within the risk management, the regulatory rating that we operate within, et cetera. That's how I think about the difference between new origination and hopefully management. LNG has developed sector-specific climate strategies as part of your climate pledge that you already referred to. Could you maybe walk us through one example and make it real how in practice you're thinking about transition pathways to net zero? In the property sector, right? I mean, property is a space where you can think very actively about energy efficiency opportunities. And we are a large developer in the UK. We fund a lot of development here. And we're starting to do much more in the US as well. Right. And for higher risk markets or let's say higher risk nascent industries, what sort of enabling conditions does Allungy need to see that gives you enough comfort to move forward with an allocation? As spoke earlier about being a correlation strategist and looking at how to invest in a market when there wasn't much track record, that's hard for the likes of LNG because we operate with the regulatory regime that reviews our models, right? And the rating agencies, we anchor a lot on credit ratings. And so both of those things mean, it's very hard for us to invest where there is no track record. It's very hard for us to invest where there's no track record that has lived through a credit cycle or two. So even track records that go back 10 years, 12 years from here, it's difficult because they haven't lived through the global financial crisis. They don't have that kind of history of a lot of volatility and having weathered volatility to really gain that comfort. That's one of the things I think we have to grapple with. And to be honest with you, as someone who comes from a higher risk appetite investing background, I'm very conscious of placing that line in the right place, given who this institution is and the money that we're managing. I had the pleasure recently of visiting one of our offices outside of London. It's in Hove and we have there a customer service desk. And so I got to meet the customer service team. And someone said, "Oh, why don't you do some call listening?" So I had the opportunity to just listen in on two customer calls and the pick up the phone. I mean, you've known this from the other side, right? It's a bit like what you said about teaching. You know that from one side. So I've definitely been on the other side for customer service agents. But here I was on the receiving end. This individual called in from Saskatchewan in Canada and they said, "Oh, I'm calling to give you a new address because I live in such a rural location that nobody can find my house." So I'm opening her post office box and this would be addressed. Please can you send all my things there? And it just made it very real. You know, there's this person on the other end of the phone and that is who you're working for. And so I take very seriously how we manage risk. And so while I want to support new markets and, you know, be innovative, I always come back to that person on the other end of the phone when I think about where we should be setting up or scat the tight or how much track record needs to be in place before we engage. OK, that was Yesim and Subtip Lamy on the mechanics of catalytic capital and how it steps into spaces that conventional capital won't and how structuring a junior to institutional money can unlock investment grade opportunities for pension funds and insurers. But catalytic capital doesn't appear out of thin air. Someone has to create the conditions for it. That's what Stephen Newer has spent his career doing. Stephen is the CEO of Better Society Capital, the UK's leading social impact investor. And he came to this from a very different direction. He spent nearly two decades inside the UK government working on everything from criminal justice to energy policy before making the leap. What makes BSC's story so unusual is how it was capitalized with hundreds of millions of pounds from dormant bank accounts that nobody had touched in 15 years. Here's Stephen on how that came about and what they built with it. I want to go back over the funding story of BSC, which is fascinating. If my memory serves me right, I think BSC might have been created around a 2012 or something like that. I spoke with Kirin Boyle a bit about it on a previous show. I was funded initially with 600 million quid. And 400 million quid came from dormant bank accounts and 200 million quid came from major high street UK banks. Where did the idea for that unique funding structure come from and what made that possible? The dormant assets piece, which is the dormant bank house basically is really unusual, came from a commission which looked into this. I think it's 2008, but I might have got that slightly wrong. And this one of your other former guests, that's the wrong Kirin that you've talked to, was the dormant even fought behind setting it up and unlocking that money. And yes, it turns out that there's really a lot of money in dormant bank accounts. And this is bank accounts that haven't been touched or there's been no contact with BSC for 15 years. So they're really pretty dormant. And the way it works, anyone, you still have an absolute right to get your money back at any time, as you can prove that it's yours after that long. But there was a lot of money there and it can be used for good purposes. But yes, long before you thought about this and you thought your previous broadcast, but he was absolutely instrumental to making that happen. And as a piece of legislation, dormant accounts act passed in the UK to unlock that money for social purposes, including division of capitalization and BSC, it's now used for other purposes as well. 