Risk Finance: past, present and future

In the first of his new series of guest blogs, David Floyd considers the types, take-up and potential of qausi-equity and other risk finance models, and asks to hear from organisations considering taking on social invest

2018 is a year when we will begin to get the answers to some of the major unanswered questions in UK social investment. With many of the funds supported by the Access Growth Fund either already up-and-running or planning to open soon, the supply of unsecured finance for charities and social enterprises seeking £150k or less is increasing significantly.

A project which I worked on, The Alternative Commission on Social Investment, was one part of the movement (of both charities and social enterprises, and investors) arguing that there was unmet demand “for cheap, risky, long term growth finance in the tens – but not hundreds – of thousands”.

With further funding from dormant accounts announced at the start of the year, to complement the blended capital already available we’ll get to find out whether we were right and significant numbers of charities and social enterprises do really want it.

But there’s also the question of when and whether loan finance is what’s needed. Even with the subsidies and support available, the right next step for many charities and social enterprises may still be a grant.

Last year, saw increased interest from Big Society Capital and others in the role of ‘venture philanthropy’, which often involves grants funding provided with an investment mindset.

For some charities and social enterprises, though, the best alternative to a loan might a different kind of repayable finance.

Last year, my Access report, Social Shares, looked at alternative models of finance for charities and social enterprises seeking investment in situations where it is not clear when (or if) the investee will be in a position to repay the investment without doing significant harm to the business.

That report focused primarily on ‘Quasi-Equity’, a model where the investee repays an investment based on paying the investors a % of income (or, less usually, profits) for an agreed period rather than a set series of monthly repayments.

Quasi-Equity is much talked in UK social investment but rarely used. Quasi-Equity investments have been made in a wide range of sizes (from the low tens of thousands to the millions) and in sectors from transports to education to mental health but the total number of Quasi-Equity deals was estimated at 30-50 out of an estimated 3500 deal in the social investment market at that time.

There are a range of reasons why Quasi-Equity has proved to be more popular rhetorically than in practice. Investors find the deals complicated and expensive to set up compared to conventional loans and fear attracting investees who will see the investments as ones that do not need to be repaid.

On the other hand, for many charities and social enterprises, Quasi-Equity has been an unknown obscure part of a social investment market that already seems confusing enough in itself.

The report then considered five other possible models of risk finance that might have the potential to meet the needs of some charities and social enterprise, and some social investors.

These models were:

  • Business Event Trigger – investment repayable when business achieves specific milestone eg. wins contract; achieves planning permission.
  • Permanent Capital – investment made with no fixed repayment date or specific plan for repayment; investee pays fee for continued use of money plus agreed return.
  • Investment Veto – investment made with no fixed repayment date but investor has veto over further investment until repaid with return.
  • Trust-based Seed Capital – small scale early stage investment with simple terms relying on trust between investor and investee.
  • Royalty Investment – product-based investment repaid as a percentage of the sales price for each product sold.      

The conclusion of the Social Shares paper was that while there is a perceived need for ‘risk finance’ to be more widely available within the social investment market, it was unclear which models were best applied to which organisations, sectors or business models.

In recent months, we have begun an additional phase of research to consider that question. We have been talking to charities and social enterprises across a range of sectors to understand their potential interest in social investment and to get an idea of which model (if any) of risk finance might be applicable to their situation.

We have also been looking at examples of how social motivated investors in other countries are using risk finance and my next blog will focus on that.

We are still keen to talk to some more organisations who are considering social investment (or have used other forms of social investment in the past) and think risk finance might be right for them.

If you’re interested in doing a short interview (around 20 minutes) please contact me – david@socialspider.com – and I’ll send you further details and agree a time.


Image credit: Paul Cross