Seb Elsworth: Lessons from the first four years of Access - part two

Access is approaching the halfway point in its 10-year lifespan. In this second of a two-part series, its chief executive reflects on some of the lessons the foundation is learning

Seb Elsworth (Photograph: Claudia Leisinger)
Seb Elsworth (Photograph: Claudia Leisinger)

In the last article, I reflected on some of the lessons from our work in helping charities and social enterprises to develop their enterprise ideas and build capacity to take on investment. The other side of our work is blending grant money into social investment funds, allowing those funds to make smaller unsecured loans and take more risk. Here are some of the emerging lessons.

First, blending grant into social investment funds works to increase the reach of social investment. Our main blended finance programme, the £50m Growth Fund, was set up to address a gap for unsecured loans of less than £150,000 for charities and social enterprises. Most of the organisations that make loans to charities and social enterprises do so with money they have themselves borrowed. They therefore have to be pretty sure they are going to be repaid and also need to keep their costs down. That incentivises them to make safer and larger investments so they have fewer relationships to manage.

To change those incentives we have funded 16 loan funds around England with a grant from the National Lottery Community Fund and a loan from Big Society Capital. The grant covers some losses in case not all the loans are repaid and helps to meet the costs for the lender of managing a larger number of smaller-value loans. Some grants can also be made available to the charity or social enterprise if required to make its investment proposition stack up.

Some 335 charities and social enterprises have taken loans from the Growth Fund. At least the same number again will benefit over the next few years. In 2018 the programme was responsible for almost 30 per cent of all social investment deals made. The blended approach is making investments smaller, with a median loan size of £40,000 versus £250,000 in the rest of the market. The loans are supporting smaller organisations and are being made all over England, contrary to the London-centric perception of social investment.

Each fund has a layer of grant that is there to cover the loans that are not repaid. The size of this layer varies from fund to fund, from about 10 per cent to 35 per cent. There are many more years to go until we will know whether this grant coverage was sufficient or too generous.

Second, getting the product right is only one element of expanding the reach of social investment. We have deliberately chosen to work with organisations that have not been lenders before but which have a deep understanding of and strong networks in parts of the sector. Those new lenders can help make social investment relevant to organisations that had not considered it before. However, those charities and social enterprises will, quite rightly, want sufficient time to fully consider the option and, even if they want to go ahead, the specific need for a loan may still be some time in the future.

All this means that the lenders need to have the capacity to work with organisations for some time before a loan is made. However, if they are not making enough loans they are not generating interest on those loans and might not be earning enough to cover the costs of running the fund. The Growth Fund hasn’t always got this balance right. Future blended programmes should learn from this structure and ensure that the lenders are incentivised to work with charities and social enterprises at the right pace.

Finally, Access has an interesting dual role. Our day job is supporting charities and social enterprises to make use of social investment. But we are ourselves an investor too. We have committed to a total-impact approach, so we want to align our endowment strategy as closely as possible to our mission. For Access this means getting as much of this money as possible working for charities and social enterprises. However, because of our fixed lifespan we also have quite specific limits on how long we can invest for.

To square these financial and impact goals, we have worked to invest as much as possible of this endowment into bonds issued by charities and social enterprises in the UK. At the moment, 46 per cent of our endowment is invested in this way, with the rest in other bonds delivering social impact and investment funds with strong ethical, social and governance criteria.

This approach is relatively rare for foundations, but one we believe more should investigate. It comes with risks of course – one of the underlying bonds we held went bust last year – but our returns are still beating a benchmark of UK corporate bonds. Other foundations with longer time horizons will want to explore other assets, but can still ask themselves the same questions about how their endowment is meeting their mission.

Seb Elsworth is the chief executive of Access, a foundation that helps to widen access to social investment for charities and social enterprises

Part one of this series of articles can be found here

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