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 and 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 growing BSC's impact. The reaction that we got when we went out to raise the first fund really embodied that polarized vision. It was explained to me in a very nice way that if we wanted to have an impact on lower-income parts 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, then we needed to forget the social mission and focus on the financial mission. Unlock 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 ESP, 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 gonna hear from three people who've been at the center of this. First, Yasan and Saptuklami, who helped define impact investing at JP Morgan. She later ran the Catalyst portfolio at British International Investment and is now the head of Investment Strategy at Legal in General.

She will break down what Catalyst Capital actually is and how it works mechanically. Then, Stephen Muirz, Chief Executive Officer of Better Society Capital, which is the UK's leading social impact investor, which was funded with the 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 stabbed Sir Ronald 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 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 the 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. Did 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-olds math. Actually, I think this is going to be just fine.

This was very early doors and impact investing, and as you say, it 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.

We 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. 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 or environmental outcomes. 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. What were you trying to accomplish with this social finance team? Well, so the team had three pillars. One was thought leadership, education, you know, 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, you know, 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 in 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 its fences. 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, lead them one step out of their comfort zone, they may follow you. So that was, I think, the biggest challenge. It was just, it was a sector, a product and a 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, battening 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 a mini yard 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, startups, but also new platforms or new sectors that didn't exist. So you didn't have a track 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 the kind of main portfolio investments could be? So I'd been advising them on this portfolio from 2013. And in 2018, they recruited a CIO to oversee that portfolio. And so I joined as 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, defined 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 the geographies where we were investing.

And 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 BII because I think it relates to everything you're doing now. Because it's an interesting place.

If I understand it right, BII 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 premise is 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 BII.

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 and 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.

Okay, 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, right? So what if you do that and you 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 what the customer pays.

We didn't really know what the market, 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 and 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 I don't know actually today where that has gone exactly. 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 won't, 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 MedAccess, where it was the sole funder of MedAccess, in fact, founded MedAccess 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 of what 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 nonprofit 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 come in 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 that 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 edit exposure? When you were attempting to crowd 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 are 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 solvency UK regime, is 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 needed to meet. But the constraints of an institutional investor that is managing pension fund assets and operating under a regulatory regime like Solvency 2 or Solvency 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? When I said we didn't sacrifice returns for impact, that was against the 2% return hurdle. Whereas here, their return hurdle is very different.

Pension funds have these extraordinarily long-term time horizons with long-dated liabilities 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 our 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 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 we're 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 they have through perhaps the active engagement? Aaron Powell 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, you know, 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 exclusions 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 net debt for nature swaps and been really, I think, at the front edge of that new product space. We have an appetite to be a leader in the space.

Of course, when we do those things, it still needs to fit within the risk management, the regulatory regime that we operate within, and et cetera. That's how I think about the difference between new origination and portfolio management. Ellen G 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 LNG need to see that gives you enough comfort to move forward with an allocation? I 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 a 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 and 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 am 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 they picked 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 it from one side. So I've definitely been on the other side to customer service agents. But here I was on the receiving end.

This individual called in from Saskatchewan and 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 a post office box and this is the address. 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 our risk appetite or how much track record needs to be in place before we engage. Okay, that was Yesim and Sabtuflami on the mechanics of catalytic capital and how it steps into spaces that conventional capital won't, and how structuring the 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 Muir has spent his career doing. Steven 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 Steven 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 2012 or something like that. Spoke with Kieran Boyle a bit about it on a previous show. It 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 accounts piece, which is really unusual, came from a commission which looked into this back in, I think it's 2008, but I might have got that slightly wrong. And this one of your other former guests, Sir Ronald Curry and you've talked to was the driving force behind setting it up and unlocking that that money. And yes, it turns out that there are 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 a person for 15 years, so they're really pretty dormant. And the way it works is that anyone, you still have an absolute right to get your money back at any time if you can prove that it's yours after that long. But there is a lot of money there and it can be used for good purposes. But yes, Lonnie probably talked about this in your for your previous podcast, but he was absolutely instrumental to making that happen.

