This month Ecorys and ATQ published the latest instalment of their Growth Fund evaluation, which is commissioned by The National Lottery Community Fund – a funder of the programme alongside Big Society Capital and co-investors. Alongside some programme data, the report is based on interviews that Ecorys and ATQ conducted with eleven of the fifteen social investors prior to covid-19 in early 2020. Here we reflect on some of the findings and recommendations of the report and share our take on some of these. We recommend also checking out this ACF blog from colleagues at The National Lottery Community Fund for their take on the picture so far.
Designed in 2014/15, the Growth Fund was established with a clear aim – to address a gap in the availability of small-scale (sub-£150k), unsecured, affordable investment to charities and social enterprises. It would do this by funding a number of new, small-scale, blended finance funds delivered by a range of new and existing social investors. Back in 2015 Access was a newly formed organisation, neither Big Society Capital nor The National Lottery Community Fund had done anything like this before, and the majority of the social investor organisations who are now delivering the programme had no history of running an investment fund – whilst of the few who were experienced lenders most had not previously been grant givers. From the start the Growth Fund was therefore true to its aim of being an experiment and a learning programme for everyone involved!
With this learning objective in mind, the Growth Fund was designed in a specific way to test one specific set of hypotheses with regard to use of subsidy to unlock small-scale lending. As described in Ecorys’ report, Grant A (operating cost subsidy for social investors); Grant B (fund level blend for first loss coverage) and Grant C (deal level blend for investors to provide discretionary grants to investees alongside their loans) each have a clearly defined purpose in and of themselves, although the multifaceted interplay between these grants results in a complex programme with a complex structure.
The original cap restricting Grant A to a maximum of 10% of the total grant within each fund is correctly highlighted in the report as having created challenges for social investors trying to build and develop their pipelines, particularly in the early-mid deployment periods and particularly for new funds managers. Whilst there is often understandably an objective amongst grant funders to see as much of their money as possible flowing directly to the charities and social enterprises, it is also clear that setting up and operating small social investment funds – and then providing wrap around support to the applicants and investees of those funds – requires significant subsidy to the social investors. The Growth Fund is contributing to a growing body of evidence around both set-up costs and hidden costs that social investors often incur beyond those which are explicitly funded.
The report encouragingly suggests that social investors overall feel positively about Grant B and Grant C individually. Grant B appears to have succeeded in enabling them to invest in charities and social enterprises where the level of risk would otherwise have prevented them from doing so, and Grant C is cited as important in enabling a focus on social impact and “wider social mission”.
However, entirely understandably, some of the social investors quoted in the report have suggested that greater flexibility and fewer constraints with regard to different pots of subsidy would be preferable. Whilst in Access’s view it is too early to draw any firm conclusions about what has or has not worked at a programme level (with regard to Grant B in particular), we continue to recognise the challenges that many of the social investors have faced around resourcing as a result of various programme constraints. We also absolutely agree that there will be adapted approaches worth exploring for any future programmes. For example, we feel there is scope for further innovation in future programmes around the operating cost model to explore the decoupling of operating revenue from deployment profile and early portfolio performance (e.g. through the role of grant). This would ideally provide greater flexibility and certainty for social investors when deployment profiles and loan book performance vary from initial forecasts – which of course they inevitably always will.
The evaluators’ report makes the important point that “there are fundamental risks and trade-offs for all parties involved that will inform the structure”. The difficulty (and opportunity) in a programme like this is in making the subsidy work for everyone. The structure must balance the requirements of the capital provider(s), the constraints of the grant source, the objectives and support needs of the wide variety of social investors delivering the funds and – most importantly – the needs of the charities and social enterprises that the programme is designed to serve. This programme is not only blending finance but had to blend interests, incentives and requirements from a range of partners that have come together with this common goal.
Access is in some respects in a unique position in this mix. Working closely with our social investor partners and each of our funder partners at both an operational and strategic level, we have always seen our main role as being to help understand and balance all parties’ needs by absorbing as much of the structural complexity as we can. Obviously we cannot and would not claim to be able to be objective or impartial in our assessment of the programme, as we are part of its delivery and only have first-hand experience of our own, intermediate role. Nor will we claim to have been able to absorb more than a relatively small amount of the complexity involved in the actual delivery of these funds. So with that in mind, when it comes to the various suggestions and recommendations that our social investor partners have helpfully shared with the evaluators we can only provide our own take on these, which we will keep relatively high-level at this stage.
In Access’s view, although the different types of subsidy and the way that they flow can certainly present something of a straightjacket for social investors at times, it also serves to reduce some complexity at the necessary levels. Access has learned through some of our other, subsequent programmes that going too far in the other direction – i.e. having very few constraints and guidelines at the start of a programme – can also create challenges, particularly in the design stage of new funds or grant programmes. We’ve found that in addition to welcoming flexibility and autonomy, delivery partners on different programmes have often sought clarity around where parameters and red lines exist – and sometimes even asked us for more if few have existed to start with! This seems to be in order to obtain confidence that there is a shared understanding of objectives, within which it can then be easier and more comfortable to design and innovate.
In many ways we view the more rigid elements of the Growth Fund’s subsidy structure (notwithstanding some emergency covid measures and flexibilities introduced subsequent to the period covered by the report) as one of this programme’s strengths. This is not because we shy away from adapting and testing new approaches – we feel the Growth Fund has certainly done both of those things. Similarly it is not because – with the benefit of hindsight – we would necessarily choose to structure everything in the same way again. The advantage (in addition to the programme’s success in bringing numerous partners together and delivering over 500 small investments to the frontline) is that the Growth Fund has been a faithful experiment in testing one clearly-defined approach to subsidy from which – by the end of the programme – we should be able to draw some clear and valuable conclusions.
The experience and recommendations of both our social investor partners and funder partners throughout the remainder of this programme will be key to informing what those conclusions should be. We therefore look forward to engaging with further outputs of Ecorys’ evaluation over the coming years, as well as to continuing to collate and disseminate the data and learnings that Access is gathering through our role in the programme, alongside our partners.
Finally, it would be remiss to close without reiterating the significant challenges that covid-19 has created for the programme, our partner organisations and – most importantly – the charities and social enterprises that we all exist to support. Ecorys’ report is based only on interviews and data from prior to covid. A lot has changed since, which will no doubt be the focus of future evaluation content.