From 2012: Private Eye on Private Fund Management for Cameron’s Big Society

This is also from Private Eye for the 20th April – 3rd May 2012, and covers David Cameron’s attempts to set up an investment fund for his Big Society projects.

Big Society

Capital Idea?

Funds might be hard to come by, but there was no shortage of self-congratulation at the launch of Big Society Capital, the big idea for getting private money into good causes.

Speaking at the Stock Exchange launch, David Cameron boasted that his predecessors had talked about social investment but “this government is actually delivering it, within two years – Big Society Capital with £600m of funds to invest”.

The idea is that the money, £400m from unclaimed bank accounts and £200m invested by the big banks, will attract further private investment too. This will be handed to fund managers (imposing a further layer of costs) who will then invest in “social enterprises” that do good works while making sufficient profit to reward their investors.

The “profits” of these enterprises, so the theory goes, will come from their results. Thus when a social enterprise finds work for disadvantaged youngsters, say, or keeps ex-prisoners on the straight and narrow, it will eventually get its reward from taxpayers. With worrying echoes of the private finance initiative, the costs to government are therefore kicked into the future and nthing shows up on the books today. If the enterprise providing what would otherwise be a public service gets into trouble, of course, it simply goes to the wall.

The big hope for Big Society Capital is pulling in private money alongside its £600m. But where will this come from if only relatively low returns are on offer?

Nick Hurd, so-called minister for the civil society, says “high net worth” individuals are already eyeing the new “market” and “that’s before you even look at the £95bn that charities and foundation trusts are sitting on, managing in very conservative ways through their very conservative, traditional financial instruments”. In other words, charities now struggling with huge cuts in income (said to be more than £1bn a year) should stop being fuddy-duddy and plough some of their funds int6o riskier social enterprises.

This is all the brainchild of Gordon Brown’s former confidant, non-dom private equity guru Sir Ronald Cohen, who chairs Big Society Capital and who, Cameron drooled, “help turn UK venture capital into a sustainable, successful and vibrant industry”.

The idea is to repeat the trick for the Big Society. Or as Sir Non Dom put it: “The power of entrepreneurship and capital markets … which we’ve unleashed for the benefit of economic profit needs now to be unleashed for dealing with social issues”.

The problem is that the private equity fund management model has unleashed vast profits for fund managers but done precious little for anybody else. And likening private equity to venture capital, which generally funds start-ups, has always been more of lobbying-ploy to sweeten the pill than anything real. Less than 5 percent of private equity investment goes into early stage businesses; most ends up in highly geared asset-stripping buy-outs – hardly a model for a new world of social activism.

Indeed, the chief executive of Big Society Capital is one Nick Donohoe, formerly of investment bank JP Morgan, where he sat on the management committee as it bought and sold dodgy securities. This entailed a massive bailout and landed the bank with a $153m fine for selling dodgy “collateralized debt obligations” to pension funds while a related hedge fund was “shorting “thm.

On Big Society Capital’s website Cohen explains where he’s coming from: “The gap between the very successful ahnd the unsuccessful has got bigger and bigger and we nee something other than government or charity to deal with that.” Is this the same man who ten years ago persuaded Gordon Brown to reduce capital gains tax to 1- percent, leaving private equity bosses paying lower tax rates than their cleaners? It certainly is!

I’ve blogged before about how much of the Nazi gleichschaltung (co-ordination) of industry took place through the Nazis incorporating large, state-run businesses, like the Heinrich Himmler steel works, named after and run by the head of the SS, as private companies. The Nazis also co-opted business leaders into the civil service and state industrial sector, in a similar way to the promotion and appointment of contemporary businessmen to official positions under the Tories. This is part of the same policies.

There is, in theory, absolutely nothing wrong with encouraging business to invest in socially responsible and improving causes. This, however, is certainly not the way it should be done. The Eye points out that the type of funds Big Society Capital aims to draw on and uses as a model are highly profitable for the fund manages, but offer poor returns for the investors. The Eye actually points out that these funds are used as part of ‘asset-stripping buy-outs’, in which previously successful companies are bought out and then effectively destroyed for the private of the purchaser, who then often moves on to prey on another company. As an instrument of the socially and economically destructive side of capitalism, it’s clearly completely unsuited for financing and rewarding socially constructive enterprises and schemes.

And as you’d expect from a public-private partnership scheme, it’s run by a crook, whose company was fined for exploiting its customers in America. As for Cohen under Gordon Brown leaving private equity managers paying proportionately lower taxes than their cleaners, that’s truly grossly immoral. It’s also something that’s become the norm under the low tax policies persuaded by successive administrations since Thatcher.

The investment capital fund idea on which Big Society Capital is based is completely inadequate to fund charitable or socially constructive enterprises and projects. These need government investment. This, however, is completely against Tory and Neoliberal dogma that state intervention and state expenditure is always bad. Hence such spending will not be made. It wasn’t after all made when setting up Big Society Capital – as the article says, £400m of this came from unclaimed bank accounts. The result will be that charities and social enterprises and projects will continue to be starved of funds through the simple inability of state and private capital partnerships to provide them. It may, however, help Cameron to make a spurious claim that his government has done something to address the problem, while in fact they have done very little.

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One Response to “From 2012: Private Eye on Private Fund Management for Cameron’s Big Society”

  1. Mike Sivier Says:

    Reblogged this on Vox Political and commented:
    Here’s a look back at the secular side of the Big Society.

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