Contents
ANALYSIS OF EVIDENCE FOR LOCAL IMPACT FUNDS The National Picture
THE NATIONAL PICTURE The purpose of this analysis is to understand better the state of the charity and social enterprise sector across England, get a sense of the potential demand for social investment in LEP areas across England, and make some recommendations for how Local Impact Funds (LIFs) could potentially meet unmet demand for local social investment.
This analysis will be used to inform the exante evaluation for financial engineering instruments (FEIs) being led by the European Investment Bank (EIB) and Regeneris, which in turn will inform the argument for FEIs in the operational programme for the European Regional Development Fund (ERDF). It will also be used to inform development of LIFs in individual LEP areas, and to support the rationale and evidence case for a national fund of funds structure for LIFs.
Broader context This study focuses in particular on the demand for social investment amongst charities and social enterprises as we know from all of the available research that access to appropriate finance is the single biggest barrier to the growth of the sector.1 Data from Social Enterprise UK (SEUK) suggests that 48% of social enterprises sought to raise external finance in the past 12 months (from a range of options including grants, loans, overdrafts and equity), twice the proportion of SMEs; 39% cited access to finance as the single largest barrier to growth and sustainability – the most common barrier experienced.
1 The People’s Business, SEUK, July 2013
2
The national picture The social investment market is small when compared to other financial markets, but is growing at a significant rate. Recent evidence shows that there were an estimated 180,000 SME social enterprise employers in the UK. They are creating jobs, employing around two million people in 2012 and contributing some £55 billion to the UK economy, bringing wealth into communities and helping to rebuild the economy.2 And this sector is growing. When compared with SMEs, 38% of social enterprises saw an increase in turnover compared with 29% of SMEs, and 22% of social enterprises experienced a decrease compared with 31% of SMEs.3 The potential funding gap for charities and social enterprises in the UK is estimated at £1.3 £2.1 billion annually.4 In contrast, the provision of social investment to charities and social enterprises in 2012 was £286 million in 2012.5 A report commissioned by BSC in 2012 indicated that demand for social investment could rise from £165 million of done deals in 2011 to £286 million in 2012, £750 million in 2015 and to as much as £1 billion by 2016.6 This amounts to an average 38% growth in demand year on year. Yet this is not enough to meet the demand from the sector. The local picture Evidence indicates that the broader voluntary sector, in particular charities and social
2 Social enterprise: market trends, based upon BIS Small Business Survey 2012, BMG research, Cabinet Office, May 2013. 3 The People’s Business, SEUK, July 2013. 4 Mind the Finance Gap, CDFA, January 2013. 5 The First Billion, BCG, September 2012. 6 The First Billion, BCG, September 2012.
enterprises, is well placed to access more social investment in local areas. The landscape at the local level is evolving as a result of the Government’s public service reform agenda. There has been a steady change in levels of voluntary income (grants) and earned income (contracts) from Government funders to charities and social enterprises. From 2000-01 to 2010-11, grants from government declined from £4.6 billion to £3 billion.7 In contrast, contract income from government was worth £11.2 billion in 2010-11, a real increase of £6.7 billion (151%) since 2000-01 (when it was worth £9.1 billion). Of the £11.2 billion of services being delivered by charities and social enterprises, only £6.1 billion currently is from contracts for services at a local level. This constitutes 8.8% of the total value of local government annual expenditure on commissioning and procurement of goods and services and represents the immense potential offered by the Localism Act and other initiatives to encourage people to take on services at a local level. Many charities and social enterprises will look to develop existing and new income streams in response to the economic downturn, seeking social investment to cover a range of financing requirements. There are over 163,763 charities in the UK, controlling assets valued at over £36.7 billion. Many of these are organisations already delivering critical services in communities, and are well placed to take advantage of the Localism Bill to take on more assets and deliver additional services in their local area.8
7 UK Civil Society Almanac, NCVO 2012 8 UK Civil Society Almanac, NCVO, 2012.
3
In addition, social enterprises are more likely than mainstream SMEs to reinvest profits locally, actively recruit local staff, employing people that are disadvantaged in the labour market from disadvantaged communities.9 Evidence indicates, in fact, that every £1 of public sector expenditure invested in social enterprise creates £6.25-£8.33 of gross value added. This compares to a lower return of £3.57 across all markets.10 Investment readiness needs of the sector In addition, a recent survey of voluntary, community and social enterprise organisations commissioned by the Big Lottery Fund, indicates that:11 •
Investment readiness, or lack of it, appears to be a major cause of drag to the acceleration of social investment, reflecting a similar experience in the ‘mainstream’ SME market.