'Cause that's super small more than that, 400 million in the part. And then the high street banks came in, apart from sort of a deal with the then government at the time, this is post-fantastic crash, there's a whole idea of discussion as to in government and banks about how they could sort of almost rehabilitate themselves to an extent after some of what had happened to 2008 and some of the things had gone on and contributing to this kind of initiative, I think it was part of that conversation. - Was this dormant money well known and talked about or was it like a really best kept secret? - I'm not sure, because at the time, I wasn't obviously that involved. I mean, as a sort of fairly well informed public policy official working in other areas of time, I didn't know about this. But I don't know how widely this had been talked about and thought about, I was wearing the system at the time. So it's a good question. But yes, it's subsequent the other countries have looked into it and sort of tried to imitate the British model on this because it's a really interesting one. - Well, Switzerland had a very different approach. - Well, yes, that is true. - How does having this unique capital structure influence what you're able to do? - It means we can be very long term, which is crucial. Do we got this sort of corpus of capital that we've been set up where they were able to take a long view, which is incredibly important. A lot of the funds we invested in are quite long term. And the things we've done that it works in scale, there've been things we've committed to over multiple years having to talk more about those people in detail. We also mean we're pretty independent because this is not government money. So we're actually just seen by a trust, the other trust which keeps us on mission, make sure we use the money appropriately in a well governed, like wasted, or anything like that, quite independent, since it makes us a little bit like a foundation. But then also we have, having the bank share, is who do keep an eye on returns and sustainability and make sure that we are making investments that ultimately hopefully will return and then come back and we can be investing. So we're trying to be sustainable ourselves and build the sustainable market, but they would take a long-term view around that, which I think is a really fortunate position to be in actually. - You've referred to your returns falling across the spectrum. What kind of returns are you targeting at the portfolio level? - At a BSC level, so this is netable, like cost and upholstery level, are the trend targets, one cent, which it was originally high and that was originally 45%. And we concluded that one realistic based on the sorts of things we were meant to be doing, that translates into the social investment portfolio is targeting the return of around the sort of free percent, ish two to three percent, because obviously we're getting it off costs and cash we have to hold and various other things like that. I mean, it's fair to say, and you haven't achieved that over our lifetime because you get a natural phase where if early investments we made some of it through a bit experimental or differently haven't worked out or how you mean you're out in the early days, you don't get much back. So yeah, we're confident we will get, we will deliver that target, but so far a little bit behind on that, because a backwash of the things we did, which some of which are experimental or risky or so on, but overall net a bit of a corporate level, we're seeking a 1% return on unrolling five-year basis. - And what are your capital providers expecting in return? - The oversight trust which overseas the dormant bank account, I mean, they're expecting us to build a market, which is bigger than us, is sustainable, has other players and doors, another cap or alongside us. So they look for us to maintain ourselves or building a bigger market alongside us. And similarly, the backs, actually they're looking for it. a shareholder is looking for us to make that return and look after the money and be sustainable, but also to do in a way that promotes social impact investment more broadly. And makes that a sort of thriving market in the UK, which is good for them and a good for everyone. So the bank investors are not looking for a certain return. This was the 1% overall BSC returns are figured that they signed up to and so they will ultimately, as and when we pay a dividend, some of that will be the bank should be eligible for some of that. And we haven't yet paid a dividend, we will do one thing. It's totally concessionary return. In terms of the bank, the commercial bank, it's not your turn that the shareholder banks will get is not what they'd expect from a normal exchange investment. In 2023, you changed the name from big society capital to better society capital. What was the story behind that decision and what were you hoping to signal with that change? We found that increasingly people found the name big society capital a bit confusing and thinking people coming new into our space or who had been overseas partners, we worked with or knew investors were they didn't understand what this is a big society concept was. It's not making sense to people because it wasn't terminology it was widely used. I mean, we found people finding it quite confusing. So we thought, okay, have a name, the place is actually what we do, it's easier to understand. But we'd rather not give up the BSC, lots of people abbreviate it anyway, there's brand value in that. We don't have to leave brand everything, let's keep it simple, what's been lots of money on the rebrand, say something that kept the BSC, which a lot of people use in big as you anyway, and actually says what we do, we best capital for the better society seem to make a lot of sense. We probably should have done it earlier, frankly, because what we did, it seemed very logical. You agonize over these things that you're in to take longer. So for people who aren't familiar with better society capital, give me a high level overview of BSC and help us understand what you do, what's the mission that gets you out of bed