A network of local funds making loans of less than £250,000 using social investment tax relief is being developed by UBS Wealth Management and social finance intermediary Resonance.
The first fund, worth up to £5m, will be launched in Bristol later this year. It will make investments in charities and community interest companies and other asset-locked bodies.
UBS and Resonance hope to expand the model to other UK regions over the next two to three years, and to eventually have funds worth more than £30m.
The funds will take advantage of SITR, a relief introduced by the government last year, which allows an investor to claim back 30 per cent of the value of an unsecured loan to charity against their tax bill. The relief is only open to individual investors.
EU regulations mean an organisation can only take investment worth less than £290,000 over three years, however the government is seeking to expand that limit to £5m.
Late last year Resonance announced the first social investment tax relief deal – a £70,000 investment in FareShare South West. The planned fund is the first SITR fund to be announced in the UK.
How the fund will work
The first fund will encourage a large number of small to medium-sized investments from investors with at least £250,000 to invest. Investors are likely to have to commit at least £10,000.
That money will be lent at an interest rate of 4 to 7 per cent to charities and social enterprises with turnovers ranging from around £250,000 upwards. It is likely to be distributed to around 20 medium-sized organisations in the Bristol area over the next two years. Daniel Brewer, managing director at Resonance, said his organisation has already identified more than a dozen organisations with the potential to take this investment.
Funding will only be available to organisations with an existing track record.
Investments will typically be for three to six years, with payments typically interest-only for the first three years.
The fund also allows revenue-participation models for some organisations, in which capital repayments are dependent on the level of growth the organisation achieves.
If the initial fund is a success other funds will be established in other cities.
Resonance will research potential deals and present them to investors. UBS will source private investors to invest in the fund. The set-up costs of the fund will be split evenly between the two organisations.
Investors will technically make direct investments into each charity backed by the fund. The fund is based on a “nominee” model used in the Enterprise Investment Scheme, a well-established tax relief for investors buying shares in small companies, and a specialist EIS organisation will be retained to ensure the fund complies with technical rules.
SITR “makes all the difference” for smaller loans
Brewer said his main targets for loans were independent community interest companies and charity trading subsidiaries. He said trading subsidiaries would have to have or convert to CIC status in order to be eligible for the relief, but that this was not a major burden for most such companies.
“This relief, together with reduced restrictions on dividends, mean the CIC model is now really fit for purpose,” Brewer said. “I think we’ll see a rapid expansion in the number of CICs as a result.”
Brewer said that SITR had made “all the difference” for social investment in smaller social enterprises.
“It’s been a real problem trying to find finance for organisations which want less than £250,000 of investment,” he said. “Traditional social investment funds have wanted double digit returns but social enterprises and charities can’t and won’t pay that sort of money. SITR is a means of squaring the circle.”
He said SITR potentially made interest-free loans for CICs and charities possible, but he did not support interest-free investment because it had the potential to create poor discipline in the organisations being lent to, and make it less likely the capital would be repaid.
Brewer said he hoped a network of local funds, rather than a single national fund, would encourage investors to become more involved. He said it was easier for local investors to promote investees, to provide support, and to buy services from them.