•
The potential demand for investment readiness support from the VCSE sector is in the region of 70,000 or more organisations in the ‘foreseeable’ future (up to five years).
Key findings
demonstrates that there is a potential £73 million annual demand for local social investment at the present time. This analysis complements data collected at national level which demonstrates an annual demand of £1.3 billion - £2.1 billion for investment into charities and social enterprises.
Methodology Sample characteristics Evidence for this research was gathered from six main sources: five funds managed by Social Investment Business (please see below), and the “Future Financing & Support Needs” survey. Below is a brief description of each fund: •
Futurebuilders England Fund: a £150 million fund managed by Social Investment Business on behalf of the Office for Civil Society in the Cabinet Office. It provides loan financing, often combined with grants and professional support, to third sector organisations in England that needed investment to help them bid for, win and deliver public service contracts.
•
Communitybuilders Fund: a £40 million fund endowment from the Department of Community and Local Government. It provides loan financing, often combined with grants and professional support. It aims to make sustainable investments in community enterprises to build their long term financial viability and increase their ability to deliver significant social impact in their communities.
•
Investment and Contract Readiness Fund: a £10 million grant fund, managed by Social Investment Business on behalf of the Cabinet Office. It provides grants to high growth potential social ventures to enable them buy in external business support. It
The principal finding from the analysis shows that that there is substantial unmet demand for social investment in local areas across England, demonstrating a significant market failure that ERDF can be used to redress. Analysis based primarily on data from Social Investment Business (SIB) historic portfolio of investments and grant awards, and from a national ‘future financing needs’ survey
9 Fightback Britain, Social Enterprise UK (SEUK), November 2011. 10 Evaluation of Community Development Finance Institutions (CDFIs), GHK, March 2010. 11 Investment Readiness in the UK, ClearlySo and New Philanthropy Capital, June 2012.
4
aims to ensure social enterprises are better equipped to secure new forms of investment and compete for public service contracts. •
•
Social Enterprise Investment Fund: a £90 million fund managed by the Social Investment Business on behalf of the Department of Health. It provides grant and loan financing, and aims to enhance the role of social enterprises in the provision of health and social care services. Adventure Capital Fund: a £10 million fund offering grants and loans to medium-sized, community-based organizations wishing to engage in social enterprise activities. Managed by Social Investment Business, it was funded by the Home Office, Office of the Deputy Prime Minister and four Regional Development Agencies.
Additional data was collected for two LEP areas: Pan London and the Greater Lincolnshire from two different sources, Funding London and CAN Invest. CAN Invest provided information from two different funds: •
CAN Breakthrough Fund: a £1.6 million fund providing grant funding and management support to enable established social ventures with a minimum turnover of £500k, three years’ trading and a scalable business model, to scale up and maximise social impact.
•
West Lindsey Community Assets Fund: a £1m fund managed by CAN Invest on behalf of the West Lindsey Authority. It provides grant and loan finance and business support to help community groups manage community assets and start up or scale up community enterprises in West Lindsey.
