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New £30m fund to finance the social sector

Seb ElsworthTalk of social investment, providing finance to charities and social enterprises, has multiplied exponentially over the last few years, but the number of new investors actually making social investments has not kept pace with the hype.

Investors are understandably worried about entering a new market with a limited track record, concerns of high risk, and necessarily low returns so that the money is affordable to charities and social enterprises. At the Social Investment Business we have sought to address this by deploying our money in a new way, explicitly to take some of these concerns away from new social investors, through our strategy of ‘catalytic capital’.

This week sees the launch of the Third Sector Loan Fund, a new £30m pot to provide charities and social enterprises with the simple loans they need.

From the perspective of the social sector, the fund, managed by our partners Social and Sustainable Capital (SASC), provides a very simple product, far from the complexity of a social impact bond. However, under the hood of the fund is a highly innovative structure which recognises that different investors have different priorities regarding social impact, financial returns and risk. We believe this structure could transform the flow of capital to the social sector.

The Third Sector Loan Fund has three investors.

Firstly, the Social Investment Business, through our parent foundation, has invested £1.5m of catalytic capital. This takes the form of a repayable grant. It is the first to bear losses in the fund, thus helping to mitigate losses for other investors. However, if the fund performs as expected over its ten year life then the grant will be repaid, allowing the money to catalyse another fund in the future. This meets SIB Foundation’s goals of both supporting the social impact of the fund’s investees and helping to grow the social investment market.

Secondly, Big Society Capital (BSC) have provided £15m of risk capital into the fund. BSC are motivated by social impact, and also need to see a modest financial return. They are prepared to accept some risk and will be the next group to bear any losses from the fund, after the SIB Foundation. However, the fund is designed to pay them a financial return and their money has helped to attract substantial investment from a commercial investor.

This third, commercial, investment has come in the form of a £13.5m loan to the fund from Santander. This is believed to be the biggest single investment by a mainstream UK financial institution into a third party fund lending to charities and social enterprises. Santander want to support positive social change while achieving security of investment and an appropriate risk-adjusted rate of return. They will be the last to bear any losses in the structure, and receive an interest rate which recognises this low risk to their capital. Santander also wanted to work with a partner with a strong track record of lending to charities and social enterprises, and SASC’s close relationship with SIB delivers this.

The structure therefore has unlocked very significant amounts of capital from Big Society Capital and, crucially, a mainstream bank by tackling head-on the reasons why they may be nervous about making social investments. This blend of different sources of capital, with each investor able to focus on what’s most important to them, has huge potential to grow the supply of simple finance to the charity and social enterprises sector further.

Through our investment and involvement in the fund, we have twenty times more money providing simple loans to charities and social enterprises, and the strongest possible partnership to meet the financing needs of the social sector. The SIB Foundation is now focusing on working with other potential social investors to understand their needs and deliver other forms of catalytic capital to realise this potential.

Charities and social enterprises may apply for secured and unsecured loans of up to 10 years, between £250,000 to £3m to finance activities which allow social ventures to scale up, increase the impact they make, and generate income to repay their loan with interest. Find out more at www.socialandsustainable.com , or email us at info@socialandsustainable.com.

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