And this piece of legislation, Dormant Accounts Act, passed in the UK to unlock that money for social purposes, including divisional capitalisation of BSC, it's now used for other purposes as well, because actually there's far more than that 400 million in the pot. And then the high street banks came in a part of a sort of deal with the Venn government at the time. This is post-financial crash. There was a whole lot of discussions between government and banks about how they could sort of almost rehabilitate themselves to an extent after some of what had happened in 2008 and some of the things that had gone on, and contributing to this kind of an issue, I think, 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 at the time, I didn't know about this. But I don't know how widely this had been talked about and thought about elsewhere in the system at the time.

So it's a good question. But yes, it's subsequently 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 to that. Well, yes, that's true.

That is 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 because we've got this sort of corpus of capital that we've been set up with, and we're able to take a long view, which is incredibly important. A lot of the funds we invest in are quite long term.

And the things we've done that have worked and scaled have been things we've committed to over multiple years, happy to talk more about those if people are interested in detail. Well, also it means we're pretty independent because this is not government money. So we're either seen by a trust, behavior slightly trust, which keeps us on mission, make sure we use the money appropriately and are well governed and don't waste it or anything like that. Quite independent.

And so it makes it a little bit like a foundation. But then also we have having the bank shareholders who keep 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 reinvest them. So we're trying to be sustainable ourselves and build a sustainable market, but able to 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 our costs, so not portfolio, or our return target is 1%, which it was originally high, and that was originally 45%. And we concluded that wasn't realistic based on the sorts of things we're meant to be doing.

That translates into the social investment portfolio is targeting a return of around sort of 3%-ish, 2% to 3%, because obviously we're in net 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 go natural phase where if early investments we made, some of which were a bit experimental or different that haven't worked out, or pay money out in the early days, don't get much back.

So yeah, we're confident we will get we will deliver that target, but so far we're a little bit behind on that because a backwash of things we did which were say experimental or riskier or so on. But overall net at the BSC corporate level, we're seeking a 1% return on a rolling five-year basis. And what are your capital providers expecting in return? The oversight trust, which oversees the dormant bank accounts.

I mean, they're expecting us to build a market which is bigger than us, is sustainable, has other players in, and draws in other capital alongside us. So they're looking for us to maintain ourselves or building a bigger market alongside us. And similarly, the banks actually, they're looking for as shareholders, they're looking for us to make that return and look after their money and be sustainable, but also to do it in a way that kind of promotes social impact investment more broadly and makes that a sort of thriving market in the UK, which is good for them and good for everyone.

Aaron Powell So the bank investors are not looking for a certain return. This was the 1% overall BSC return is a figure that they've signed up to. So they will and ultimately, as and when we pay a dividend, some of that will be the banks will be eligible for some of that. And we haven't yet paid a dividend.

We will do one big. It's totally concessionary return. Aaron Powell In terms of the banks, the commercial banks. Aaron Powell 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? Aaron Powell We found increasingly people found the name Big Society Capital a bit confusing. And particularly people coming newer into our space or who had been overseas partners we work with or new investors we work with, they didn't really understand what this sort of big society concept was. It stopped making sense to people because it wasn't terminology that was widely used.

And we found people finding it quite confusing. So we thought, okay, have a name in the place is actually what we do and it's easier to understand, but we'd rather not give up the BSC, because lots of people abbreviate it anyway. There's brand value in that. We don't rebrand everything, let's keep it simple, not spend lots of money on a rebrand.

So something that kept the BSC, which a lot of people use as an abbreviation anyway, and actually says what we do, i.e., we're best capital for a better society, seemed to make a lot of sense. So we probably should have done it earlier, frankly, because once we did it, it seemed very logical.

You agonize over these things, don't you? And take longer if it could be. 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, the two linked ways, in this sort of theory of change bit, in 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're sort of directly investing and then enabling others to invest by creating a sort of wider set of conditions. And our the crucial part about our approach is where 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 want it to at least double the total size 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 are 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 amounts of capital to flow, which then will reach more organizations, which are in turn then creating the direct impact. So we sit at a wholesale level, so we invest into funds. The funds invest into frontline organizations, charities, social 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, break down 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. Linked to that is we are generally, in fact, for us pretty much exclusively, investing in organized or the investment is flowing to organizations where creating that measurable positive social impact is part of what they're trying to do. It is not just a byproduct 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 a company that's baked into articles or whatever, some other form.

