If your organisation is thinking about raising finance through social investment, you may want to consider some recent examples of how this has been done in the voluntary sector. Golden Lane Housing, the housing arm of Mencap, has now raised two bonds through different routes and it is timely to reflect on some of the lessons learned.
GLH owns 700 houses and bungalows across the country, which we let to people with a learning disability. But the need is far greater, and if we want to do more we need capital to buy and adapt housing.
In 2013, we issued what, at the time, was the largest charity bond of its type in the UK. We raised £10m, which we have invested in buying and adapting houses and bungalows that are now home to 99 tenants. Last year, we were the first charity to raise funds through the new Retail Charity Bonds platform, allowing us to access mainstream investors through a bond listed on the London Stock Exchange. It raised £11m in eight days, with over half of the investment coming from individuals and the rest from institutions. As a result of this we are now busy negotiating the purchase of over 30 more properties, which will create homes for another 100 tenants.
Getting to this point required extensive discussion with our trustees about the risks involved and how they were to be managed. It was a useful and positive process, so I thought I’d share what we did in case other chief executives and finance directors are considering a similar, social route to finance.
Know your aims We started by clarifying what we wanted, including the amount and type of capital we required and what we would spend it on. We showed our trustees a robust business plan that articulated the future impact of our organisation, both with and without the bond issue.
With these fundamentals in place, we then did some detailed scenario modelling to show what the financial impact would be if we made different assumptions from the baseline business plan - in relation to things like interest rates, inflation, welfare reform and void and turnover rates. This saw us looking at different routes to finance and analysing our options based on different types and amounts of capital.
Demonstrate your ability to repay Having made the case for raising social finance through a retail charity bond to our board, we then demonstrated how the bond would be repaid without having to rely on another bond to refinance it at the end of the term. We also had to demonstrate that we wouldn’t break any of our existing covenants which we had made to lenders in relation to previous loans. This, in turn, required us to model the impact on our banking covenants.
Be prepared for the due diligence that potential investors will do It takes time and adequate financial IT systems to be able to demonstrate things that investors will want to see. This includes gearing ratios, an historic track record of sustained growth, and detailed financial records.
Spend time doing the market research It is well worth having informal conversations with potential lenders and brokers before deciding on the precise details of the offer. This increases the chances of developing a proposal that will be supported and gives investors a chance to start to get to know you and your organisation.
Demonstrate the social impact It’s important to be able to demonstrate the social impact of the investment, as well as the financial impact. We commissioned an independent report, now on the social stock exchange website, which shows how the move to a bond property has been a new lease of life for our tenants, who report increasing confidence, a wider social network, more involvement in the local community and learning new skills. The parents reported significant improvements in their own psychological health.
Seize the opportunity for good publicity In July last year, Stephen and Damien, two of our tenants, opened trading on the floor of the London Stock Exchange when the bond was formally admitted. This was the first time this had ever been done by someone with a learning disability. One of the benefits of social investment is that it can generate positive publicity for your organisation and its beneficiaries, and help to change public attitudes.
Reaching consensus around what was then an untested platform was always going to take time but in a mature and well-run organisation, the trade offs between risk and impact can only be properly assessed if an optimum position is agreed. The risk-aversion of many trustees is a vital check and balance to what could otherwise be over-optimistic assumptions. For us, this allowed for the best outcomes to be achieved, balancing the interests of existing and future beneficiaries.
Alastair Graham is director of Golden Lane Housing