Independent review highlights impact of blended finance in underserved communities and calls for more ongoing resource from Government

June 24th, 2022 by Seb Elsworth

An independent review, commissioned by DCMS and conducted by NPC, has highlighted how blended finance supports trading charities and social enterprises to increase their impact, build their resilience and reach more people, particularly in underserved communities.  

The report, based on interviews and data analysis with over 40 organisations, also concluded that there is a well-evidenced and ongoing need for grant subsidy from government into blended finance.  

Blended finance combines repayable finance with grants, often in the form of small-scale unsecured loans for charities and social enterprises that would not otherwise be able to access appropriate finance.  This often means lending to charities and social enterprises on more favourable terms so that they can deliver greater social impact. 

The report highlights how, given appropriate resource, blended finance could facilitate delivery of the Government’s Levelling Up agenda. Suggesting blended finance is a ‘valuable mechanism’ to achieving the four key objectives set out in the recent Levelling Up White paper and direct delivery of two of the Levelling Up missions. This would be achieved through increasing the number of resilient and growing organisations offering purposeful employment in so-called ‘left-behind’ areas.  

These conclusions rest on an assessment of the impact of blended finance to date. Overall, the report suggests that blended finance has enabled “organisations in some of the poorest areas to grow and increase their impact—either through reaching more people or through improving their impact.” 

  • Nearly half of blended funds go to organisations working in lower socio-economic areas of England (IMD 1-3).
  • The majority of deals go to organisations with a turnover under £1m, with over a quarter going to those under £100,000.
  • Two-thirds of organisations receiving investment from the Growth Fund increased their income and most of them attributed that to the Growth Fund (The Growth Fund is a £50 million partnership between The National Lottery Community Fund and Big Society Capital, delivered by Access through a range of social investor. The Growth Fund uses a combination of grant funding, made possible thanks to National Lottery players, and loan finance from Big Society Capital and other co-investors).
  • Analysis of a sub-sample of Growth Fund investees shows they had grown by 43% in the three years following investment[1] and had increased staff numbers by nearly 50%.
  • The report also identified a positive impact on the social investment market itself, particularly on the number and strength of social investors offering blended products. 

The independent review concluded that there is an ongoing need for government to support charities and social enterprises through the provision of grant subsidy into blended finance. Other sources of subsidy (such as mainstream lenders or foundations) were unlikely to move into this space without direct encouragement. Removing subsidy would be ‘harmful’ and reduce the number of organisations offering social investment to smaller organisations, particularly those in underserved areas.  

The report also poses several options on how best to deliver subsidy – and many of the options coalesce around the need for a dedicated wholesaler of grant – either continuing the status quo or making some intentional changes to how the market is structured in relation to a wholesaler of investment capital. I am pleased to see the option to ‘do-nothing’ was firmly rejected – recognising that the withdrawal of subsidy into blended finance would likely shrink the social economy in some of the most underserved areas and result in a loss of infrastructure and expertise that would be detrimental.  

Arguably, the detail of how this is delivered is not as important as the acknowledgement of the vital role that government can and should play. The most important conclusion – and the one I hope will be taken to heart – is around the important and long-term role for government in enabling charities and social enterprises to access the finance they need, particularly for those in underserved areas of the country. Providing grant for blended finance structures is a critical way of this being achieved.

The forthcoming consultation on dormant assets represents the most likely avenue for making this vision a reality. Alongside our partners, through the recently launched Community Enterprise Growth Plan, we’ll be advocating for blended finance to be part of the mix when making decisions about how best to spend this precious funding.  

Many in the sector will be aware of the history here – and how government support waxes and wanes over time. I hope this report marks the beginning of a sustained commitment to delivering change in some of our poorest communities and getting funding and finance to the places and communities where it is needed most.

[1] The sample size for this data was small, drawing from 48 out of a total portfolio of 148 organisations within 2 funds from the Growth Fund. Organisations were excluded if they did not have more than 3 years of published accounts post-investment or if they did not report any of the core metrics. Beyond the small sample size, several additional caveats accompany this data, including the potential for selection bias, (borrowers that went insolvent wouldn’t be included in the sample), and exclusion of the smallest of borrowers through lack of reporting requirements to company house. While there remain questions about how reliable and useful financial data is as a predicter of performance, this gives an indication of the relationship between social investment and organisational resilience.