Different types of funder (from philanthropic to commercial) are involved in social investment to varying degrees. Ultimately, they want to see the right type of funding getting to frontline organizations tackling the social challenges of today, but they have very different constraints on using their capital to achieve it.
Recognizing this, we asked ourselves two questions: first, can philanthropy play a more catalytic role in unlocking different types of funder, and different types of capital, so that a lot more money flows to charities and social enterprises?
Second, can it be done in a way that addresses these needs, but critically remembers to meet the straightforward funding demands of frontline organizations?
Last Friday, we launched a new fund, the Third Sector Loan Fund (TSLF), seeking to do just this.
The TSLF builds on a £1.5 million ‘repayable grant’ from the Social Investment Business Foundation, which has helped to catalyse a total fund of £30 million. This includes £13.5 million of commercial funding from Santander, in what is believed to be the biggest single investment by a UK bank in a third party fund lending to social ventures.
SIB has put its philanthropic capital at risk in order to attract far greater sums from other investors. The grant provides the other investors with first-loss protection but will not subsidize their returns. The TSLF structure achieves this by requiring SIB Foundation’s grant to be repaid in full before other investors in the fund can make a positive financial return.
Big Society Capital has committed the other £15 million of risk capital.
Santander’s £13.5 million is invested on commercial terms, thereby differentiating it from a number of funds run by banks as part of their corporate responsibility programme.
TSLF is managed by Social and Sustainable Capital (SASC), an FCA authorized and regulated fund manager (and itself a social enterprise). The relative complexity of the fund was necessary in order to ensure the different investors were aligned. However, this complexity is not passed on to frontline organizations. TSLF simply provides unsecured and secured loans of £250,000 to £3 million to charities and social enterprises across all social sectors in the U.K.
This structure offers an interesting model for philanthropists: using grants to attract much greater sums of investment for the causes they care about by unlocking other investors. In TSLF’s case, SIB Foundation’s £1.5 million catalysed a fund 20 times the size.
At a more theoretical level, commercial capital, social finance and philanthropic funding can be understood to have greatly differing risk-taking capacity, return expectations, and impact sought. This useful framework, outlined by the G8 taskforce reports last month, can help explain the challenges in getting these sources to work together.
Unlocking more capital from different types of funder will help achieve this, so that social investment can realize its potential – by enabling charities and social enterprises to realize theirs.
Vinay Nair is the director of business development at the Social Investment Business Foundation and at its partner organization, Social and Sustainable Capital. @vinaynair