Debt funds
Debt funds can help social enterprises and charities grow their impact and increase their resilience.
- £65m Drawn down from Big Society Capital – Data from Big Society Capital
- £154.2m Drawn down from Big Society Capital and other investors alongside us
- 1x Amount our capital has been matched by other investors
The challenge
Some social enterprises and charities need investment capital to grow their trading income helping them become more resilient and grow their impact. In these cases, loans can be a useful tool – providing working capital and growth finance to charities on terms that work for their business models. However, many enterprises struggle to access this type of debt finance because they lack security or track record, leaving them on the wrong side of traditional lenders’ risk parameters.
Our approach
With our debt funds, we aim to bridge this gap. This product type provides charities and social enterprises with the right type of finance, so they can continue to grow their impact and increase their resilience. Since 2013, we’ve worked on two things:
- Providing cornerstone investment to new debt funds, investing alongside others to increase the supply of debt that can take more risk: Since 2013 we’ve identified or secured catalytic capital in 11 unsecured debt funds with 9 fund managers that have collectively committed £61 million to 84 enterprises.
- Supporting the development of fund managers that are building trusted networks within the sector and connecting the capital to those organisations that need it. This has included working with long-standing, experienced managers such as Key Fund, Social Investment Scotland and Big Issue Invest as well as newer managers bringing vital skills and capital to the sector, such as Social and Sustainable Capital and Bristol and Bath Regional Capital.
The type of investment that these funds make available varies, but common features include the ability to lend with limited security, more patient timeframes (often with terms of 10 years), and some flexibility of payment features, whether through repayment holidays or linking to revenues. This asset class also includes the investments we make in community shares. We have facilitated the flow of higher risk, lower return finance through match and underwriting funds, such as the SITR Crowdmatch Fund and Resonance's Community Share Underwriting Fund.
- 67400 Number of retail community share investors in 2020 – Data from fund managers across the portfolio
- 85 Number of SITR deals by 2020 vs 0 in 2012
Impact and learning
We understand our impact in this area through:
Meeting the financing needs of more social enterprises and charities
Since 2011, the amount of non-bank lending has more than doubled, from £149 million to £327 million. These organisations operate in diverse sectors such as unemployment, sports, arts and social care, employing a variety of revenue models to do so.
A key lesson for us and our partners is that demand and pricing remain difficult. On the demand-side this partly reflects the need for fund managers to build networks and trust – demand is rarely “ready-made”. It also reflects the challenge of matching the needs of social enterprises and charities with the returns that are required to attract investors. The higher risk of these loans means that funds need to charge higher interest rates to cover the losses – typically 6-9%. Although rates are lower than those available to SMEs, not all business models of social enterprises and charities can support rates at this level.
Attracting more capital alongside us to help grow the sector
Our goal in this sector has been to increase the amount of Non-bank lending available to social enterprises and charities, primarily through attracting other investors. Our commitments have attracted £72 million of catalytic capital to help grow this segment and we have also seen three managers (Big Issue Invest, Social and Sustainable Capital and Social Investment Scotland) go on to raise second-time funds.
However, we have attracted less co-investment than most areas of our work (match ratio of 0.8x). We have learnt that it will remain difficult to attract significant capital to this product type, given the various risks combined with low overall returns. To facilitate lending to support the significant impact delivered by many social enterprises, there is a need for more blended products that combine lending with grants or guarantee schemes. These can help bridge the risk-reward gap to connect investors to enterprises.
Tax reliefs can play a similar role, which is why we set up the SITR Crowdmatch Fund. The Fund encourages retail investors to take advantage of Social Investment Tax Relief (SITR) and invest in community shares in local pubs, event venues and community assets.