in the morning, what are the problems that you and the organization are trying to solve, and what's the theory of change that guides the organization? So the mission is to increase the amount of capital that's being invested in tackling social challenges in the UK, and that's all kinds of capital and all kinds of social challenges. And the way we approach that is sort of twofold, two linked ways, and this sort of theory of change, and that we have our own capital to invest, and we aim to do that in a way that grows the overall market and brings another capital alongside us. And we also try and more broadly create a set of conditions that encourage investment to flow towards social impact in the UK. So we are directly investing and then enabling others to invest by drifting as a wider set of conditions. And our crucial part about our approach and so we are is that our key KPIs and measures are all about the market as a whole and growing the total impact investment in the UK, rather than just growing BSc's impact. A key metric for our current strategy is we wanted to at least double the total sort of ease of the social impact investment market in the UK. It's not at least double BSc's balance sheet or our own investment or our own profit or anything like that is about the total market. And those all the key KPIs at that sort of level, the theory of change is that we can use both direct investment and that sort of work around the system to enable great enough to capital to flow is then we'll reach more organisations which are in turn then creating the direct impact. So we see it at a wholesale level so we invest into funds, the funds invest into frontline organisations, charities such enterprises, mission driven businesses, which then create impact for people on the ground. We're going to drill down more like to make sure we're all on the same page. We've done social impact investment for those who might be new to the concept. How would you explain it to someone who's never heard of it before and what makes it different from traditional investing? The crucial part of it is we're looking to make investments that have a financial return but also a measurable positive social impact. And that is the absolute crux of it. Link to that is we are generally in fact, for us pretty much exclusively investing in organisations where creating that measurable positive social impact is part of what they're trying to do. It is not just a byproducts of the activity they're doing anyway but is in some way integral to their mission and that may be because they are a charity where that's the case or they might be coming out, spating to articles or whatever, some other forms. So money is flowing to organisations to try and create a positive social impact and are assessing themselves on that basis but is also creating financial returns as well. We field has its challenges. What are the biggest barriers you face in social impact investing and what misconceptions do you constantly have to battle against? Misconception, one of them is, and this is a confident misconception, is that there is a some kind of relatively linear trade off between financial impact and social impact and that hungover financial impact investments will be lower social impact and you'll have lower financial returns on the higher social impact investments. The key to the arcases is where that is true. If we look at our portfolio, it isn't true at the portfolio or even at investments within funds, the investments we have that have the greatest social impact and we've measured and tested that are not particularly ones with lower financial impact. So it's not a line, it's not even that kind of kind of curve, it's more like a scatter. Charles, you actually can't really find a correlation at all. So we have low financial and low social impact investments where it has worked at all. We have high financial impacts and low social impact investments with the other funds. We also have the R8 and we have ones which are in the other quadrant. So we've got the whole sketch chart. There's a narrative that is very common in, and this is actually instantly both from investors in the more financial sector but also from the social sector and charity saying, "Well, there's just a trade off here and where are you on the spectrum of impact versus financial returns?" That's not our experience after doing this 12 years that it works that simply. And there are trade off some choices you make in there but it's not a linear and linear thing. Then back to the barriers, that misconception and others, the main challenge we have is simply whereas yet not big enough. The scale of the challenges and scale of the capital need is so big that socially money investment has got to get bigger to make a dent in them. So it's taken example, one of the biggest growth areas which we've been involved in along co-authors is investing in such an affordable housing in the UK. So housing for people who often otherwise would be in temporary accommodation, such as homeless or women-free domestic abuse who don't take your fund, folks on there and all these sorts of areas, that market's gone from very little to a few billion. It's great and it's amazing, it's now housing thousands of people. It needs to go from a few billion to several tens of billions to be anywhere near, touching the homeless's challenge we've got in the UK which is, I've been the worst home challenge in Europe. The scale of that a lot and that's great and we've been part of that along with us, not just us doing that, but to get to actually really tackling the problem with another scale jump which is probably hard on the first one. So that's the sort of thing that keeps you up at night, I mean not too often but the back of my mind is like, the market's grown 12 fold in the 12 years we've been working in this and a lot of that's down to BSE, they're not just us. But we're still, the challenges are so big and the amounts