Over the last 15 years the funding landscape for the third sector has changed dramatically. The launch of the National Lottery, the creation of new government funds like Futurebuilders and Change Up, the development of social investment products by Charity Bank and others and the introduction of venture philanthropy have all been part of this change, along with increasing contract income from government and growing voluntary income.
Two separate, but related concerns have characterised the way funders have operated in this period. The first is that they have paid increasing attention to the processes they use to fund the sector- application and monitoring systems, policies on full cost recovery, a focus on outcomes and different types of funding instruments. The Intelligent Funding Forum, convened by the Big Lottery Fund, now provides a focus for many of these interests.
The second concern has been about the impact of their funding- the lessons to be learned from the projects they fund, the influence they can bring to bear on policymakers and the best ways of using their limited funds to achieve social change. The Woburn Place Collaborative, convened under the auspices of the Association of Charitable Foundations, now provides a focus for those with an interest in these wider concerns.
Interviews
During 2008, I interviewed the chief executives of 22 different funders on behalf of Prospectus, the third sector recruitment agency. The interviews formed part of a wider project which involved interviewing 110 chief executives of third sector organisations about the challenges and opportunities they and their organisations face. The funders included trusts and foundations, social investors, government related funds and umbrella bodies. The twin concerns of process and impact came through strongly in the interviews, along with growing concerns about the implications of the financial situation.
New approaches
One major development in recent years has been the development of additional approaches to funding. Grants will always have a vital role to play, but if organisations can develop the capacity to generate income, whether through public service contracts, sales or even fundraising, then loans or quasi-equity may be appropriate ways to finance the capital expenditure needed for development. Not only do they require the investee to develop a business-like approach, working out how and when they can repay, but they also mean funders can recycle their funds. The goal is to build the financial resilience of charitable enterprises.
Social banks, like Triodos, and other social investors, like Venturesome, have been promoting this approach to the sector for many years and now feel the need for capital investment in charitable enterprises is accepted. Government funds like the Department of Health’s Social Enterprise Investment Fund are more recent examples. Because they are backed by government they can also afford to take higher risks, for example through quasi-equity vehicles where the investee only has to start repaying when they exceed agreed income targets.
Some foundations are beginning to use part of their capital for programme related investment; for example, the Esmee Fairbairn Foundation have earmarked £15m of their capital for their new Finance Fund and others are in the process of trying to persuade their trustees to adopt similar types of performance related investment approaches.
More than money
Once funders adopt an investment philosophy, where you invest for a social return, it is in their own interest to try and ensure their investees succeed. Funders like UnLtd, therefore, provide considerable assistance with business planning and management, as well as simply providing finance. Their mission is to ‘unleash the talents of the people who can transform the world in which they live’. They do this by providing awards to individuals, comprising a mix of finance, coaching and mentoring, as well as development support and networking.
The same philosophy characterises the venture philanthropy movement pioneered by Impetus Trust, who seek to build the capacity of individual charities through provision of unrestricted funding and then help the charity develop best practice and achieve strategic change in the way they tackle the issue. To date they have committed nearly £8m to 11 investees with over half the support in the form of help in kind, which they secure on a pro-bono basis from partner organisations.
Some trusts and foundations, like the Northern Rock Foundation, give particular priority to supporting their grantees. They have established a team of consultants who they can commission to help a group address a particular problem they may be facing. They also run training courses eg on leadership, which are open to other local groups as well.
One of the most cherished features of trusts and foundations is their independence. This enables them to take risks, which may not be open to government funders operating under the constraints of political accountability and the spotlight of the media. Some, like A Glimmer of Hope Foundation, a small family trust, chaired by David Gold, who is also chief executive of Prospectus, deliberately set out to fund very high risk projects, which may be untried and untested and which may not always work, but which have the potential to make a major impact. The challenge, says David, is to trust your instinct and feelings about particular projects and then let the people running them get on with it.
Size matters?
Some of the funds already referred to, like Venturesome (£10m) and Impetus Trust (£12.5m including the value of pro-bono support) are still relatively small, but high profile. The dilemma for John Kingston from Venturesome is whether to focus effort on growing the size of the funds under management or whether to focus on scaling impact through changing other funders’ behaviours (eg persuading more trusts and foundations to go down the social investment path), through testing new types of funding like quasi-equity and promoting debate about different ways of financing the sector through thought leadership.
At the other end of the spectrum, some sector leaders like Stuart Etherington, chief executive of NCVO, have called for the merger of Capacitybuilders, Futurebuilders and the Big Lottery Fund to form a new quango for third sector loans and grants. The Big Lottery Fund already manages other government funds, such as the Community Assets Fund for OTS and myplace for DCSF, and are the named distributor for dormant accounts. There is also the possibility of the Adventure Capital Fund, which now manages Futurebuilders, taking on the management of other government investment funds. The development of a ‘super funder’ could bring obvious benefits in terms of shared backroom services and easier access for applicants.
However, some of my interviewees expressed concerns at the prospect of too much funding ending up under one manager. John Kingston from Venturesome, for example, who also chairs the Social Investment Market Group, did not think it would be good for the market, which he feels needs to have a variety of suppliers competing with each other. If one becomes too dominant, smaller funds could get squeezed out (from attracting both demand from charities and supply from investors), because the big supplier will have huge investment resources and a large marketing budget and will be less interested in partnerships or co-investment.
Charles Middleton from Triodos Bank is concerned about the accountability of large government funds. He feels they start off with good intent about not distorting the market, but are then put under political pressure to get the money out quickly, which can have a negative impact on the market. He felt this risk would be enhanced if too many funds were under one manager. Daniela Barone Soares from Impetus Trust saw the advantages of a one stop funding shop in terms of customer care, but felt the level of control it would give one organisation could be problematic.
Exerting influence
All of the trusts and foundations I interviewed were keen to influence policymakers and opinion formers through their funding, but the approaches they adopted differed in important ways.
Some like Linda Kelly from Lloyds TSB Foundation were keen to ‘facilitate the voice of funded charities, but not to be the voice’. Others like the LankellyChase Foundation, one of whose main programmes is on Offenders and Society, seek to draw on the experience of their grantees to influence policymakers. Their chief executive, Peter Kilgarriff, who chairs the Association of Charitable Foundation’s Special Interest Group on Penal Affairs, ensures their legitimacy by consulting grantees and service users before taking action. Peter feels funders should be more confident about playing this role.
A further approach which Impetus Trust are seeking to develop is to ‘achieve a system change in the way in which a particular social issue is addressed’ by replicating and scaling up successful projects eg through franchising, influencing behaviour or achieving policy change.
Recession
Most of my interviews took place before the full extent of the financial situation became apparent. Even so, the trusts and foundations were already worried about the impact on their own income. For those involved in social investment, like Charles Middleton from Triodos Bank, there were concerns about the potential effect on some investees’ financial position and their ability to service loans. He also expressed concern at the potential impact of measures being taken to control the previous excesses of other financial institutions. Impetus Trust expected there to be more partnership funding and more mergers, whilst Triodos expected to see increased interest in investment in renewables and energy efficient products, as well as more finance people wanting to work in the sector.
If the credit crunch results in clearing banks winding back their recent commitment to lending into the sector, the demand on other suppliers will grow rapidly, reflects John Kingston, perhaps even leading to a scarcity of supply in the short term
Perhaps the most important impact of the financial crisis will be the recognition that the time is ripe for more thoughtful approaches to investment which recognise the importance of social and environmental returns as well as financial ones. Time for the social investors to take centre stage?
Richard Gutch
Prospectus Associate
14 January 2009
