Futurebuilders is the future, not the past: Lessons from a pioneering social investment fund

Data is released today from one of the UK's earliest social investment funds, the £142m Futurebuilders fund created in 2004. The lessons learned can help us to design the kind of targeted, flexible, patient finance needed now, writes Social Investment Business CEO Nick Temple.

Covid-19 has exposed the need for a new approach to how we invest in places and people. The pandemic has exacerbated inequalities between and within communities. The places that were already at risk – due to levels of deprivation, job insecurity, or low wages – will struggle to bounce back. The challenge now is not just to ‘level up’ but to raise the bar entirely to ‘build back better’ – with targeted, flexible, patient finance that helps rebuild our social infrastructure in the communities that need it most.

It is a central part of our current strategy at Social Investment Business (SIB) to learn from what we do and seek to influence the landscape of finance and support so it can be fairer and more effective. In an article towards the end of last year, I set out some initial findings taken from SIB’s work to date. In particular, I discussed Futurebuilders, the £142m social investment fund created in 2004, which SIB has been running since 2008. We believe Futurebuilders has been a success and is a model worth paying attention to and learning from in the current climate.

What has worked?

It is patient: The average loan length was 13.9 years, with longer loan terms corresponding to higher returns: more akin to mortgages than 3-5 year exits.

It is flexible: Financial and non-financial variations were applied to a significant number of investments, representing the long-term commitment to supporting investees through difficult times.

It invests where most needed: Over 40% of investment was disbursed to the 20% most deprived areas in the country, ensuring social impact objectives remain at the heart of social investment decision-making.

 

We have now been able to delve further into the data, and have published the learnings (with support from the Department for Digital, Culture, Media and Sport) and can therefore go further with the evidence to demonstrate why we think this type of social investment can work effectively for struggling places. Our analysis of the Futurebuilders portfolio has provided answers to longstanding questions around ‘what makes social investment work’. In particular, there are six key lessons to be drawn from the Futurebuilders experience:

1. It creates long-term employment:

Social sector organisations are productive and enterprising – this investment approach could work efficiently to generate jobs, grow incomes and create fairer employment. Our data shows that three years after receiving Futurebuilders investment, organisations increased their employment figures by 16%, and wages increased alongside business growth.

2. It improves the financial performance of charities and social enterprises:

Key indicators of financial performance – such as turnover, net assets, and cash – all increased for 3-4 years after receiving Futurebuilders investment; ultimately reaching a new and higher plateau. Following investment from Futurebuilders, charities and social enterprises are more sustainable, with profit cycles showing as positive on balance.

3. It generates tangible financial returns for investors:

Of the £142m invested, £98m has already been returned (with 16 more years until the Fund’s closure).

4. It supports more affordable investment offers:

Smaller organisations were provided with proportionately larger grants than bigger ones; this kind of subsidy enables smaller organisations to take on investment and become stronger and more resilient. Subsidised loan rates were 2.14% based on initial offer terms (smaller if considering the financial interest rate variations offered during investment management).

5. It needs subsidy to be most effective:

The IRR on loans is 1.2% at time of writing, which is anticipated to rise. This has been subsidised by long-term business support and portfolio management costs: if these are taken into account, the IRR is around -8%. This subsidy has been essential to achieving the financial performance, employment growth and impact of the fund.

6. It absorbs risk through subsidies:

Operating on small profit margins (with maximum median profit at £30k), subsidies through variations, flexibility, use of blend and longer time horizons, have kept write-offs and provisions at only 17% (in 2019), against an original target of 25%. Despite Futurebuilders being geared towards higher risk lending, specifically to test use of repayable finance in the third sector, the fund has exceeded expectations in terms of financial performance.
 

 

Building the future of social investment

Our findings should, of course, be placed in the context of the limitations of  our current data, and alongside an acknowledgement that financial resilience does not necessarily equal sustained or increased impact. Nevertheless, we are now at the point where learning and analysis can move us towards more concrete recommendations:

1) Future targeted social investment funds should be provided with grant blend and subsidy to provide the patience and flexibility best suited to the organisations those funds are there to serve and the reality of the local economies in which they operate. The same needs to be true at the wholesale level for others providing capital.

2) Social investment organisations need to embed impact throughout their processes to ensure that an alignment of mission with their investees is not just at a high level, but represented in decision-making, and through the detail of responsive flex as and when organisations need it.

3) Government departments should consider both ringfencing dedicated portions of existing (grant) funds for (longer-term) social investment and also creating dedicated social investment funds – which are proven to strengthen local economies, support better employment practices, and build social infrastructure

4) Those engaged in place-based work, whether national funders, local authorities or community-based partnerships, should be factoring in patient and long-term social investment as part of their renewal and regeneration strategies.

5) Data drives better decision-making within organisations, but also can make a collective case: the Social Economy Data Lab (which seeks to do for social investment what 360Giving has done for grant-making) can play a significant role in providing evidence and insight for relevant commissions, policy-makers, leaders and peers. It needs support.

These recommendations are powered and informed by funds like Futurebuilders and, more importantly, the track record of the organisations who received investment. If we want to build stronger, more resilient organisations that help create fairer local economies, improve and increase employment, and shape connected community spaces, then social investment should play a substantial and significant role in the recovery.

Futurebuilders wouldn't be the same now as it was in 2004: there are many more intermediaries, more capital (albeit not as flexible or patient in many instances), and a greater understanding and awareness – but the data and evidence from the fund can, and should, help us to build a better future for social investment that supports employment, income and infrastructure in the areas that will need these most.

At Pioneers Post we're working hard to provide the most up-to-date news and resources to help social businesses and impact investors share their experiences and get through the Covid-19 crisis. But we need your support to continue. As a social enterprise ourselves, Pioneers Post relies on paid subscriptions and partnerships to sustain our purpose-led journalism – so if you think it's worth having an independent, mission-driven, specialist media platform for the impact movement, please click here to subscribe.

Header image: P3 Charity, a Futurebuilders investee, helps people to get off the streets, maintain their own home and live independently