£30m third sector loan fund launches in the UK
The UK has today launched its largest ever loan fund for organisations seeking to address social challenges. The £30m fund will make both secured and unsecured loans of £250,000 to £3 million to social enterprises and charities, charging interest of 6%-12%.
Alongside £15m from Big Society Capital, £1.5m from the Social Investment Business, Commercial bank Santander has invested £13.5 million into the fund. It is hoped that this will set a precedent for other high street banks to invest in the social sector.
In a press statement following the launch of the fund, Chancellor George Osborne described social investment as “a great idea that uses the power of finance to tackle some of the most difficult social problems”.
“It is one of our priorities as a government, and an area in which Britain leads the world,” he added. On congratulating Santander, Big Society Capital and the Social Investment Business in developing the fund, he said he would “hope to see other high street banks following their lead".
Whilst the Chancellor's hope that high street banks should offer further support to the development of social investment will be broadly shared, his implication that other banks are not yet involved in this space will not be well received.
RBS has been running a multi-million pound social investment programme – the RBS MicroFinance Funds – since 1999 and was both host and sponsor for the government's own Social Investment Awards event just last month. Over the past three years, Lloyds has invested more than £6m alongside partners such as the Big Lottery Fund into a major support programme run by the School for Social Entrepreneurs. Earlier this year, Barclays become a major partner offering both investment and mentoring in the Corporate Social Venturing Challenge run by Big Issue Invest – the social investment arm of the Big Issue magazine. And both Barclays and RBS have invested significantly in the Community Development Finance sector.
A joint press statement from the partners in the new third sector fund said it 'paved the way' for future investments by heavyweight financial institutions. This in turn would free up more finance for social enterprises and charities.
Nathan Bostock, CEO of Santander UK, said: “We believe that supporting positive social change can be a commercial endeavour. Banks need to look at alternative ways to support all sectors of the UK economy.”
How it works
Fund manager Social and Sustainable Capital (SASC) has developed the model, which recognises that different investors have different priorities regarding social impact, financial return and risk.
So that the fund appeals to the respective priorities of mainstream financial institutions like Santander and social investors like the Social Investment Business, some partners take on higher financial risks and losses than others. The fund ‘tiers’ risks and losses in order to satisfy big financial players with financial return and at the same time create the sort of social impact that social investors seek.
The SIB Group are at the high end of the risk and loss scale providing a repayable grant of £1.5 million, and have agreed to take on losses and forego profits. In a statement on behalf of the Social Investment Business, CEO Jonathan Jenkins, said: “Our £1.5 million investment has catalysed a fund 20 times that size. This is a radical way for philanthropists to make their money work much harder to create change.”
Big Society Capital has committed £15 million of ‘risk capital,’ and is next in line to bear any losses but receiving all excess returns from the fund. Santander takes on the least risk and will get a fixed return on its £13.5 million investment. ‘Senior debt with a fixed-income return’ is the type if investment that Santander has made, which means it will be the first to be repaid, and will only face losses should all other investors lose all of their capital.
Nick O’Donohoe, CEO of Big Society Capital, said: “This is an important milestone in unlocking finance from mainstream financial institutions and exactly the sort of thing we want to use our investments to enable.”
Ben Rick, managing director of SASC, said: “We have raised £30 million in this fund by catering for investors with different priorities on risk, financial return and social impact. The fund absorbs this complexity so that frontline organisations get what they need – simple, straightforward loans.”
The Third Sector Loan Fund will run for 10 years and finance activities which allow social ventures to scale up, increase the impact they make, and generate income to repay their loan with interest. It will aim for example to provide investment social enterprises need to expand and compete with commercial organisations to take on new contracts to deliver public services. It is already open for business and considering its first investments.
SASC and the Social Investment Business now plan to develop similar funds, working with philanthropic funders such as trusts and foundations, corporate CSR programmes, and wealthy individuals, who are interested in using their money for the causes they care about.