Blended finance

Blended finance is an approach to combining risk-tolerant capital (referred to as ‘concessional capital’) with capital seeking market-rate returns (referred to as ‘non-concessional capital’) to address social and environmental issues, such as homelessness and climate change. Investors use blended finance as part of their toolkit to create impact whilst fulfilling their duties to internal and external stakeholders.

Blended finance brings together different kinds of capital from various partners, helping to make social investment accessible and useful – both for front-line organisations and investors alike. While there are different ways in which blended finance can be used, it is typically organised at two levels: at the fund (or structure level), where the capital from investors is pooled up front; and at the product level, where the blend happens directly as part of the product mix that enterprises receive.

Blended finance structures

Blended finance structures operate at a fund level, where the fund takes on concessional capital and blends it with non-concessional capital, which is then used together to provide repayable finance to the frontline enterprise.

Organisations who take on the more concessional role in these funds (perhaps by using grant or equity-like capital) are often doing so because it helps to unlock much larger, more diverse pools of capital from other investors. This helps to increase the amounts that can be invested towards their social and or environmental impact goals. Using blended finance in this way is especially useful for organisations who have more flexible, mission-oriented capital to invest, but have a limited budget to do so. These organisations include Government, quasi-governmental organisations or charitable and corporate foundations.

For investors playing a non-concessional role within these funds (for example, those investors seeking market-rate returns), the use of concessionary capital can help to lower the risk around the deal, by providing protection against potential defaults. This helps to reassure investors, especially those who previously may have been unable to invest in certain funds, therefore increasing the amount of capital available towards social and environmental impact. In effect it makes the proposition more attractive (which can be called “credit enhancement”).

Blended finance structures can also allow the terms on which the investment is provided to organisations (delivering social impact), more appropriate. This is often a vital part of the deal, as these organisations might not have been able to access capital from other sources. This is because they may not have access to the elements that can sometimes be required for taking on finance, such as shorter repayment terms, or security in the form of a building.

In summary, blended finance structures can be used to for the following purposes:

• Blended finance can help bring more conventional investors to socially impactful funds, that otherwise might not meet their risk and return targets, or those who are unfamiliar with the sector and/or product.
• Blended finance can help to enable the creation of an investment product that is more flexible for enterprises – for example through being unsecured, offering a more affordable rate, or longer terms (or a combination of all three).
• On occasion, blended finance can help to subsidise the operating costs of a fund, thus reducing the ultimate cost to the frontline, helping make the economics of the fund stack up for front line enterprises and investors.

Blended finance products

Blended products are finance packages that enterprises can access directly. They combine repayable finance alongside a second element that does not need to be repaid, for instance a direct grant and/or free advice and business support (also known as technical assistance). These products are designed and provided to impactful frontline organisations.

How are they used to support social enterprises and charities?

Many social enterprise models are operating in challenging markets and therefore require enterprise-centric repayable finance, including the mixing of investment and grants to enable delivery of their mission. Accessing traditional investment can be challenging - either because an organisation needs more flexible funding to take on investment and be able to repay it (because of tight profit margins that prioritise social as well as financial value), or because investors are not familiar with their business models and therefore assess them as a higher risk. Concessional capital may be needed either to make the deal viable for the investor to proceed, or to make the deal affordable for the enterprise. To find out more about blended finance products and how they work to support charities and social enterprises, you can read more here.

Blended finance helps to bridge the gap between investors (supply) who make the investment and the investees (demand) who take on investment. The creation of blended finance structures and products helps to balance the needs of both parties. For investors by mitigating risk, return and effort and for social enterprises and charities by increasing the availability, flexibility and affordability of investment capital. There are several examples of how blended structures can work in practice. Some of these models are shared below.

Blending of grant and investment

The blended finance model that is most frequently used in the UK social investment sector is when grant and repayable capital is combined at a fund level and the grant provides cover for capital lost due to defaults (also known as ‘first loss’). This allows for loans reaching enterprises that are deemed to be higher risk.