So money that's flowing to organizations that are trying to create a positive social impact and are assessing themselves on that basis, but is also creating a financial term as well. Every 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 constant misconception conception, is that there is a some kind of relatively linear trade-off between financial impact and social impact, and that higher financial impact investments will be lower social impact, and you'll have lower financial returns on the higher social impact investments. There clearly are cases where that is true, but if we look at our portfolio, it isn't true at a portfolio or even at investments within funds that the investments we have that have the greatest social impact, and that we've measured and tested that, are not particularly the ones with lower financial impact.

So it's not a line, it's not even a kind of curve, it's more like a scatter chart. You actually can't really find a correlation at all. So we have low financial and low social impact investments where it haven't worked at all. We have high financial impact and low social impact investments.

We do have some of those. We also have the high, and we have ones which are in the other quadrant. So we've got the whole got the whole scatter chart. There's a narrative that is very common in, and this is actually interestingly both from investors in the more financial sector, but also from the sort of the social sector and charity saying, well, there's just a trade-off here, and you know, where are you on the spectrum of impact versus financial challenges?

Well, that's not our experience after doing this 12 years that it works that simply. And there are trade-offs and choices you make in there, but it's not a linear and linear thing. Then back to the barriers, that misconception and others, I mean, I think that the main challenge we have is simply that we're as yet not big enough. The scale of the challenges and the scale of the capital need is so big that socially imbalanced investment has got to get bigger to make a dent in them.

So to take an example, one of the biggest growth areas which we've been involved in, along with others, is investing in social and affordable housing in the UK. And so housing for people who often otherwise would be in temporary accommodation, potentially homeless or women-free domestic abuse. We don't have particularly fund focus on them, uh all these sorts of areas. Yeah, that market's gone from very little to a few billion, which is great.

It is amazing, is now housing thousands of people. But it needs to go from a few billion to several tens of billions to be anywhere near tackling the homelessness challenge we've got in the UK, which is arguably the worst homelessness challenge in Europe. We've scaled up a lot, and that's great, and we've been part of that along with others, not just us doing that. But to get to actually really tackling the problem, we've got to do another scale jump, which is probably harder than the first one.

So that's the thought of thing that keeps me up at night. I mean, not too often, but the back of my mind is like you know, the market's grown twelvefold in the 12 years we've been working in this, and a lot of that's down to PSE, they're not just us. But we're still, you know, the challenges are so big, and the amounts of money you potentially invest for great impact is so big, we're not even close yet. I'd love to hear some real examples of investments that you've made across these uh 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 model 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 in sort of bed and breakfast or hostels or really poor quality, like that you know, the one level about being homeless, and instead they're being given a stable secure long-term home with a charity that's managing that and supporting it.

So I've invested a whole set of funds in that supposedly missing the very first fund that was housing 50 or something people in London, and that model is now housing a few thousand people and get going really well, started to raise money from some pension funds, uh more institutional investors, where the first investors are more us, some foundations, that kind of stuff. And those funds are still maturing, but uh the earliest one, Real Lettings, has has produced a pretty decent return.

I think it will be in the high single digits return performance on that, which it'll be as well as exponential impact. So that's a good example. In the impact venture space, so there's a really interesting fund there called Fair by Design, which we developed sort of proactively with a partner and Jason Routcher Foundation, one of the biggest foundations in the UK, plus others, which aims at investing in startup businesses, mainly 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 for it, you find it hard to get insured, or if you can't get insured, it's expensive. All these things have a sort of cost premium if you're poor. And that fund invests in businesses that try and tackle that and then measures how much money it saved people. And it's you know, the the savings are really quite impressive.

And that there's a particular company they invest in which has driven the fund, the overall fund is returning very well. And I think a company they would invest in there called Wage Stream, which basically tries to mean that people don't have to use high-cost payday credit by partnering with big employers, enabling people to essentially borrow forward against salary by small amounts of money, but otherwise you'd be going to predatory payday lenders, basically. And they work with big employers who have quite large numbers of people on fairly low incomes who need that service.

And they've been extremely successful, they're now raising money from sort of commercial vegetable capital funds. But they yeah, the sort of first key investor was this impact-driven fund that we'd endorsed, and that's that's both a commercial and impact success with a little scale, which is really interesting. On the deaf side, I mean there's yeah, so this covers a broad range of things, but to give illustration of it, we're the largest shareholder in charity back, which is a that's what it says on the tin, it's a bank in the UK that banks specifically charities and charitable organizations who often say struggle to get conventional banking services and loan finance from some of the mainstream banks.

