This week we have opened an expression of interest (EOI) process for fund managers to access grant for blending with repayable capital to offer emergency support to charities and social enterprises in England. This is part of the £30m committed to Access from dormant account money which was announced last month. We plan to deploy these funds over two phases, this being the first. The second phase, which we expect to kick off in August, will focus on developing new blended finance solutions to support the sector through the recovery, with a focus on building more flexible and patient models of support.
The aim of providing grant to create blended products for social investors who are making emergency loans to the sector is to increase the number of charities and social enterprises who can use repayable finance as part of the mix in stabilising their finances in the wake of the crisis.
As I’ve written about in my third sector column, there are a limited number of organisations for whom repayable finance in any form is appropriate in a crisis like the one we are currently living through. When revenue dries up, taking on debt is usually not appropriate. There are some exceptions though, for example when an organisation has a short term cash flow challenge but where there is secure income in the future – such as a government contract or when regular fundraising can restart. There are also organisations who have experienced growth in some elements of their work as a result of the crisis and therefore need to invest. But in general emergency lending is not like normal lending.
So we are interested to see the extent to which emergency blending is like normal blending. We think it will look different, although if you read the EOI you will see that we want fund managers to give us their solutions rather than prescribing too much now.
Firstly we think that the blend will mostly be at the deal level, rather than in a fund structure. In the Growth Fund, with our partners in the National Lottery Community Fund and Big Society Capital, we have blended at three levels: in the fund manager (providing grant to support the additional costs of making a large number of small loans); in the fund (providing grant to absorb losses to protect the capital of the other investor(s)); and in the deal (providing a loan and grant mix to the borrower).
For emergency lending we expect it to be mostly at the deal level for a number of reasons. Some of these are practical: fund structures take time to set up, with negotiations between multiple investors. We don’t have time for this as the sector needs the money now. Therefore we plan to deploy the grant alongside investment capital which is already in place. It is also likely that some of the fund managers we work with may be taking advantage of existing loss protection programmes, such as the Government’s Coronavirus Business Interruption Loan Scheme (CBILS), and so the capital risk has already been addressed.
We also expect it is the grant at the deal level which will have the greatest impact on the ability of a fund manager to support a larger number of organisations in this emergency context. In the normal course of blending, the presence of grant providing loss protection in the fund has a profound impact on the risk appetite of the lender, and therefore turns marginal no decisions into yes decisions. We think that here the credit decisions will be more binary because of the nature of how the crisis plays out in different organisations. Either they have a line of sight to a reasonable revenue stream or they don’t. A bit more risk tolerance probably won’t make the difference between who can be supported.
We think blend in the deal will make more of a difference because of the range of problems it can solve, but again in an emergency context these might be different from the usual reasons for blending at a deal level. What we have seen with the deal level blending in the Growth Fund, and what we have learned from the many other fund managers who have tried this (including SIB via Futurebuilders and other programmes; and SASC and Key Fund with money from Power to Change) is that the grant, when deployed well, helps to make deals affordable which otherwise wouldn’t be affordable. It may be that this is because their capital need is greater than their ability to repay over time because of the tight margins in their impact driven business model. It might be that the grant is covering costs which are unlikely in themselves to be revenue generating.
These circumstances may be relevant to emergency lending, but we think we might also see the grant being used to mitigate some of the interruption in revenue while the loan meets their working capital or capital investment needs. We also think we might see a significant number of organisations seeking to quickly pivot their business model, where there will be some one-off costs which are unlikely to generate new revenue which can be funded via the grant, and overall where the future revenue is hard to anticipate.
So for these reasons we expect blending at the deal level will be the most useful tool for more no decisions to become yes decisions. This is our current hypothesis. But we’ve not done this before so we are very keen to see what the fund managers who wish to express interest in the programme come back with. Our approach is an enabling one as much as possible. (For example we haven’t defined expected deal or fund sizes because we want to understand market demand better, although we will need to limit the number of funds we support so that we can set up the programme quickly so we are unlikely to support a large number of small scale interventions.) But we are clear about what we are trying to achieve with this additional blend and we look forward to working with a range of fund managers to provide the vial support that charities and social enterprises desperately need now.