One important caveat is associated with our data collection: data has been gathered from different funds, each of which had different
investment priorities and requirements (i.e. size of social enterprises, minimum annual turnover, and minimum trading years) and focus (i.e. health and social care, community assets). Another important caveat is the limited sources of data: our research is mainly based on our own portfolio of historic grant and loan investments. SIB is one of UK’s largest social investors, however, we understand any additional local investment data would contribute to a more robust enhanced analysis. It is also worth noting that we have excluded certain SIB managed funds from this analysis, including the £20 million Social Action Fund (SAF) and the £27 million Community Assets and Services Grants Fund (CASG) as they are grant funds primarily related to revenue for project delivery, and would not shed any light on the organisational development and social investment needs of the sector. Our ‘Future Financing & Support Needs’ survey is a 30 question needs analysis survey that has been conducted since 201It seeks to better understand the current financing gap in the sector in order to offer products and services best suited to the needs of existing charities and social enterprises. SIB used all its existing relationships and networks available to develop the sample frame and obtain the data. The sample frame was further enhanced by relevant organisations contacting their own network/ members and encouraging them to participate in the survey. We note certain areas may risk being underrepresented. We note certain areas, in particular Pan London and the Liverpool City Region, have obtained a higher number of survey respondents. This can in part be explained due to close connections to local intermediaries in certain areas encouraging the sector to respond.
5
Research focus
Glossary of terms
In our research, we have primarily focused on assessing the need for the following products:
Below is a short description of terms, commonly employed during our analysis:
•
Unsecured debt: Unsecured lending accounts for only 5% of the social investment market, even though it is the investment type that is most accessed by social ventures (39% of social ventures access unsecured loans only).12
•
•
Loans smaller than £250,000: Evidence suggests that there is demand for unsecured loans of under £250,000 that is currently not being met by existing social investment provision. According to our survey data, 69% of social enterprises seek unsecured loans of under £250,000. According to one study, the median average unsecured loan sought is of £25,000, and the mean average is of £53,000.12
Development grants: development grants include capacity building grants, feasibility grants, investment readiness grants and social impact reporting grants. They are mainly focused on helping an organisation develop and strengthen its business to become sustainable and ready to raise investment, bid, win and deliver public contracts.
•
Deprivation: general lack of resources and opportunities. The Department of Communities and Local Government has developed a qualitative study which ranks areas in English local councils (Indeces of Deprivation), which takes into account income, employment, health, education and training, barriers to housing and services, crime and living environment.
•
Capacity building grants: grants to help organisations strengthen their organizational systems and structures, strategies and governance by increasing their sustainability and effectiveness.
•
Capital grants: grants that include property lease or freehold, purchase or refurbishment including associated costs, equipment, intellectual property and working capital.
•
Feasibility grants: grants to help organisations develop viable sustainable projects including support and grants for business development.
•
Investment readiness grants: grants that cover both external support and internal costs. External support must be offered by an approved provider and will include a range of different activities such as: business planning and strategy; marketing, promotion
•
•
Development grants: There is an urgent need to provide a tailored package of business wrap around support for charities and social enterprises in order to help them become sustainable and investment ready. Financing in deprived areas: In order to achieve equal opportunites amongst different communities in England.
In our LEP analysis, reference has been made to each LEP economic plan and, where applicable, to the LEP 2014-2020 Local Impact Fund allocation. Main investment priorities and major market failures for each LEP have been briefly described in order to better understand how our recommendation for a local impact fund aligns with LEP economic and social priorities.
12 Growing the social investment market: the landscape and economic impact, prepared for the City of London, Big Lottery Fund, Big Society Capital, and Her Majesty’s Government by ICF GHK in association with BMG Research July 2013
6
and networking; financial modelling; development of products and services; drawing in appropriate talent and skills. Eligible internal costs include additional staffing and equipment costs but do not include capital or general overheads costs. •
LSOAs: Lower Super Output Areas
•
Social impact reporting grants: grants ranging from £1,000 to £10,000 to help an organisation measure and report its social impact.
Figure 5.1 Regional share of charities and social enterprises 6.90% | East Midlands 6.90% | East of England 7.46% | North East 8.52% | West Midlands 9.23% | South West 9.65% | South East
Summary of our findings
13.52% | Yorkshire and The Humber
a. State of the sector 15.63% | North West
Based on our analysis, over 1,200 charities and social enterprises have taken on social investment and / or grants support. Figure 5.1 shows a breakdown of charities and social enterprises by region. Greater London, with c.300 different charities and social enterprises in our study, is one of the richest areas within England for social enterprise activity followed by the North West (over 200 organisations in our study). •
The main sectors charities and social enterprises cover are the following:13 --
22.18% | London
Figure 5.2 Charities and social enterprises by social sector
4%
28% 1% 14%
6%
Physical, mental health and healthy living (28%);
--
Education and learning skills (23%);
--
Employment and training (14%);
Figure 5.2 shows a breakdown by main social sectors.