So they have a sort of broad reach into all sorts of different charities and large to small, right across the UK, and say we've sort of really been key in capitalising them and helping them, helping them grow and develop, and they've been growing their loan book really impressively in the last few years. And I we're an equity holder there, but we in the long yet again, the financial performance is now looking pretty good. And then on the social outcome side, yeah, I an example of a really interesting scheme there in Manchester, Greater Manchester Housing Partnership, which one of our funds is invested in, which essentially works for young people who would be home who are either homeless or at high risk of becoming homeless, looks to house them, support them, gets paid by the Greater Manchester Authority if they stay in a sustained tenancy and make progress towards employment start over a long period.

And imagine that was going to help a few hundred people. It was so successful, the local government likes it so much. They scaled up to one and a half thousand people, hoping to get up together in the future. And that's also returning money to investors, and it's a decent, yeah, maybe single-digit kind of return as well.

So but those are just a few of the kinds of things that we've gone off. Well, 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 type 2 diabetes to manage their condition to avoid them ending up in hospital because if they used to have crisis diabetes end up in hospital, very bad outcomes both for the health service and for the individual if that happens.

And so they provide the support people remotely delivered. Being very successful, I think. Last time I checked, it's been commissioned by I think it's 50 or 60 NHS National Health Service Trusts across the UK. So it started quite small, and it's a scale up, it's there.

So it's only sort of tech-driven, it came out of a Bethan Green Ventures, which is a in a tech incubator accelerator type. UK has been around for a long time, and we've backed for a while. There's one of their one of their really successful kind of graduates that'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 Wave Stream one where there's lots of people who find it really hard to get insurance for all sorts of reasons. And Urban Jungle will have for you a lot of very clever ways of cutting data, underwriting and using analysis differently, and just looking in places that mainstream insurers 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 both a impact success because not being able to get insurance is a real problem for people, or they have to get credibly expensive insurance. But it's actually commercially successful as well as in providing that sort of support. Let's talk about catalytic capital, which fascinates me as a concept. How do you define a catalyze the words in it?

That starts something that has potential to grow and become bigger. So I think this is and so it's different for it's not necessarily concessionary capital, but which is a different thing. A fund manager wants to do an impact fund for the first time is trying something different. And if we buy to it and we think it's good enough, you know, we're prepared to come in the first close with a significant ticket sometimes and make something happen.

That's catalytic. You're taking sort of first mover risk almost. That's a great example of the kind of thing we do that that I would see as catalytic. Do you have specific tools that BSC employs to attract private finance and multiply your impact beyond your direct capital deployment?

That's the first mover piece, is definitely one piece. I mean we've often gone out and designed funds. So we don't just sort of wait for fund managers to come to us with ideas. We've seen gaps in the market or seen where there's potential, actually gone out and found someone to work with us to build that because we see that's where the potential was packed money.

And that's again linked to our sort of yeah, that's a sort of cost that we carry that a lot of investors wouldn't. But we see that as our So quite recently, for example, we saw an opportunity to sort of recapitalize it, gone to see for a bit of a market for community-owned renewables in England. So we uh went out and sort of found the fund manager who had capacity in that space, and we've been the sort of first cornerstone with them as a partner in the way they can raise some private finance to set up a new fund to help capitalise community ownership with renewable energies.

That's not where we sort of went out and made something happen because we saw there's an opportunity here. The new government is key on doing stuff in that space. That's going to take a bit of time, put it to get something moving, get some pipeline built, get some momentum going here. What about risk mitigation strategies?

Can you give me some examples of some of the tools that BSC uses to catalyse further private investment? I've mentioned one or two of these already. So government guarantees are a really key one. So the British Business Bank, which is sort of the government development bank in the UK, in certain circumstances will provide aspects of a loss guarantee, which then can make particularly some of the social lending products more viable.

And we've used that in actually several structures. For example, one we did during COVID, a kind of COVID response fund, and another one we've done recently about supporting lending to micro businesses in particular sort of disadvantaged communities. That government guarantee piece has been really key. And the other bit is sort of blending grant and alongside loans, and that might be grant for capacity building for organizations that are able to take investment, or indeed grant to cover transaction costs to the ministering, very small loans in specialized areas and that kind of thing.