of money you could pension the best for growing back to the so big, we're not even close yet. I'd love to hear some real examples of investments that you've made across these different verticals and to know what kinds of returns you've achieved and how do they compare to conventional investments in similar sectors. On the property side there's a whole set of funds we invested in from a fund manager called Resonance who are a social impact dedicated fund manager in the UK and their mobile is to their funds purchase houses, just normal houses on normal streets and refurbish them and then let them out on long leases to charity partners, charities who work with people who are in very high housing need, usually people who are otherwise living in temporary accommodation and temporary accommodation in this context usually means terrible conditions into bed and breakfast or hostels or through really poor quality either the one level of up being homeless and instead there being given stable secure long term home with a charity that's managing that and supporting it. So I would invest in a whole set of funds and that's basically missing the very first fund that was housing it was 50 or something people in London and that model didn't know how to earn a few thousand people and getting really well start to raise money from some pension funds. Our more institutional investors were the first investors were more us some foundations that kind of stuff and those funds are still maturing but the earliest one real litings has produced a pretty decent return. I think it will be in the high single digits return performance on that would be next as well as extra impact. So that says a big good example. And the impact venture space says a really interesting fund there called Fairby design which we developed so practically with a partner and Jason Brown to foundation and the biggest foundations in the UK for subters which aims at investing in startup businesses many tech businesses that tackle the fact that people in poverty pay more for crucial goods and services. So if you're poor you pay more for your energy you find it hard to get banking services or you pay more fee for it hard to get insured or if you can get insurance expensive but all these things have a cost premium for poor and that fund investing businesses that try and tackle that and then measures how much money it saved people. It's yeah the savings are really quite impressive and there's a particular company investing which has driven the fun overall fund is returning very well and it can become a invest in their call wage stream which basically tries to mean that people don't have to use high cost payday credit by partnering with big employers and maybe people to actually borrow forward against salary by small amounts of money otherwise you'll be going to get predatory payday lenders basically and they will big employers who have quite large numbers of people on very low incomes who need that service and they've been extremely successful, they're now raising money from commercial capital fund but they are sort of first key investor with this impact driven fund we'd endorsed and that's both a commercial and impact success with a little scale to be interesting. the DEF song. I mean, there's, yeah, so this covers a broad range of things, but to give you the illustration of it, we're the largest shareholder in charity bank, which is a, just what says on the tin, it's a bank in the UK that banks specifically charity using charitable organisations. You often say struggle to get conventional banking services and loan finance from some of the mainstream banks, that they have a broad reach into all sorts of different charities and large to small, right across the UK, and say we've really been key in capitalizing them and helping them help them grow and develop and they've been growing that loan, but really impressively in the last few years and I, we're actually holding there, but we are in the long, yet again, the financial performance is now looking pretty good. And then on social outcomes side, the example of a really interesting scheme there in Manchester, Greater Manchester Housing Partichips, one of our funds invested in, which is a situation which are young people who would be, who are either were homeless or high risk coming homeless, looks to house them, support them, gets paid by the Greater Manchester Authority if they stay in a sustained tendency and make progress towards employment, it's not a long period. And I'm assuming that was going to help a few hundred people, they're so successful, the local government likes to say much, they scale up to one and a half thousand people, I think they will get in the future and that's also returning money to investors and there's a decent, yeah, they need a single digit kind of return as well. So, but there's just a few of the kinds of things that we've been going on. What about second nature and urban jungle? So second nature is an organization, is a company that helps manage long-term health conditions, particularly diabetes, so it provides mainly online enabled support to people who have typed to diabetes to manage their condition to avoid them ending up in hospital because if they used to have a high risk, diabetes, they had a hospital very bad outcomes, both for the health service and for the individual if that happens and so they provide the support to people who are mostly delivered. Been no successful, I think last time I checked it's being commissioned by 50 or 60 NHS National Health Service Trusts across the, it started quite small, there's a scale up it says, if only tech driven it came out of a Bethanyl Green Ventures which is a tech incubator, accelerator, I'm not UK, it's been around for a long time, we've backed, quite a while, there's one of there, one of those successful graduates, there's really having an impact on a big health issue. Urban jungle is another example of this sort