4% 4%
6% 10%
23%
Physical, mental health and healthy living Education, learning skills Culture, arts, sport and heritage
--
Children, young people and families (21%);
Housing, property and essential needs Consulting, finance and legal assistance Employment and training
13 Figures are based on our research of 15 LEP areas. We consider these areas to represent national statistics.
Community and transport Environment/Recycling/Waste Management Workspace rental Other
7
--
People with disabilities (15%).
Figure 5.3 shows a breakdown by beneficiary groups.
Figure 5.3 Charities and social enterprises by beneficiary group
b. Grants analysis
22%
24%
Based on our data, over 1,600 grants were made totaling over £128.9m. Some of our key findings include14: •
Average size of grants was £60,027;
•
94% of grants were less than £250,000;
•
58% of all grants were development grants out of which 34% were for investment readiness support, 32% were for capacity building, 31% were feasibility grants and 3% were for social impact reporting. The remaining 42% were capital grants.
Figure 5.4 shows a breakdown by type of grants.
1% 4% 16%
3% 5%
4%
12%
9%
Pre School, children, young people, families People with disabilities, injuries Elderly people Minorities Women Unemployed
c. Loans analysis
Ex-offenders and prisoners
Based on our data, over 460 loans were made, totalling over £172.5m. Figure 5.5 shows a breakdown of the loans by region.
People with addiction (alcohol, drugs...) Homeless Other or general public
Some of our key findings are:
15
•
The median average size of loans was £140,000;
•
69% of all loans were of less than £250,000. The average interest rate for loans of less than £250,000 ranged between 4% - 5% (compared to the average interest rate for loans over £250,000 ranged between 5% - 6%).
Figure 5.4 Breakdown of grants by type of grant 2% 18%
42% 19%
•
The average repayment terms for loans of less than £250,000 was of 8 years.
14 Figures are based on our research of 15 LEP areas. We consider these areas to represent national statistics 15 Figures are based on our research of 15 LEP areas. We consider these areas to represent national statistics.
20% Feasibility Capacity Building Investment Readiness Other
8
Social Impact Reporting
•
Overall demand for development grants based on our historical data ranges between £70 and £100m.
•
Local Impact Funds require a loan and grant mix in order to provide organisations with the necessary support and capacity to take on repayable finance. The results of our research suggest the average loan and grant mix for a Local Impact Fund should be 40 : 60 (grant : loan).
Figure 5.5 Loans by region 6.70% | East Midlands 4.90% | East of England 3.08% | North East 5.71% | West Midlands 7.31% | South West 5.75% | South East 10.10% | Yorkshire and The Humber 14.09% | North West 42.36% | London
According to our analysis, interest rates range between 0% - 6%, with larger loans taking on higher interest rates (mainly 5% - 6%).
Conclusions Based on our research of over 1,200 charities and social enterprises and the results obtained from Social Investment Business survey, “Future Financing & Support Needs”, we have reached the following conclusions: •
Current overall demand for unsecured loans based on most recent survey results is approximately £73m.
•
Historically we account for over £172.5m total investments done, more than double the amount, suggesting: 1) an existing larger demand in the market for unsecured loans, and 2) certain areas may have been misrepresented in our survey by a particular low rate of response or due to a lack of existing connections with them.
9
}
Find out more at sibgroup.org.uk
call us on 020 7842 7788 email enquiries@sibgroup.org.uk visit www.sibgroup.org.uk twitter @TheSocialInvest 1st Floor, Derbyshire House, St Chad’s Street, London, WC1H 8AG 020 7842 7700 info@sibgroup.org.uk
Author: The SIB Group Published: February 2015