Casey Lord, CAF Venturesome & Julie Roberts, HelpAge International


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Creative financing: building complex investment models - presented at NCVO Sustainable Funding Conference 2011: Adapt, Gain, Grow.

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Casey Lord, CAF Venturesome & Julie Roberts, HelpAge International

  1. 1. Creative financing: building complex investment models Casey Lord Investment Manager, CAF Venturesome Julie Roberts Marketing and Fundraising Manager, HelpAge International 24 th November 2011
  2. 2. Agenda <ul><li>The funding environment for charities is changing – many charities are choosing to diversify their income </li></ul><ul><li>Social investment can help organisations grow and innovate </li></ul><ul><li>Loans cannot replace grants – social investment can only be used in certain scenarios (growth, transition, working capital) and should always complement other sources of income </li></ul>
  3. 3. Revenue is different to capital <ul><li>Income / revenue </li></ul><ul><ul><li>Covers the costs of expenditure of ongoing work (service provision, projects etc) </li></ul></ul><ul><ul><li>Suppliers of income = PURCHASERS of your work </li></ul></ul><ul><li>Capital </li></ul><ul><ul><li>For asset purchase, growth/development, etc </li></ul></ul><ul><ul><li>Capital funders = INVESTORS in your organisation </li></ul></ul>
  4. 4. Building vs. Buying
  5. 5. Understand your funding structure FUNDING STRUCTURE Restricted/unrestricted split? <ul><li>Development / growth capital </li></ul><ul><li>Bridging loan to help manage the timing of contract income </li></ul><ul><li>Development capital to expand an established trading arm </li></ul><ul><li>Bridging loan to help manage the timing of grant receipts </li></ul><ul><li>Patient capital to invest in fundraising </li></ul><ul><li>Working capital loan </li></ul>100% unrestricted i.e. trading income Mostly unrestricted i.e. transitioning to an earned-income model, weaning off grants 100% restricted i.e. grants Mostly restricted i.e. mostly grants, some trading income
  6. 6. What type of funding? <ul><li>You! </li></ul>Reserves <ul><li>Social investors </li></ul>Unsecured loan Funding Who provides it Grant <ul><li>Grant makers, venture philanthropists </li></ul>Quasi-equity (royalties) <ul><li>Social investors </li></ul>Overdraft / underwriting <ul><li>Banks provide overdrafts </li></ul><ul><li>Venturesome provides underwriting </li></ul>Secured loan / mortgage <ul><li>Sector banks, high street banks </li></ul>
  7. 7. Matching financial mechanisms to funding needs Unsecured Loan Overdraft Quasi-equity Equity Grant Pre-funding capital fundraising Higher risk working capital Development capital Standby Facility LOW RISK HIGHRISK Property/Asset purchase (mortgage) Appropriate Funding (correlation) Patient Capital Secured loan Cashflow bridging LOW CHANCE OF REPAYMENT HIGH CHANCE OF REPAYMENT
  8. 8. Getting ready <ul><li>Legal structure (is an SPV needed?) </li></ul><ul><li>Business plan </li></ul><ul><li>Numbers: financial modelling or scenario planning </li></ul>
  9. 9. Before approaching the investor…. <ul><li>This is ‘on mission’ for our organisation </li></ul><ul><ul><li>Look how much experience we have </li></ul></ul><ul><ul><li>We’ve done our market research and there’s a good fit with our skills, the current environment and the market gap </li></ul></ul><ul><li>Lots of people have been involved in getting us to this point </li></ul><ul><ul><li>There’s strong ownership from the Board </li></ul></ul><ul><ul><li>Staff are really enthused </li></ul></ul><ul><ul><li>This would really help our beneficiaries, here’s what they think… </li></ul></ul><ul><li>We understand the numbers </li></ul><ul><li>We know it will take time </li></ul>
  10. 10. <ul><li>Exercise! </li></ul>
  11. 11. <ul><li>Case Study 1 </li></ul>
  12. 12. HelpAge International <ul><li>The challenge of an ageing world </li></ul><ul><li>100 million older people have less than $1 a day </li></ul><ul><li>Carers, leaders and catalysts for change </li></ul><ul><li>By 2050 1 in 5 of the world’s people will be over 60 </li></ul><ul><li>80% of them will be in developing regions </li></ul><ul><li>HelpAge International is the only global charity focused on older people </li></ul>
  13. 13. Creating the right funding structure to meet the challenge Unrestricted DEC & appeals Institutional grants Age UK restricted
  14. 14. The big idea: fundraising in new markets