of inclusive financial services kind of model, I mentioned the way she went where there's lots of people who find it really hard to get insurance for all sorts of reasons and urban jungle will have through a lot of very clever ways of cutting data, underwriting and using analysis differently and just looking in places that mainstream shows wouldn't look, they provide insurance services to people who really struggle to get them. So a big chunk of their clients are public housing, social housing tenants who often find getting insurance really difficult, that's being made for impact success because nothing else can insurance, the real problem for people or they have to get credit for those insurance, but it's actually, is it commercially successful as well as providing that sort of support? Let's talk about catalytic capital which fascinates me as a concept. How do you define that? Catalyze the words in it that starts something that has potential to grow and become bigger. So I think this is, as it is different, it's not necessarily concessionally capable, it is a different thing as well, I see it's permanently taking a different position, but it's a great example of where we do think that a catalytic is by being a significant corner stay in the first fund. A fund manager wants to do an impact fund the first time, is trying something different, if we buy to it and we think it's good enough, we've paired to come in the first close with a significant ticket sometimes and makes something happen. That's catalytic, you're saying so first move a risk or less, that's a great example of the kind of thing we do that I would say is catalytic. Do you have specific tools that BSC employs to attract private finance and multiply your impact beyond your direct capital deployment? That's where first move a piece is definitely one piece. We've often gone out and designed funds, so we don't just wait for fun just to come for us with ideas. We've seen some steam gaps in the market or seen where this potential actually gone out and found someone to work with us to build back. We see that's where the potential has packed money and that's again linked to our sort of that's a sort of cost that we carry that a lot of investors wouldn't, but we see that as our lot also. Quite recently, for example, we saw an opportunity to recatleize it and gone see for a bit of a mark of the community-owned renewables in England, so we went out and found the fun manager who had capacity in that space and we've been there's the first cornerstone with them as a partner in the money they can raise private finance to set up a new fund to help capitalize community ownership of renewable energy. That's not where we went out and made something happen. We saw there's an opportunity to hear the government, the new government is key on doing stuff in that space. That's going to take a bit of time, you hear what white's gets moving, gets some pipeline built, gets momentum going here. What about risk mitigation strategies? Can you give me some examples of some of the tools that BSC uses to catalyze further private investment? I mentioned one or two of these already. Government guarantees are really key ones. The British Business Bank, which is the Government Development Bank in UK, in certain circumstances will provide aspects of a lost guarantee, which then can make a particularly some of the social lending products more viable. We've used that in actually several structures, as I was on the one with Wamy did during COVID response fund. Another one we've done recently about supporting lending to micro businesses in particularly disadvantaged communities. That government guarantee piece has been really key. The other bit is of blending grant and alongside loans, and that might be grant for capacity building for organisations that are able to take investment or indeed grant, to cover the collection costs of the ministries, very small loans in specialized areas and that kind of thing. So there's some of the sort of tactic that we've drawn over the years. Is there a specific example of where one of these tools unlocked a significant additional investment that wouldn't have occurred? Yes, so it's what I think we want to just alluded to. So the Community Enterprise Investment Fund, which is capitalised as CDFI's, Community Development Finance and Solutions, which is a do micro lending to businesses, particularly in communities where the mainstream banks tend not to operate for various historic reasons or people with less credit histories. By bringing in the British Business Bank guarantee there, and then BSC as a junior debt layer, we've capitalised senior at a pretty large volume from one of the large UK banks, who definitely would not be able to do that without creating a structure of government guarantee, first last BSC piece of junior debt, and then get a much larger piece of senior debt from a bank of its say. That market has a big capital. You're meeting with that, we're not meeting all capital needs that sector has, but it's a big step change, what was there before? That was Stephen Newer's on How Better Society Capital has helped row the UK's social impact investment market 12 fold, from almost nothing to over 10 billion pounds. So we've heard from Yesimann on how Catalina Capital works mechanically, and from Stephen on how you build the policy and institutional infrastructure to support it. Now I want to bring in someone who took Catalina Capital and ran with it. Michelle Giddens co-founded Bridges Fund Management in 2002 alongside Suronel Cohen. Their first fund was 40 million pounds and 10 million pounds of that came from the UK government as Catalina Capital, and it was structured to take more risk by going in first and coming out last. From that 10 million pounds, Bridges has now raised over 2 billion pounds in private investment. Here's Michelle on How That Happened. Around your 2000 comes another pivotal moment for you when