Rescue, Recovery, Revival - Social Investment and Covid-19

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Rescue, Recovery, Revival: Social investment and Covid-19 Insights in Brief Report 1 June 2020

Esmée’s approach to social investment

This report

We believe that social investment is a powerful and financially sustainable tool we use, alongside grants and our own actions, to achieve our impact goals.

This document sets out what we’ve witnessed to date from our social investment portfolio in light of Coronavirus, what we might be able to learn and how we can use this to inform our social investing, taking a tools-in-the-box approach, through the rescue, recovery and revival stages caused by Covid-19.

We take a proactive, flexible approach to making investments - not ‘one size fits all’: we assess the most effective use of our investment to create the greatest impact.

Practically, this means using a variety of tools and convening methods to enable impact. We are impact-first, and, as such, use a diversity of social investment instruments.

Given that the situation is constantly changing, our actions are anticipated rather than certain. Our learning will evolve and deepen as we gain a wider perspective and we will reshape our response accordingly.

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How is Covid-19 affecting our social investments?

Chart 1: Esmée Fairbairn’s 67 active social investments

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12

46

9 investments have not been in contact

£179,000 in grants 21% of loans 15% of funds

We've given additional funding or granted variances to 12 investments

We're tracking and talking to 46 investments given in emergency funding to our active social investees have received some form of variance or support have received either direct or indirect capital and interest holidays

Our portfolio forecast analysis suggests: Chart 2: Esmée Fairbairn’s 67 active social investments 13% will see an increase in demand for their services

55% will be relatively unaffected, though may need headspace to adapt business / delivery

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37 31% will struggle – includes organisations who were struggling pre-Covid-19

Patient capital This period is proving the power of patient capital. 51% of our current social investment portfolio takes the form of patient capital of some sort (the remaining in more standard debt).

Although these instruments yield less reliable investment income, we have seen that the flexibility of instruments like this is paramount in unusual situations such as this.

Emergency grants The first emergency grant we made was to an organisation with an immediate loss of income who should adapt to the current situation.

Our original investment to this organisation was made using an equity instrument, so short-term grant funding was all that was required to give the organisation space while the management adapt their model.

High footfall businesses We have very few investments to high footfall businesses who are encountering loss of income in our portfolio. Of those we do have, we have already given capital and interest holidays and are exploring emergency grant funding.

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Rescue phase – our approach and activities

Emergency grant funding

Taking a nuanced approach

As part of the £16m grant funding package agreed by Trustees in April 2020, £1.08m was ringfenced for social investees. From this, emergency grants of up to £60,000 are intended to keep impactful organisations afloat.

We purposely have not adopted a blanket approach to our portfolio. Instead we have tried to identify likely needs and work with these organisations to support them in the best way possible.

Collaboration

Grants Plus

We continue to engage to support others, including Big Society Capital as they and Social Investment Business launched the Resilience and Recovery Loan Fund, and other Foundations through the Social Impact Investors Group (SIIG). We recognise and believe that a collective, rather than a siloed, approach must be adopted.

Our Grants Plus programme has been expanded to include consultancy support to help organisations adapt their business models, to supporting wellbeing during home working and to digital services to help move existing services online.

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Recovery phase – our approach and activities Emergency grant funding

0% performance-linked loans

As well as making emergency grants to keep organisations afloat, we are also using these grants to give organisations headspace as they seek to adapt their business models.

In addition to grant funding, we have developed an emergency interest-free loan product of up to £60,000. Repayment is linked to taking a single digit percentage of gross profit on a quarterly basis (following a 6-month repayment-free period) until the loan has been repaid.

With immediate challenges of maintaining services, supporting staff, and raising funds to meet additional costs, few management teams have the time to think ahead. We believe, therefore, that these types of grants will be key.

Pooled emergency funds

Understanding and promoting high quality support

As an organisation, we have made a £2m commitment to pooled emergency funding schemes. We anticipate this funding will go into both rescue and longer-term recovery funds.

Support alongside funding will be paramount and having a good understanding of what high quality non-financial support ‘looks like’ even more so. We have recently co-funded a piece of research to be conducted by Big Issue Invest with other UK social investors, in collaboration with Access, to look at exactly this.

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Revival phase – our approach and activities Our new strategic approach

Mergers, acquisitions, and collaboration

Our new social investment strategy will be published in September 2020. We operate an ‘impact-first’ approach: adapting and selecting financial instruments that are most appropriate for organisations we support and the social needs they seek to address.

It is likely that organisations will look to consolidate and share resources to have a more durable impact; these mergers may be out of necessity as well as desire. Given the likely rise in demand for mergers and acquisitions among social sector organisations, we are reviewing our Merger Feasibility Fund – which provides grants of up to £15,000 for currently funded organisations to explore the appropriateness of M&A.

One key element of our strategy is a focus on catalytic funding and staged grant and investments to enable innovation which tests high risk, high impact, solutions. This type of innovation funding will be more important than ever.

In addition, our approach to building a portfolio which leads to collective impact will be key; convening organisations and sharing best practice becomes even more valuable.

The importance of quasi-equity

Availability of funding

We believe that a more patient, equitable risk-sharing approach to investing - quasi-equity instruments - will be key to organisations as they recover; something we have already heard from partners and investees. Repayable funding will be required, but for many with uncertain income, standard debt products will not be appropriate.

Organisations will have to ask themselves some big questions: are Covid-19 delivery plans stop gaps, or a new way of working? For many, it will be the latter and those organisations who have successfully adapted their business models are likely to have an increase in funding demand.

Prior to Covid-19, we funded research by Shift into the unmet need for equity-like capital. As investors, we aim to balance patient, long-term investments with the need to generate investment income to recycle capital for further investments.

This is possible due to our flexible, rather than ‘one-size-fitsall’, approach to investing and portfolio construction.

The positivity and resilience shown by social sector organisations will be key to rebuilding a strong and diverse civil society. Social investors will need to back new and existing models which seek to maintain some of the positive adaptations of the Covid-19 crisis: improvements to the environment being one such example.