Neil Berry: Time for more choice

Social investment should offer a more varied menu of funding options to charities

Neil Berry
Neil Berry

And so the season that for many of us is an excuse for over-consumption and over-indulgence passes into memory. That over-indulgence is driven at least in part by the sheer variety and choice of food and drink that is not just on offer, but is almost a ritual requirement. Or such is the excuse of someone who over-indulged in all three of the festive dried-fruit preparations: pudding, cake and pie. All similar, but all so different and right for different times of the day.

Back to reality now, though, and the reality of much more limited choice for a third sector organisation seeking finance. Last year in this column Seb Elsworth estimated that only about 0.1 per cent of all social investments made to date in the UK would be defined as quasi-equity, despite it continuing to be a financial product that both social investors and front-line voluntary organisations repeatedly tell us would be of great interest.

And still the third sector finance menu largely comprises stodgy starters (grants), with a separate dessert menu – mostly loan finance with the odd social impact bond thrown in – that remains too rich for most tastes. For those wanting flexible growth or capital finance, there remains too little to sample in the middle ground. Stodgy starters retain their appeal or become the default option, and for many the cycle of grant dependence will continue.

But as ever there are exceptions to this rule, and they are growing in number. Here are just a few examples.

Sumerian Partners is a small organisation delivering a different approach to managing philanthropic funds. Taking principles and approaches developed by the Shell Foundation in its work overseas, Sumerian contends that traditional non-returnable grants can lock organisations into a cycle of short-term thinking and dependency. Instead, Sumerian develops bespoke packages of patient, returnable finance combined with a long-term advisory relationship to encourage and support long-term strategic planning, resilience and growth. It is particularly helping organisations that provide affordable credit as well as tackling housing and homelessness issues, but the approach could be adopted for any sector. Sumerian is attracting philanthropic capital into this model from donors who see greater value in this approach than from traditional grant-making activity.

Comic Relief is experimenting with new approaches to social investment through its Red Shed initiative, finding different ways to support innovation and impact by combining its traditional grant-making with other forms of repayable finance. Early in 2019 it will be piloting a "beyond grants" programme, a new way to tackle the cliff edge that can appear for organisations that are reaching the end of a traditional three-year funding round and face either reinventing themselves to retain funding or embarking on a perilous journey towards new income streams. Beyond Grants aims to facilitate that transition more smoothly, with mixed elements of grant, repayable grant, loan and support. A key element of the pilot – and arguably its most important – is that there is no set product or formula for the investment. Each package of finance and support will be bespoke, taking into account the existing and future plans of the investee.

The Barrow Cadbury Trust has recently trialled the use of a convertible loan note, using money from the Connect Fund, to invest in Singlify, which is developing a new investment management system suitable for social investors. This CLN product brings to the investment the patience and flexibility that is often needed for longer-term and more risky propositions. The CLN will convert into equity when Singlify raises its first equity funding.

It is true that some of these approaches can be more complicated to establish and more intensive to deliver than traditional grant or loan arrangements. And it might be argued that it is a risk to develop new products for a market that is still often slow to respond to those that already exist. But in every sector, product innovation has at some point forged ahead of demand and driven the emergence of new markets, and there is every reason to believe that this would be the case for social investment too. Indeed, there has been no shortage of demand during the early testing phases of the new products referenced earlier.

So I would like 2019 to be a watershed year for the development of new forms of blended finance for the sector, including quasi-equity. Another slice of that particular pie anyone?

Neil Berry is director of programmes at Access – the Foundation for Social Investment

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