  15. 15. Wanted: £1m <ul><li>CAF Venturesome £300,000 loan </li></ul><ul><li>Charitable trust: £150,000 interest free loan </li></ul><ul><li>Network partner: £150,000 interest free loan </li></ul><ul><li>HelpAge International: £150,000 from own unrestricted </li></ul><ul><li>Yet to raise: £125,000 – £250,000 </li></ul>
  16. 16. Managing risk <ul><li>Market research </li></ul><ul><li>Piloting the idea and staging the investment </li></ul><ul><li>Design the fundraising programme to limit our risk </li></ul><ul><li>Fixed thresholds for continuing the project </li></ul><ul><li>Board and SMT monitor via Risk Register </li></ul>
  17. 17. Lessons (so far) <ul><li>It’s not impossible! </li></ul><ul><li>Securing a ‘lead’ investor helps </li></ul><ul><ul><li>Gives confidence to other investors </li></ul></ul><ul><ul><li>They can help you create a better investment plan </li></ul></ul><ul><li>Risking some of your own funding is key </li></ul><ul><li>A mix of loans and grants gives more flexibility to deal with changes </li></ul>
  18. 18. <ul><li>Case Study 2 </li></ul>
  19. 19. Fair Finance <ul><li>Fair Finance provides micro loans to individuals and small businesses in East London </li></ul><ul><li>Launched in 2005 </li></ul><ul><li>By 2009, Fair Finance had reached the limits of how far it could grow whilst relying solely on grants and trading income </li></ul>
  20. 20. How to scale up beyond grants? <ul><li>Need to grow loan book to achieve profitability and scale </li></ul><ul><li>Existing grant funding nowhere near the scale of expansion need </li></ul><ul><li>Clear need to raise social investment </li></ul>
  21. 21. Raise the right type of finance <ul><li>Separate out business activities and match different forms of finance for different parts of the business </li></ul><ul><li>Bank Debt to fund the loan book </li></ul><ul><li>‘ Leveraging Loan’ to increase the portfolio </li></ul><ul><li>Equity or quasi-equity to fund operating & expansion costs </li></ul><ul><li>Grants still required to support purely charitable activities of FF (e.g. Debt advice) </li></ul>
  22. 22. Leveraging mechanism Commercial terms Benefit from ‘first loss’ cover provided by social investors Grants focused solely on areas where needed most Social investment unlocks commercial finance, thereby increasing the scale and social impact
  23. 23. The financing package raised by FF <ul><li>£750k Quasi-equity </li></ul><ul><li>Social investors: HNWIs, CAF Venturesome </li></ul><ul><li>£350k Leveraging Loan </li></ul><ul><li>Big Society Finance Fund (NESTA) </li></ul><ul><li>£2mn Commercial Bank Facility </li></ul><ul><li>SocGen, BNP Paribas, Santander </li></ul>
  24. 24. Imaginative use of social investment <ul><li>Social investment used to unlock commercial bank funding </li></ul><ul><li>Provides a possible template for other transactions in the CDFI sector </li></ul><ul><li>3 different scaleable models of financing </li></ul><ul><li>Largest commercially funded microfinance deal in Western Europe </li></ul>
  25. 25. Key to success <ul><li>Strong business plan </li></ul><ul><li>Financial planning </li></ul><ul><li>But also… </li></ul><ul><li>Board and networks </li></ul><ul><li>Management team </li></ul><ul><li>“ The numbers have to be right but </li></ul><ul><li>people have to believe” </li></ul>
  26. 26. Be realistic! <ul><li>‘ This time next year, we’ll be millionaires’ </li></ul><ul><li>In five years’ time, this is where this plan takes us </li></ul><ul><ul><li>We’ve tested the market </li></ul></ul><ul><ul><li>We’re clear on what financial and social success would look like </li></ul></ul><ul><ul><li>This is how we’re going to track progress </li></ul></ul><ul><li>We know this will take time </li></ul><ul><ul><li>We’ve identified the potential pitfalls </li></ul></ul><ul><ul><li>Here’s how we’re mitigating the risk and staggering investment </li></ul></ul><ul><ul><li>And if that doesn’t work, here are plans B, C and D </li></ul></ul><ul><ul><li>We’ve thought about the worse case scenario </li></ul></ul>
  27. 27. CAF Venturesome <ul><li>Since 2002, we have offered £24m to over 300 small- and medium-sized charities </li></ul><ul><li>Provide capital investment in the form of unsecured loans, underwriting and equity-like investments </li></ul><ul><li>To date, 96% of funds have been recycled, to be reinvested </li></ul><ul><li>Nine out of ten organisations have achieved or outperformed initial capacity building aims </li></ul>
  28. 28. Q&A Casey Lord [email_address] 03000 123 279 Twitter: @cafventuresome Blog: