How the growing taste for a key ingredient in civil society’s fortunes is shaping social investment lending
Unsecured, sector-friendly, small-scale loans are opening the world of doing good up. Once upon a time, philanthropy was the key ingredient underpinning efforts to catch people at risk of slipping through the gap between the power of the state, the market and the reach of social networks to address need. But in 2019, things look a bit different. Increasingly, enterprising and socially concerned citizens are realising that resource for doing good isn’t only to be found in the hands of philanthropists or custodians of grant funds. Samantha Magne, Knowledge & Learning Manager, Social Investment and Sector Resilience at The National Lottery Community Fund, tells us more.
Unlocking money for good
Ways of unlocking money for the purpose of doing good - at the same time as doing it - are gradually emerging, from socially enterprising motorway service stations (check out Gloucester’s) to property development schemes involving ex-offenders, such as Together Group’s work in Bristol.
Many of these social ventures use restricted grants to provide some of their income, but the ability to generate unrestricted funds through trading is appealing. Social Enterprise UK’s research in 2017 identified that 88% of the UK’s social ventures earn more than half their income through enterprise and over 50% go beyond break-even to make a profit. This kind of money brings a new angle to the goal of re-balancing power over money, empowering communities to take the lead in doing good.
We’re working with our partners at Big Society Capital and Access to help social enterprises kick-start or enhance their use of trading, with some ‘good yeast’ in the mix: social investment. But, activating – and even accessing - that yeast requires the right conditions. For many charities and social enterprises - especially those with no collateral, no credit score and little capacity to absorb the terms of high-risk finance - the right conditions include a friendly, affordable, trust-inspiring and low-risk introduction to social investment.
The Growth Fund initiative
This is where our Growth Fund initiative, which has recruited 16 organisations as the activating agents for social investment opportunities, comes in. An evaluation of the initiative has just produced the first chapter in the story of how the first 11 of our lending recruits are helping civil society organisations deliver their daily good.
Our story’s opening chapter finds the initiative’s more established social investors and larger social ventures featuring among the first batches of loans coming out. But as the pool of investors and their pipelines have grown, so has the predominance of smaller investees, seeking loans averaging £50,000.
One arts outreach VCSE reported they hadn’t considered a social investment loan at all, until their bank manager suggested they approach one of the Growth Fund’s investors:
"I said to [the investor], ‘Look I don't know too much about this’. I just wanted to have a chat, I'm sure [our organisation] is not something they'd invest in, but … they were so, so lovely, and so friendly, and really answered things in a lot of detail, and they didn't think I was being silly, didn't think that I was asking stupid questions. They were really, really encouraging. I think I was expecting it to be a lot more corporate, more ‘salesy’, but it wasn't like that at all."
Feedback from other investees illustrates how the constructive criticism and honesty that comes with the due diligence process of applying to our lenders was a surprising bonus:
"Our funding manager was lovely and so supportive and helpful. I really felt like he was working with us to ensure we got it rather than trying to catch us out...It was a good process and simple process.
“Let’s put it this way, we do as much work or more for sums of five or ten grand. It was probably a better return on our time than we get in most places.”
The experience means that investees no longer tend to see social investment as a last resort:
“We will be looking at it more proactively, and if we're going to be having things that have a financial return, one of the best ways of doing that might be through a social investment fund of some sort."
For 33% of our investees, the loan focus is on scaling up. For others it’s about getting on a more stable footing, using the loan for working capital, asset acquisition, refurbishments, and switching to new revenue generators.
Identifying the investees
So, who are these enterprising charities and social ventures, and how are their loans shaping up?
About 56% gain their primary income source from trading and only a further 26% derive it from contracts. Some 53% have less than 10 employees while 30% have 10-49 employees and 7% have no full-time staff.
The smallest among them turned over £4,060 and median pre-deal income is £250,000 (much smaller than the £1 million+ average pre-deal turnover in the wider social investment market). Meanwhile, 57% are looking for loans less than 20% of annual turnover, with 77% of the loans running for 1-5 years. About 11% aim to turn their loan around in less than 12 months. So far, our investees report that repayment terms are affordable and manageable.
Investors receive a subsidy to build their appetite for working with high-risk investees and small-scale deals. And word of mouth, plus the grant that investors can blend into their offer to investees, seems to be attracting more organisations to the offer.
The next chapter
For the moment, everyone seems sold on what our Growth Fund initiative is trying – and managing – to pull off.
Our next evaluation reports will reveal more about the business models that feature among investees and the impact the loans have on their resilience.
Until then, find out more about social investment, dip deeper into our Insights.