you're asked to advise the UK Treasury's social investment task force, which was chaired by our mutual friend Suronel Cohen. So tell me about that. If you think of my life in chapters, the 1980s was education, the 1990s was international development finance, and then the 2000s was my return to the UK, and my attempt to take what I had learned in international development finance and apply it in my home country combating its own challenges of inequality and over time also the climate crisis. I was asked to come and advise the UK's social investment task force chaired by Suronel Cohen, which was appointed by the then chancellor of the ex-Jekker Gordon Brown, and it was a group of private sector and not-for-profit sector leaders that were tasked with answering the question, how do we change the way capital flows to try to break down some of the parts of the country, give more economic opportunity in parts of the country that are left out of a lot of the economic growth and dynamism that has been seen over the last couple of decades. That was the goal of the task force. I was asked to advise them because I had been doing this work internationally in international development finance, but I had also at the same time been doing quite a lot of consulting in the US on community development finance, and we wanted to try to learn from what had happened in community development finance, the how to inform how, what was then a new government in the UK could try to use capital to offer economic opportunities in parts of the countries that had lacked those economic opportunities. Coming out of that led to the co-founding of Bridges Fund management. Maybe you can make that bridge for me. To coin her phrase on bridge. Yes. Yes. We wrote down five recommendations as a task force. One of them was that government should catalyze the creation, or I think it was five months. That would invest in the most deprived court of the country, bringing the tool of venture capital private equity to investing the most deprived court of the country to create economic opportunity and role models of success in business and to create jobs, etc. Having written that down, I then called up Ronald and said, you know, would you like me to help you to create the first one? And fortunately, we did decide to go on that journey together. He was very much the founding chairman of Bridges Fund management. And we sat down, I recall, on next to his beautiful Mohogany desk with a piece of paper between us and said, so how will we create a fund manager that is going to be at the same time very commercial? and serious about financial returns and about business success. And this is also going to always be committed to having a positive social impact. Now, there's plenty of firms that have been created that way. But then that piece of paper was, you know, it was quite white. Well, we really thought about how we should create what then became bridges. You had another co-founder, Philip Newboro, correct? Ultimately, I hired Phil to be my co-founder and to be my boss unusual to do. But I felt I'd been working in international development finance primarily in debt. For a decade, I've not worked in this country really since leaving university. I don't feel I'm the person that should run a private equity-focused. Definitely can bring the purpose side of it, but the private equity expertise knows. So I went on a search to find someone to be my co-founder and to be my boss. And it was very fortunate to find Philip Newboro, who'd been working primarily in the UK, who'd run, he'd been at A-PAC's partners as had Ronald, and they'd need to run a series of successful businesses. So he brought both the private equity and the operating experience. And we got started with Ronald and our piece of paper and created this firm, which now is Bridges and Management. You know, and Serrano started with a white piece of paper on the das, and you've mentioned the concept of impact and messing didn't really exist at the time. Did you ever doubt yourselves? And so how did you maintain this belief in your vision when nobody around you could see it at that point in time? Probably all the time. Well, what happened was I said earlier on, I talked earlier on about this sort of polarised market. And if you're looking for this, you know, as I was trying to find this career with a sense of purpose, but also measureability and accountability, it was hard to find it. And so the reaction that we got when we went out to raise the first fund really embodied that polarised vision that was then, you know, the way that finance sector thought about life. I went and pitched to a lot of wonderful introductions that Ronald made for us across banks and pension funds and other institutional investors and high net worth individuals. And was told quite, explained, it was explained to me in a very nice way, that if we wanted to have an impact on lowering compounds of the country, that we should be setting up a foundation and giving away money. And if we wanted to be serious about making returns by investing in growth businesses, then we needed to forget the social mission and focus on the financial mission. That is the way that the finance sector did think about itself. It was very much focused on maximising risk, adjusted return, within what is, you know, permissible by the regulators and the law, and things have changed dramatically since that point, but it was very much that was the reaction. When they told you this, how did you respond to that kind of thinking? I responded by explaining case studies of businesses that we had come across, where we felt that there was this real combination between the possibility of, if you would just give that business, the capital and the kind of help and support that private equity and venture capital give to the companies they invest in, that you could see that the financial returns could be really strong. So we needed to have case studies of pipeline