Last month Social Investment Business published a wealth of data on the long term performance of the Futurebuilders fund. It paints a fascinating story about the impact on organisations of taking on loans, and highlights a range of lessons for the social investment ecosystem and for government.
Created in 2004, the Futurebuilders fund was a recommendation from the Treasury's Cross-Cutting Review of the Role of the Voluntary and Community Sector in Service Delivery. It made investments between 2004 and 2010.
In 2008 Social Investment Business took over the management of the fund and continued to manage the outstanding loans. More than £140m was invested in 359 organisations: £25m in the form of grants and the rest as loans.
The government supported the programme to this extent because of the policy focus of the Blair government on public service reform, and the expanded role the sector could play. Access to capital would enable more organisations to bid for, and scale up to deliver, more public service contracts.
Futurebuilders built a strong connection in the consciousness of the sector between social investment and public service delivery.
It was not always an easy relationship. Because the loans themselves ultimately came from public money, there was an expectation in the minds of some borrowers that commissioners should pay a contract price that explicitly included the cost of capital.
Others felt that if they lost a contract then the loan should be forgiven. Of course, neither was the case.
As margins in public service contracts have become tighter, and austerity has eaten away at services the sector used to deliver, the connection between social investment and public service delivery has become looser.
Charities and social enterprises now borrow to support a wide range of business models, including trading with the public and with other businesses.
It is therefore important to look at the record of Futurebuilders outside of its specific policy context.
In terms of getting the sector more comfortable with the idea of taking on debt, the scale and profile of Futurebuilders had a profound impact. The new data also shows that for individual organisations the loans had a significant impact.
On average, total assets of borrowers grew significantly in the years after investment and then plateaued at that higher level. Generally cash holdings and profit also increased after investment, and remained around the higher level.
Futurebuilders borrowers created greater economic impact by employing more people. Staff numbers increased by more than 15 per cent in the three years after investment.
And with 40 per cent of the investees in the 20 per cent most deprived communities, those jobs were being created in places where they were most needed.
In terms of a social investment programme, Futurebuilders was a trailblazer because it mostly offered a blend of loan with some grant to help make the loans more attractive.
A higher proportion of grant was generally offered to those with a smaller turnover. This was important in making loans affordable, and in changing the perception of borrowing within the sector.
The programme was subsidised in other ways, too. There was no explicit return expectation on the capital lent out when investments were being made; the objective was more to test whether the sector could take on that level of repayable capital.
A subsequent target of 75 per cent return of capital was set, and this is likely to be easily achieved. With much of the loan book closed, current forecast write-offs and provisions stand at 17 per cent.
This capacity to tolerate capital loss is essential to being able to offer the investment products the sector needs, because it changes the ways in which social investors make decisions.
If there is no capacity to lose money then investors have to be risk-averse. The reach of Futurebuilders shows the importance of being able to absorb losses in this way.
The fund also had a management fee that has allowed for extensive post-investment support to be provided to some organisations in distress, and for loans to be reprofiled and amended as the borrowers’ circumstances inevitably change.
With average loans of 14 years, this patient and flexible approach to lending is a key lesson for the social investment ecosystem.
SIB is right to argue that the lessons from Futurebuilders point to the need for longer-term government subsidies to support the capital needs of the sector.
Much has changed in the nearly 20 years since Futurebuilders was created and there are now many more lenders ready to play a role in supporting the sector with the right sort of capital.
And while the public service reform narrative has faded in policy terms, the impact of the programme on supporting job creation in some of the most deprived communities in the country could not be more relevant.
The government should look back at Futurebuilders and see a success story to build on.
Seb Elsworth is chief executive of Access, a foundation that helps to widen access to social investment for charities and social enterprises