I predicted a riot: City sage who saw there was trouble ahead

Tom Peck speaks to a financier with a recipe for mending Broken Britain

Tom Peck
Tuesday 01 November 2011 12:29

When the venture capitalist Sir Ronald Cohen warned of potential for violence on the streets at the peak of the economic boom in 2007, his warnings were derided by wealthy City colleagues.

Sir Ronald warned back then of the widening gap between rich and poor and said: "Entrepreneurial economies which have high rates of growth and high rates of job creation do lead to great divergences in wealth. When economic situations get bad, it takes a spark to ignite a violent reaction."

Yesterday, looking back at the violence, he said: "When I saw the rioting I connected it with the fact that life is getting tougher for a lot of people and they might be feeling society is not as fair as it should be.

"It sounds now as if there was also an element of hooliganism and gang behaviour, but it is not an either/or situation."

Egyptian-born Sir Ronald founded Apax Partners in 1972 and amassed a fortune of more than £200m after providing funding for the likes of Boots, Pret a Manger and Yell.

Having pioneered the private equity industry in Britain, for the past decade or so he has championed social finance – a way to invest in good causes with a profitable return – which he says can help those currently left behind.

While David Cameron blames the riots on poor parenting and moral decline, the Work and Pensions Secretary, Iain Duncan Smith – charged with dealing with gangs and mending "broken society" – listens to Sir Ronald, a former Labour donor and Gordon Brown ally.

Sir Ronald is the man behind social impact bonds, which allow people to invest in dealing with social problems and earn a yield from ensuing public sector savings.

"I was talking to Ronald Cohen about this," Mr Duncan Smith told this week's Spectator magazine.

"We think this could be a marketplace as big as some of the late-1970s marketplaces in investment banking. It can release money which the Government itself doesn't have to spend."

A recent social impact bond pilot scheme for prisoner rehabilitation in Peterborough run by the Social Finance group, which Sir Ronald founded, has been hailed a success.

"This is a revolutionary step forward,"he told The Independent. "You will soon find social investment banks in many countries. Obama has introduced $100m of 'Pay for Success' bonds, as they call them, in his budget. Canada has a social finance task force, as does Israel. It is not about politics, it is about policy."

Last month Sir Ronald was named chairman of the new Big Society Bank, funded with £400m from abandoned British bank accounts. It led him to claim: "We are on the cusp of a revolution.

"I stood up at the 30th anniversary of Apax in 2002 and made the point that there is a problem with the way that the system functions.

"It deals with its business consequences and its financial consequences but not with its social consequences.

"Even if the relative standard of living for the poorest improves, if the gap between rich and poor increases, and people feel it's inequitable, you're storing up problems for the future. In difficult times, injustice breaks out into violence. No part of the system deals with the people who get left behind. Only governments do and [they are] not always best placed to do so."

He added: "Between the private and the public sector there is a social sector. It is considerable in size but underpowered.

"In the UK it has £100bn in assets but most charities struggle to make ends meet. If you want to deal with a social issue, be it homelessness, disability, whatever, it's difficult to think, 'I can make a dent in this', because you can't get the capital.

"Social finance connects the social sector to the capital markets. But what social impact bonds can do is to go about connecting the social sector with the raising of capital."