You may have seen the announcement last week that Resonance have launched the first fund lending to charities and social enterprises which has been supported by the Growth Fund. This is the first fund to go live and is now available for applications from charities and social enterprises in South West England working to bring about positive health and wellbeing outcomes (you can see more details here).
You may also have seen the general update on the Growth Fund and call for proposals, which mentions that we have made a further five commitments on the Growth Fund and in total committed more than one third of the fund.
That was the first update on the Growth Fund we have shared for a few months and those of you following our progress closely may have been wondering why things had gone a bit quiet. Well under the surface we’ve been pretty busy. I wanted to take the time to explain what’s been going on behind the scenes, some of the challenges we’ve faced in blending grant and loan and setting up this first fund, and how we are learning from this experience to seek to make the process smoother in the future.
We’ve now made six commitments from the Growth Fund and so are on track to commit the fund within three years. However, we’ve also made a decision with our partners at the Big Lottery Fund and Big Society Capital that we would only make specific announcements when our funds went live, not simply when we committed to making the investment. This was so charities and social enterprises could be clear what funding was available and from whom, rather than hearing about potential funding which may come on stream in the future. It’s also the case that until a fund is launched, things could still go wrong, and so we didn’t want to falsely raise expectations.
So we have kept quiet until all the work on setting up the fund was complete. While the principles of the Growth Fund had been established ahead of Access’s launch, we needed to work through how these principles would translate into detailed agreements governing the fund and each investment we make, and ensure the agreements would work in practice for the social investors.
From our side this has involved agreeing three major legal documents with Resonance and our partner organisations:
- An External Delegation Agreement for the Big Lottery Fund to delegate their grant making authority to Resonance (the EDA);
- A loan agreement with Big Society Capital and the South West Academic Health Science Network (the lenders); and
- A share pledge, which allows the lenders to take security over the new subsidiary company at Resonance which will manage the fund.
Developing these documents together for the first time on the Growth Fund hasn’t been simple and as with any commercial arrangement which involves a large number of parties, there are a number of issues to work through and resolve together.
Firstly, although the Growth Fund is new, we’ve not been quite starting from scratch. The Big Lottery Fund have been making grants for a long time, as have BSC been making investments. For the Big Lottery Fund the structure of the Growth Fund means that grant money will be used to make loans, and this means that some of the usual terms and conditions you would put around a grant don’t apply and have had to be adapted. For BSC it’s been a question of developing loan and security documents that work alongside the EDA and do not put disproportionate onus on the social investor.
As we have been working these points through with colleagues at Resonance it has made sense for us to develop guidance which seeks to explain why the documents are set up in the way that they are and the reasons for the terms which are in place.
Secondly, we want to make sure that the partner organisations’ legal documents are all consistent in their terms, covering things like what constitutes a default and what the social investors need to report to us. This latter point is particularly important so that the social investor is able to put in place loan agreements with the underlying charities and social enterprises which are as simple as possible and so that they are not duplicating reporting. This need for the documents to be consistent has meant that any change in one has to be replicated across the others.
Thirdly, we needed to work through the very specific flows of funds between the parties and how repayments of loan and in some cases grant would work. To safeguard public money, Lottery Funds need to be held on trust and so it has made sense for each social investor to operate two separate bank accounts when running the Growth Fund, one for receiving the grant and one to administer the fund itself.
As repayments come back from loans which have been made to charities and social enterprises we have needed to work out the specific waterfall of payments between making new loans, repaying the BSC loan and funding the social investor’s fees in different circumstances. It makes sense for this all to sit within a wholly owned subsidiary to isolate the risks both for Access and our partners, as well as for the social investor themselves.
Finally, we are very aware of the opportunity we have to develop resources which others can utilise in creating blended funds; be they foundations, government agencies or other social investors. While our legal documents do have some specific features especially owing to the sources of funds being public, our aspiration is that these can be used over time as templates to allow others to create similar structures in the future. This can hopefully also apply to our guidance documents. We are not there yet; but hope to be soon as the Growth Fund continues to evolve.
For their part, the team at Resonance have also needed to undertake some specific projects to get to the point of signing, in addition to responding to the drafts of the legal documents as they have come through. Each offer we make comes with some specific conditions which need to be satisfied before we can transfer the funds.
For Resonance these have included incorporating a new company from which to run the fund (in Resonance’s case this is a CIC), setting up bank accounts, hiring a manager of the fund, developing the investment manual which outlines the process for how the fund will be run, developing a service level agreement between the CIC and Resonance itself explaining the services which Resonance will provide to the CIC in the running of the fund, and clarifying how they will manage any state aid issues which may arise in the running of the fund. Some of these stages have only been possible once the documentation was sufficiently complete so for the first social investor to go through this process this has taken several months.
We are very grateful for the way Resonance have approached this process and have borne with us as we have been laying the track which we are now running down. Their constructive challenge to improve and simplify our documents has resulted in a better outcome and their hard work will result in the process being smoother for those who come next.
Based on this learning we have published updated guidance on the whole Growth Fund process, a revised expression of interest form which better captures what we need to know at the early stage of an application, and a revised business plan template which is sent to those we invite to apply and which builds on the previous application form. Crucially we now have updated template legal documentation for the next social investors to which we have committed funds; and we hope that this will significantly simplify the execution process.
The Growth Fund structure does present some specific complexities and we have already learned a lot about how these can be better tackled. We see our job, working with our partners and social investors on the Growth Fund, as absorbing complexity as much as possible. The point of the Growth Fund is to help charities and social enterprises to be able to access simple finance which meets their needs. This is what the Health and Wellbeing Fund (South West) will deliver, and the charities and social enterprises benefitting from the fund shouldn’t need to give any thought to the plumbing which sits behind it.
However for those interested in the mechanics of how blended finance can help to make this happen, I hope some of this is background and context is useful. Do let us know, and we will continue to share our experiences of making this sort of blended funding a reality.
