Long loan terms and small margins emerge as key lessons from trailblazing UK social investment fund
Data released today from one of the first social investment funds in the UK – the £142m Futurebuilders England Fund – offers new insight into what makes social investment work.
Futurebuilders was created in 2004 to provide loan financing to social sector organisations in England to help them bid for, win, and deliver public service contracts. The government-backed fund was first run by a consortium of Charity Bank, Unity Trust Bank, NCVO and Northern Rock Foundation. Since 2008 Social Investment Business has managed the fund.
In 2017 – by which time half of Futurebuilders loans had been repaid – then civil society minister Rob Wilson called it “one of the building blocks of social investment in the UK market”, crediting it with helping to “pave the way for the world-leading ecosystem we have today”.
It provides a useful model to guide the future of repayable finance for the social economy
Futurebuilders aimed to encourage third sector organisations, especially those in the health sector, to take a greater role in the delivery of public services. It made 403 deals in 2004-2010, with 359 organisations; about £120m was spent on blended finance (grant and loan) deals. Of the £142m invested, £98m has now been repaid, with 16 more years until the fund’s closure.
Nick Temple, CEO at Social Investment Business, said the fund had been “a success”, and provided “a useful model to guide the future of repayable finance for the social economy”.
- Nick Temple: Futurebuilders is the future, not the past: Lessons from a pioneering social investment fund
Findings from the fund, published today by SIB and its Social Economy Data Lab, with support from the government’s Department for Digital, Culture, Media and Sport, highlight three priorities for social investors, based on its experience:
- Patience: the average loan length under Futurebuilders was 13.9 years, with longer loan terms corresponding to higher returns.
- Flexibility: financial and non-financial variations were applied to a significant number of investments, representing the long-term commitment to supporting investees through difficult times.
- Investing where most in need: over 40% of investment went to the 20% most deprived areas in the country.
The report also shares lessons learned in the areas of employment, financial performance and financial returns, and subsidy, risk, and affordability.
Just as the average loan length, at 13.9 years, was significantly longer than the average social investment on offer in the current market, the average profitability from the Futurebuilder loans appeared to be a lot lower.
This subsidy has been essential to achieving the financial performance, employment growth and impact detailed elsewhere
The report revealed that the IRR [internal rate of return] on loans was “1.2% at the time of writing”, although this was anticipated to rise. But it added: “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 detailed elsewhere.”
However, it added that operating on small profit margins (with maximum median profit at £30k) and “subsidies through variations, flexibility, use of blend and longer time horizons”, had kept write-offs and provisions at only 17% (in 2019), against an original target of 25%. “Despite the purpose of Futurebuilders being one of higher risk, specifically to test use of repayable finance in the third sector, the fund has exceeded expectations in terms of financial performance,” the report found.
It concluded: “A blended social investment fund on the scale of Futurebuilders has not been repeated in the market since. It is important that these learnings from Futurebuilders and other available data sets are used to make new patient, flexible funds fairer and more effective for those most in need.”
Sharing the Futurebuilders learnings openly, and in detail is a step towards building the social investment evidence base
Temple said: “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.”
Kirsten Mulcahy, head of the Social Economy Data Lab, said: “The Futurebuilders data deep-dive showed us the enterprising nature of social sector organisations, and the importance of subsidy in social investment. But the data (and importantly, lack thereof) also highlighted gaps and areas of inequality within social investment, which we as a sector need to better understand and address.
“Informing these conversations is exactly why the Data Lab is so pleased to share the Futurebuilders learnings openly, and in detail. It is a step towards building the social investment evidence base, and the impetus needed to inform data-driven decisions on how to most effectively prioritise limited resources in support of those most vulnerable communities.”
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