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By John Kingston
Director
Venturesome
In the past five years, there has been increasing interest from both donors and charities in exploring new ways of providing support to charities, other than grants or donations.
The Social Investment Task Force Report (2000) highlighted opportunities to use a range of financial mechanisms that are commonplace in the private sector, yet almost unknown in the charitable sector. For example the use of senior debt is accelerating with, inter alia, Triodos and Charity Bank demonstrating rapid growth.
The evolving social capital market now offers charities a range of funding, spanning a spectrum of risk profiles, where risk is defined as the chance that money will be repaid.
What is risk capital investment?
In the risk capital model, funders want to see their money 'recycled' several times, rather than given away once. That is, funds are committed to a charity and then repaid to the funder, usually with interest. These funds are then reinvested, hence the term 'recycled'. They can be cost-effective tools, as often interest is not charged on money not drawn down.
The recycling principle has been extended to the use of underwriting instruments. These enable charities to reduce the level of their financial risk since they need not actually draw down the money but proceed in the confidence that they could.
Risk capital funds may therefore form a part of an organisation's overall financial risk management strategy.
Risk capital funds tend to assume higher financial risk than would a conventional bank lender, for whom, in the absence of security, the charity or project could be assessed as too risky or to have too high an appraisal and monitoring cost. Whilst risk capital funds do not necessarily expect a higher financial return for this increased risk, they expect and monitor social returns on their investments. The total return is therefore made up of both financial and social elements.
Risk capital funds such as Venturesome frequently deliver a mix of finance, advice and access to the social investment network, in some cases even advising against risk capital or signposting to other providers. Experience to date suggests charitable organisations tend to be risk averse, and show a low rate of default.
Demand for Risk Financing
Risk capital funds support charities that find it difficult to raise funds from more traditional sources, such as grants or bank borrowing. This may be because the application falls outside of traditional grant-makers' criteria, is not project specific, has too great a commercial characteristic or because competition for funding in the sector is intense.
Awareness of the potential role of risk capital is growing, and there is greater willingness amongst trustees to consider such finance in a charitable organisation. Charity trustees, who are obliged to consider the management of risk in their organisations, are beginning to see risk capital as an appropriate element of the financing mix of their organisations.
Example: the demand side A long-standing charity working in urban regeneration required financial support to develop a fee-earning consultancy service, which was closely linked to its mission. Trusts and foundations contributed 95% of the charity's annual income. While these organisations supported the charity's core costs, they viewed the consultancy as 'commercial' and therefore not appropriate for grant support. Venturesome viewed the project as 'on-mission' trading with the potential to contribute to the core mission, and provided £50,000 as a subordinated loan to help develop the consultancy. An interest rate of 5% (similar to market rates at the time) was charged, with a step-up each year while any balance remained outstanding. A capital repayment schedule was agreed whereby Venturesome would recover its funds over five years. The consultancy business progressed well - from £40,000 annual turnover in 2001/02 to £250,000 in 2004/05, and the charity repaid the Venturesome loan well ahead of schedule (Venturesome does not charge early redemption penalties). |
Supply of Risk Capital
Risk capital mechanisms are being explored and supplied by individual donors, trusts and foundations and central government. Support can be given directly, although intermediaries offering the opportunity to invest in risk capital funds are increasingly seen as an efficient route to market for those seeking to maximise the use and social impact of their money.
Organisations operating in this space include the following.
Adventure Capital Fund is an approximately £7 million fund offering patient capital (long- term loans at favourable interest rates) and equity-like investments, coupled with advisory time in the form of dedicated supporters. It is funded by a consortium of government departments and Regional Development Agencies.
Futurebuilders England is a Treasury-supported fund of £125 million aimed at helping voluntary organisations working in government's priority areas to provide public services. The fund focuses on loans, equity and quasi-equity, with a small number of grants as an element of a broader financing package.
Bridges Community Ventures is a venture capital fund investing in ambitious businesses in deprived areas in England. The UK Government committed £20 million, matched by £20 million of private investment. The scheme focuses on for-profit businesses.
Venturesome is a £5 million fund invested in by a mixture of corporate investors, trusts and foundations and individuals. Venturesome uses investment mechanisms such as underwriting, unsecured loans and equity-like instruments to support charities with commitments in the range of £20,000-£200,000. Venturesome funding falls into three main categories: pre-funding of capital fundraising, working capital and development capital. Venturesome aims for its funds to be re-used four-to-five times.
Additionally, providing lending support are:
Charity Bank takes deposits in order to create a source of affordable loans and to provide related support services for the charitable sector. It does not offer grants and will not commute loans to grants.
Triodos provides banking services to individuals and social and environmental businesses and charities, including lending services.
Involvement of individual philanthropists
As the sector grows, individual philanthropists are increasingly taking an investment approach to their charitable giving. By investing in the developing intermediary risk capital market, philanthropic investors benefit from:
Efficiency: Investors hope to see their charitable money recycled several times, in contrast to one-off donations.
Access and research: Investors benefit from a route to market, and particularly to small, entrepreneurial charities that they may otherwise miss. This access is backed up by due diligence and screening by a trusted source.
Engagement: Some funds may offer investors opportunities to engage in different ways, from the simple commitment of funds to the opportunity to visit charities, select investments and provide on-going mentoring support.
Innovation: Funders taking an investment approach are helping to build the emerging social investment market and have benefited from the mutual learning of their peer group.
Example: individual investor Four individual philanthropists have supported Venturesome with combined investment of £1.2m. One example is Peter Baker who makes grants through his charitable trust. He wanted to explore other ways of using his money, and wished to focus on smaller charities where his charitable funds could make a meaningful impact. From his trust, Peter invested £200,000 in the Venturesome fund. Initially, Peter selected the charities in the Venturesome portfolio that he wished to support. As time went on, he moved to a less hands-on approach, allowing his money to be committed as a percentage of each Venturesome deal. He receives regular reports on his investments and face-to-face meetings as appropriate. Peter has now committed 100% of his initial investment to ten charities, of which £50,000 has been recycled and is currently available for re-investment. |
Venturesome provides stand-by facilities, unsecured loans and equity-like investment support to charities and other social enterprises achieving high social impact. It aims to provide custom-built funding for charities who expect to repay the money, filling the gap in the financing spectrum between grants and bank loans. For more information, visit www.venturesome.org.
© Copyright 2007 Association of Charitable Foundations (ACF)
Every effort has been made to ensure that the information provided in A Guide to Giving is current at the time of publication (October 2005), but the Association of Charitable Foundations (ACF) cannot guarantee its accuracy. Furthermore, there may have been subsequent changes to legislation, policy and/or to tax bands and rates. If you are considering any investment you should seek appropriate professional advice. This guide is not intended to replace professional advice on particular investments or the manner in which tax relief is applied under any scheme, and you should not rely on it for such purposes. You are responsible for your own tax and financial affairs and so should seek independent advice. ACF can not accept responsibility for the investment choices you make.
Views expressed in A Guide to Giving are not necessarily those of Philanthropy UK or the Association of Charitable Foundations.
Coutts & Co is not responsible for the content of A Guide to Giving, and the content does not constitute any advice whatsoever from Coutts & Co. The case studies and profiles within the Guide are not necessarily clients of Coutts & Co. Coutts & Co shall not be liable for any loss whatsoever arising from your reliance on any information produced in the Guide.