So just some of a sort of tactic that we've drawn on over the years. Was there a specific example of where one of these tools unlocked a significant additional investment that wouldn't have occurred? Yeah, so I think the one I just alluded to, so in the community enterprise investment fund we've just done, which capitalizes CDFIs, community development finance institutions, which is do micro lending to businesses, particularly in communities where the mainstream banks tend not to operate for various historic reasons or people with slightly worse credit histories.

By bringing in the British Business Bank guarantee there and then BSC as a junior debt layer, we've catalyzed senior at a pretty large volume from one of the large UK banks who definitely would not be able to do that without creating that structure of government guarantee, first loss, BSC piece of junior debt, and then you can get a much larger piece of senior debt from a bank of it, say that market has a big capital. I mean, even with that, we're not meeting the whole capital need that sector has, but it's a big step change from what was there before.

That was Stephen Ewers on how better society capital has helped grow the UK's social impact investment market 12-fold, from almost nothing to over 10 billion pounds. So we've heard from Yeseman on how catalytic 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 catalytic capital and ran with it. Michelle Giddens co-founded Bridges Fund Management in 2002 alongside Sir Ronald Cohen.

Their first fund was 40 million pounds, and 10 million pounds of that came from the UK government as catalytic 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 year 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 Sir Ronald 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 Sir Ronald Cohen, which was appointed by the then Chancellor of the Exchequer, 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 a phrase on bridge, yes, definitely. Yeah, we wrote down five recommendations as a task force.

One of them was that government should catalyse the creation of, I think it was five, funds that would invest in the most deprived quartile of the country, bringing the tool of venture capital private equity to investing in the most deprived quartile 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 beautiful next to his beautiful mahogany 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 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 while we really thought about how we should create what then became bridges. You had another co-founder, Philip Newborough, correct? Ultimately, I hired Phil to be my co-founder and to be my boss.

Unusual thing to do. But I felt I've 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 could bring the purpose side of it, but the private equity expertise, no. So I went on a search to find someone to be my co-founder and to be my boss. And uh was very fortunate to find Philip Newbra, who'd been working primarily in the UK, who'd run, he'd been at Apex Partners, as had Ronald, and then he'd 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 Fund Management. You and Sir Ronald started with a white piece of paper on the DAS, and you've mentioned the concept of impact investing didn't really exist at the time. Did you ever doubt yourselves? And if 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, probably more than I might have. Well, what happened was I said earlier on, I talked earlier on about this sort of polarized 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 measurability and countability, 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 polarized vision that was then, you know, the way that the finance sector thought about life. I went and pitched to a lot of wonderful introductions that 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 lower-income parts 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. But that is the way that the finance sector did think about itself. It was very much focused on maximizing 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 and 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 and come out last. So we changed the risk return parameters and gave a and 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 investors who'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 of.

So it was a combination of pure sort of 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 had to combine that with having structured the fund in a smart way, the change 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 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. I presume it 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. British 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 nonprofit 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 quid. What is your total AUM today? And how many different funds do you have? And how many people, just to put some context to it.

I like to think that 10 million in government catalytic investment is one of the very best uses of taxpayer money because from that 10 million, we've been able to raise so far 2 billion sterling and counting, growing fast, all of which has been private sector investment. We started 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 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 a more inclusive vertical? Yeah, so and it is this inextricable linkage of 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 there's training to allow those individuals to convert into the new jobs?

It'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, allow 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 put in insulation. As a result, during the period that we owned Agility Eco, I think it was 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 investors. So those maybe give you a couple of examples of the sorts of things that we're doing in the transition to net zero. Agility Eco 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?

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 and 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, because it's hard to do that and achieve 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 finance the build of thousands of units of housing.

One example that I quite liked 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-digit net return.

You've been 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.

Those, 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, then even more so. We in 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 on inclusion and on ESG and responsible investing.

I'm seeing that very, very strongly, which is very positive. We're seeing that in our fundraising and actually in 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 polarized points of philanthropy and investment through 20 years of building up all of responsible investment between those. And so much of that now is embodied in the practice and in the way that investments are made.

I think it's not possible for it to be rolled back. But that's not, I don't mean 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.

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