stories, tell stories about real businesses that were out there. But very honestly, we also needed catalytic capital. I don't think through just the force of my own persuasion or Ronald's networks, necessarily we would have got that first fund off the ground. We were smart about the way we designed it. We knew that the private sector investors would not be ready for this at this point in time. It would not necessarily believe the financial return story. So we asked the government to put in 10 million of the 40 that we raised in catalytic capital that would basically take a bond level of return and would go in first to come out last. So we changed the risk return parameters and gave a, we created a very early blended finance stack and I continue to think that in new areas of impact investing, creating a layered finance stack which blends different investments, we've got different tolerance for risk and different requirements in terms of financial return can be a smart way to enter into a new impactful area that the investors haven't seen and don't have a track record in and can't look at a track record off. So it was a combination of pure determination, finding the champion in any organization. So most organizations I was talking to didn't have a pot of capital that said please go out and try to make money and be impactful. They didn't have that allocation. So you had to find a senior enough person who would say I just buy that idea and I'm going to do it even though there isn't an allocation. And then you have to combine that with having structured the fund in a smart way that changed the risk and return scenario to just allow them to catalyze them into feeling that it was something that they were in a position to do. Let's get a snapshot of Bridges Fund Management today and if someone who knows nothing about the impact investing asks you what does Bridges do, how do you explain it to them? Bridges is a private fund management company with a difference because everything, all the investments that we make are informed by a desire to achieve one of two top line goals. We want to invest in creating either a more sustainable future or a more inclusive future. And we absolutely love it when we find investment opportunities that can do a bit of both. I'm interested in your theory of change. My presumed relates to those two points but can you articulate those more succinctly? So our starting point is that building a more sustainable and a more inclusive economy is not just a moral or an ecological imperative. It's also a unique opportunity to create lasting economic and social value. Bridges is about finding different ways of tackling social and environmental challenges through investments and we know that in many cases by doing that we're going to drive highly attractive returns to investors. So by supporting the transition to net zero and by helping more people to thrive our inclusivity goal we unlock human potential and we open up exciting growth markets. Our theory of change is that we can take the tool of financial capital and use it to address macro social or environmental challenges whether it be through investing in growth businesses whether it be through our property funds investing in brown to greening of buildings investing in the buildings where healthcare takes place investing in buildings for an aging population or whether it be through our two nonprofits activities all of those are using the tool of capital to invest in a more sustainable or a more inclusive future. Just to put some bookends around this you started with 40 million quit what is your total AUM today and how many different funds do you have and how many people just to put some context through it. I like to think that 10 million in government capitaliting investments one of the very best uses of taxpayer money because from that 10 million we've been able to raise so far two billion sterling and counting growing fast all of which has been private sector investment we start with the investment in growth businesses if you like private equity focused investing a couple of evolutions that we've had we've gone from just private equity into so thinking about how businesses can drive more sustainability and more inclusion into thinking about the real estate in which perhaps those businesses sit or in which people live and we've raised real estate funds and then we also have an activity in outcomes contracts within the group and we also have a philanthropic arm within the group. Can you define what the just transition means to you in the context of your more inclusive vertical? Yeah so and it is this inextricable linkage the requirement to include everyone in the transition to a greener economy so that means thinking about for example the individuals whose jobs might be lost as we move from fossil fuel industry into a cleaner industry how do we ensure that those training to allow those individuals to convert to the new jobs that's thinking in emerging markets context about how we get fairness in the fact that those economies have not yet gone through as much economic development and now we kind of want them not to put more emissions into the atmosphere so how are we going to balance that? Wow those parts of the world to reach their full economic potential while doing it in a more climate friendly way frankly than we the industrialized countries have done it ourselves in our growth funds an example that I like because actually it is a just transition type investment is an investment we made through our inclusive growth fund in a company called agility eco so agility eco serves the families that are experiencing fuel poverty and as fuel prices went up you know fuel poverty became really critical in Europe agility eco sends in people to replace boilers with more energy efficient boilers with and it could be ground or air source heat pumps to do put in insulation as a result during the period that we own agility eco I