Guarantee loan schemes

Another fund-level example is when there are guarantees in place, where it is agreed that a third party will repay the lender a certain amount if the borrower defaults. This can bring investors into parts of the market at times when the risk of loss would otherwise be too high. In the UK social impact investment sector, a key guarantor is the government via the British Business Bank administered schemes.

Tax reliefs

Tax reliefs can also be used within a blended structure to attract new investors. Tax reliefs are designed by the government to incentivise certain activities, often particular types of investments, by offering individuals or organisations a reduction in their tax obligation, for instance Community Investment Tax Relief (CITR). Tax reliefs can mean investors have a "buffer" against losses in higher risk segments or it can help them meet the level of return they need.

Nesta Arts and Culture Impact Fund

Nesta Arts and Culture Impact Fund, a £23m fund with £5million of grant funding from the Arts Council England and the National Lottery Heritage Fund which attracted a further investment of £18 million from several investors including Big Society Capital. It provides affordable, flexible loans to arts, culture and heritage organisations that have a positive social impact on the communities they live in. You can read more about the fund here.

The Recovery and Resilience Loan Fund

Another example of a blended finance fund is The Recovery and Resilience Loan Fund (RRLF). The fund was developed in the early phase of the coronavirus pandemic in 2020, to offer immediate affordable credit to organisations who were unable to access other funding sources to meet their needs. Investors, including Big Society Capital, Social Investment Business (SIB) and other social investment partners collaborated to provide £25 million in loans and £4 million in grants through the fund. This was backed by the government’s Coronavirus Business Interruption Loan Scheme (CBILS). 40% of funding went to the UK’s most deprived areas. Recognising the importance and responsiveness of the fund it was awarded Social Enterprise Deal of the Year At the 2021 UK Social Enterprise Awards. You can read more about the RRLF here.

Access Growth Fund

The Access Growth Fund is a blended structure that offers blended products to charities and social enterprises. The fund is a partnership with the National Lottery Community Fund that since 2016 has offered over £36.5m in flexible, unsecured loans and £6.8m in grants to over 500 social enterprises and charities. You can read more about the Access Growth Fund here.

Social Investment Tax Relief

Tax reliefs have been highly effective at encouraging investment into businesses pursuing profit, yet until recently the same incentives have not been available to encourage investment into enterprises and charities with a social objective serving the public good. Social Investment Tax Relief (SITR), which came to an end in April 2023, was a targeted relief for social purpose organisations, which allowed investors to claim a 30% income tax relief on their investment, via shares or debt, into qualifying social enterprises and charities. An example of a fund using SITR, is the Resonance SITR Top-up Facility, which invests in social enterprises addressing regional poverty and inequality. You can read more about SITR here.

As previously mentioned, blended finance can be used within different models to benefit both investors and enterprises alike. Most importantly, it enables impact-focused investors to use their capital to leverage in additional capital from more commercial investors, thereby growing the amount of investment available to enterprises delivering social and environmental impact.

Advantages to investors also include:

• Blended finance attracts more conventional or risk-averse investors who might be unfamiliar with the sector to impactful funds that otherwise might not meet their risk and return targets.
• Blended finance enables impact-focussed investors to use their resources to leverage in additional capital, creating a multiplier effect.
• Blended Finance creates opportunities to efficiently recycle capital – particularly concessional capital – thereby increasing the value for money for impact-focused investors.
• Blended Finance can enable the provision of capital to a wider range of enterprises and business models, who may not have previously been able to access impact investment and, in doing so, help grow the pipeline of investible solutions looking to address key societal challenges.

Advantages to charities and enterprises include:

• The use of blended finance can allow for the creation of investment products that are more flexible and patient – for example, through being unsecured, offering a more affordable rate, or longer terms (or a combination of all three, or other attractive features).
• Blended Finance can support capital to flow into sectors that may have traditionally be seen as ‘too risky’ for investment, reaching organisations who may not previously been able to access investment and allowing them to build track record. Often blended finance structures will also provide or signpost technical assistance and investment readiness support for these organisations.
• Blended Finance can improve efficiency, by reducing the time needed for investees to look for investment and enabling them to focus on delivering their impactful work.