It is pleasing to see the publication of the first two reports from the independent evaluation of the Growth Fund, written by Ecorys and ATQ Consultants. The evaluation is running over the life of the Growth Fund and so these first two reports focus on early lessons, one from the set-up of the overall programme, and the other on evidence of delivery of loans from social investors to charities and social enterprises.
It is also pleasing to see that overall, these reports paint a positive picture of what the Growth Fund is achieving. Loans are reaching the right organisations (more than half turn over less than £250k); at the right sizes (median investment size is £50k); for the right purposes (to support the development of trading activity). Although there is some significant complexity in the Growth Fund structure owing to the nature of the partnership and the respective sources of money, the programme partners and social investors appear to be absorbing this complexity and not passing it on to the charities and social enterprises who benefit.
As the evaluation states:
Experiences of the loan/grant application process have generally been positive so far. VCSEs valued the simplicity of the process, building up a strong relationship with the investor and having an honest and open dialogue.
As this quote from the case studies suggests, VCSEs are benefitting from going through the investment process beyond just accessing money, although it is not without its challenges. Building a better understanding of their own business model is something which will outlive the individual investment. Some very early data on their ability to build resilience and develop their impact is encouraging although should be treated with caution at this stage.
In terms of the experiences of the social investors who have themselves taken on the blend of grant and debt from the Growth Fund and who are making loans to charities and social enterprises, the report highlights some of the challenges they are having with deployment of loans. Overall at the time of writing the Growth Fund was slightly behind on projected deployment and there is a mixed picture within the different funds, all of which are at different stages of development. There are lessons for social investors about the time is takes to build a pipeline of investment and the work needed to market loans to the sector and support capacity building.
However, it is worth noting that in many cases the forecasts against which deployment is measures were based on a significant number of assumptions. The fact that 166 charities and social enterprises had been supported with loans at the time of writing (this figure is now over 250) is a major achievement.
There are also important lessons about how the operating costs of smallish loan funds are paid and how the right incentives are created for the funds to make the best investments. Tying operating income to the speed of deployment was probably not entirely appropriate for all the funds and future blended finance programmes would benefit from a diversity of approaches to how fees are paid.
The social investors delivering the Growth Fund have not been able to use the blend of grant and debt as much as hoped for to develop new types of social investment products for charities and social enterprises, such as longer term more equity-like patient capital. While this is a shame, it was also not the intention of the Growth Fund, which was designed to fill the gap in the supply of smaller scale unsecured loans for the sector. Future blended finance programmes should incorporate greater flexibility if they wish to achieve this aim.
Encouragingly, greater exposure to the market of charities and social enterprises seeking smaller loans seems to be changing the behaviour, and in some cases the strategies, of social investors. Indications are that they want to continue to explore this end of the market further and are increasingly sold on the concept of utilising blended finance to serve this market.
From the perspective of the programme partnership: Access, National Lottery Community Fund, and Big Society Capital, and the original aims of the Growth Fund, the breadth of the portfolio of 15 social investors is really encouraging. As the evaluation states:
The programme had achieved its aim of encouraging a wider group of organisations to become social investors and offer loans and grants below £150k. Many stakeholders interviewed were excited by this development.
Over the course of the three years during which time the Growth Fund was making new investments and supporting social investors to establish their funds we learned a great deal about how to improve the investment, legal, and set-up process. While social investors reported that aspects of the due diligence process was useful for them in improving their plans, it was a lengthy and intensive process. More recently Access and partners had been able to make much better use of templates, for example for legal documents.
Bringing together three organisations (one of them, Access, being entirely new) with different objectives, cultures, ways of working and financial tools has not been without its difficulties and the report is right to highlight some of the challenges in the programme partnership. However, we are all learning extensively from each other and overall the Growth Fund is benefitting from the range of expertise which the partners each bring.
This is the first stage of an evaluation which will tell us much more over the coming years about how well the Growth Fund is working and in particular the value for money of the grant subsidy which has gone into the programme. Later this year Ecorys will produce two learning insight reports on building a better understanding of the underlying business models of charities and social enterprises being supported through the Growth Fund, and of the flows of subsidy across the programme and its implications for other blended finance programmes.
With much for data being generated from the programme, crucially over the coming years we will be able to see a much clearer picture about how smaller unsecured loans are supporting charities and social enterprises to build their earned income streams, and develop their resilience to better meet the needs of their beneficiaries.
For more information on accessing investment via the Growth Fund, see www.goodfinance.org.uk
Read National Lottery Community Fund’s thoughts on the evaluation update.
Read Big Society Capital’s thoughts on the evaluation update.