think there's 200,000 families reduced substantially their fuel bills as a result of this kind of activity we also of course reduced carbon emissions and we made very attractive multiple double digit returns for our investment. So those may be given you a couple of examples of the sorts of things that we're doing in the transition to net zero. And JIVISUK was a really difficult company to invest in because it's revenue, entirely driven by policy. And we're always very anxious, and this is often the case when you're trying to achieve social or environmental goals, that there is some governmental risk. And we had to look really long and hard at ourselves in terms of that binary risk. And it's ended up being fabulous success and a fabulous exit. What did we learn from that? What we've gone on to learn is that we, given that there can be this linkage between decisions of politicians and success of impact companies, we need to be better at reading the political landscape. And so that's why we've now connected the work that we're doing with lots of government local authorities in outcomes with the work that we're doing in the inclusive growth funds. So that rather than trying to completely avoid government risk, it's hard to do that and achieve a strong impact. Instead, we're going to try to be among the best at judging political risk. We've discussed your different portfolios, but could you share a specific example from your portfolio of one property investment, maybe one private equity investment, but just take us through the bridges strategy from initial thesis to execution to outcome that really demonstrate how you create value while you're delivering measurable positive impact. Maybe take an example, Scott, of one of our living investments in property. We financed the build of thousands of units of housing. One example that I quite like about the way that we work is an example where we were buying the land opposite a local council building. The local council had given planning for that land to be developed into housing with only a level of 15% of social or affordable. We were able to go in and speak to the council about that land because they owned that land. And to work out a way that we could make this a very financially attractive investment for our investors, while at the same time increasing the level of social and affordable housing to 50% from 15%. That all comes from the philosophy of wanting to try within the financial constraints to maximize the social impact. And instead of having a conversation with the planning authorities, which is how can we reduce the amount of affordable because we don't make money on that, rather say how can we work with you to find a way to achieve the financial goal as well as the social goal. So I'm very proud of that example where we were able to raise the affordable level from 15 to 50 while also making very attractive double-tagant net return. Even at this for over 20 years, watching impact investing evolve from a novel concept to what's now arguably a mainstream approach. We're seeing some pushback, particularly in the US, looking at where we are now. What makes you hopeful about the future of this field despite some current challenges? I think the current challenges are very real. We are spending time at bridges thinking about what changes in sentiment mean for our investing. However, to me, it's absolutely clear that the two key drivers that we're trying to achieve, more inclusion and more sustainability are huge macro factors that will continue past the current period of time that we're in now. I think a few reasons for optimism. One is, impact investing is here to help solve challenges. Sadly, those challenges are not going away and there's going to be a huge imperative to continue to solve social and environmental challenges through investment, particularly actually, if the politicians aren't doing everything that we would love them to be doing for, a more sustainable and a more inclusive economy than even more so. We and the impact investment field need to be investing there. But I'm also seeing, there's certainly in Europe so far, there's a real resilience to among institutional investors to their commitment on sustainability and inclusion and on ESG and responsible investing. We're very strongly, which is very positive. We're seeing that in our fundraising and actually in some investors, even coming from the US seeking sustainable and impact investing and finding it in Europe. So I've lived the experience as we've talked about from the moment where we just had those two polarised points of philanthropy and investment through 20 years of building out all of responsible investment between those and so much of that now is embodied in the practice and the way that investments are made. I think it's not possible for it to be rolled back, but that's not a domain to undermine the shock that is coming and not just out of the US, but to a large extent out of the US at the moment. It's a very real shock. It will prove to have been a challenge that we will all meet and move past. You've been listening to SRI 360. If you enjoyed it, please hit the like button and subscribe to get future episodes. You can find an archive of all previous podcast interviews and more articles and information on SRI, ESG, impact investing, sustainable investing and socially responsible investing at our website, SRI360.com. If you'd like to read more lessons learned from world-class SRI investors, get a copy of Scott Arnell's book, "Sustainable and Responsible Investing 360." It's a must read for anyone wanting to know more about investing for positive social, environmental and ethical impact. All with market financial returns. These are the stories and tactics of those leading the way as sustainable and responsible investing goes main stream. Sustainable and responsible investing 360 is now available in hardcover. eBook and audio book format, wherever books are sold.