The concept of blended finance is all the rage in the world of social investment, says Seb Elsworth, but what is it and why does it matter to charities and social enterprises?

Blended finance is helping to make social investment more relevant to charities and social enterprises by connecting the varying objectives of investors with the current needs of social organisations. It’s helping to make sure that supply of social investment matches demand from charities and social enterprises.

More and more investors are exploring the possibilities of using their capital to achieve both social and financial returns. However an investor’s own requirements for risk and return may not match the needs of charities and social enterprises. For example banks lend their depositor’s money, so they need to be pretty sure that they will be repaid or have security in place if they don’t. Therefore bank finance is unlikely to be suitable for making small working-capital loans to new social enterprises because the risk profile is probably too great.

This sort of mismatch between the supply and demand for social investment has meant that many organisations have found it hard to find the sort of money they need. That might be small-scale loans, loans where there is no security or track record, or loans for activities which traditionally haven’t attracted much social investment before.  

The principle of blending finance is to mix together a number of sources of capital, each investor with their own objectives and requirements, and create an investment product which better meets the needs of charities and social enterprises.

The Arts Impact Fund is one such example which brings together public, private and charitable sources of investment to provide repayable finance of between £150,000 and £600,000 for arts organisations. The fund totals £7m and seeks to demonstrate the impact which arts organisations make and how this can be better supported through loan finance. A national dance agency, amateur dramatics group, and artists’ studio space were the first three organisations to receive investment from the fund earlier this year.

Using loans to support arts organisations in this way is relatively untested and it is unlikely that any one investor would have been able to build a fund to meet this need. A partnership of Bank of America Merrill Lynch, Esmée Fairbairn Foundation and Nesta, supported by Arts Council England and with additional funding from Calouste Gulbenkian Foundation structured the fund with the different investors playing different roles.

If the Arts Impact Fund proves to be successful then there is every chance of more funding following in the future. There may also be opportunities to replicate similar models for sports organisations.

The Third Sector Loan Fund run by Social and Sustainable Capital (SASC) is another example of bringing a range of different investors together in order to fill a financing gap for charities and social enterprises – in this case making more simple, unsecured lending available. By blending funds from the SIB Foundation, Big Society Capital and Santander, SASC were able to build a £30m fund which provides growth finance for charities and social enterprises who don’t have assets against which to secure a loan. None of these investors would have been able to fill that gap on their own, it was the blend which made it possible.

Blending doesn’t only need to happen in funds. It can also happen in individual investments for charities and social enterprises.

Power to Change have been working with Key Fund and SASC to use their grant funding to unlock extra investment for individual community businesses which wouldn’t otherwise have been possible. One example of such an investment is in Storeroom 2010 (pictured), a social enterprise situated on the Isle of Wight that enables deprived families to affordably furnish their homes, strengthen their quality of life and preserve their dignity. Storeroom received a blend of a loan from SASC’s Community Investment Fund and a grant from Power to Change to purchase their warehouse and develop corporate partnerships.

By the end of 2016, Power to Change estimate that £2m of grant funding will have allowed another £6m of additional social investment to be accessed.

Providing more blended finance to increase the supply of smaller loans was one of the reasons Access was set up. The Growth Fund provides a blend of loan and grant to social investors who make small scale investments into charities and social enterprises. We announced our first investment in July and will be providing blended finance for more than a dozen further funds over the next two years.

If you are a charity or social enterprise wondering about whether social investment is right for you then you shouldn’t need to worry about this plumbing, that’s the job of social investors. Hopefully though you will see more and more investment products available which better meet your needs. It’s likely that blended finance is what’s making that happen.

Seb Elsworth is chief executive of Access – The Foundation for Social Investment