Growth Fund initial observations

Last week we published some analysis of 13 live growth fund applications. These include the funds which are already live and making loans to charities and social enterprises, those where we have made an offer and are in the process of setting up the fund, and those where we are undertaking due diligence, as at December 2016.

Before I go on to point out some of the trends I must make a few very clear caveats. Firstly this is obviously a small sample. Secondly, the data is taken from applications and not actual fund performance. This is what we and our applicants who are setting up a fund think will happen. In the context of the Growth Fund being a learning exercise and testing a new market, we ought to be pretty confident that it won’t work out like this. Finally as some of the data come from funds still being assessed they may not all launch, or not in this form.

Some of the highlights include:

  • We are seeing a good spread of different sorts of organisations applying, from existing social investors to community foundations (there are three in this cohort); local infrastructure organisations and housing associations.
  • We have coverage around the whole of England, with particular depth in the North West and South West. London is notably under-served currently.
  • Most funds cover multiple impact areas. Two have a sole focus on health and wellbeing and one on homelessness.
  • We are seeing a good spread across our three portfolio themes; but we have not yet seen many applications which propose an alternative product to a simple loan, such as a risk product.
  • The average fund size is £3.47m, with the average loan size to charities/ social enterprises at £62,231 (remarkably close to the average size of loan which SEUK members said they needed in the last state of the sector survey in 2015!)

Of particular interest is what this early analysis is telling us about the blend of loan and grant which is needed to set up funds to provide small loans to charities and social enterprises. While the Growth Fund has some particular parameters about how the grant can be used (which are explained in the Growth Fund guidance) we can pick out some interesting findings.

The first is intuitive: the larger the fund, and the more loans that the fund will make, the more grant the social investor needs to subsidise their operating costs in order to make the fund viable to run. (In fact the amount of this grant – which we call Grant A – which the social investor can apply for is linked directly to the total grant amount so this correlation is in fact pretty obvious.)

The second use of grant is much more telling of the target market which the Growth Fund is aiming to meet. This is the amount of grant which is blended with the BSC loan and lent to charities and social enterprises and absorbs potential losses in the fund – which we call Grant B. The amount of Grant B in the pot for lending is directly linked to the expected rates of default of those funds. From the data we see a range of proportions of Grant B in the pot for lending of between 10% and 35%. The mean of 27% is skewed by two outliers at the bottom end, so the median of 29% is a better guide.

Perhaps reflecting the diversity of the different proposals within these 13 applications, there is no correlation between these proportions of Grant B and either fund size or average loan size. Rather it is driven more by the specific groups of charities and social enterprises which that social investor wants to target and also to some extent their experience as a lender.

The third use of grant is where grants are offered alongside loans directly to charities and social enterprises – what we call Grant C. 11 out of the 13 application include Grant C. Of those which don’t, one intends to source grant from elsewhere and the other does not believe that their target market needs it. Overall 71% of the loans made to charities and social enterprises will include a Grant C element, and six of the applicants to the Growth Fund intend to make grants available to all of their borrowers.

The Grant C must always be the minority of the investment, and these grants range from 17% to 50% of the size of the loan, with an average of 32%.

There is a clear trend from the data that the larger the average loan size in a fund, the fewer the loans that will include a Grant C element. This may suggest that the charities or social enterprises dipping their toes in the water for the first time are perhaps likely to receive smaller loans and may need the incentive of the grant to make taking on the investment more viable, or feel less risky.

One particularly interesting aspect of the use of the grant at the front-line is that it doesn’t appear to be being used to mitigate making riskier deals. There is no clear correlation between the amount of Grant B in the lending pot and the average size of Grant C made to a charity or social enterprise.

This is of course early days, and so we will continue to monitor these trends and report back. The evaluation of the Growth Fund will also of course focus on the use of subsidy. We are also in the process of appointing a learning partner to help us reflect on what we are leaning from all of our programmes and what it means.

Particular thanks also to Helena and her fantastic excel skills in pulling the data together!