Blended finance structures operate at a fund level, where the fund takes on concessional capital and blends it with the non-concessional capital, which is then used to provide repayable finance to the frontline enterprise.
Common benefits of using capital in this way:
It attracts more conventional investors to socially impactful funds that otherwise might not meet their risk and return targets or are unfamiliar with the sector and/or product
·It allows for 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, it subsidises 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.
Examples of Blended Finance Structures
Blending of grant and investment
The most typical example is where 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.
Nesta Arts and Culture Impact Fund, a £23m fund with £5 million 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.
To find out more about the Nesta Arts and Culture Impact Fund click below.
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 or 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.
In the early phase of the coronavirus pandemic in 2020, Big Society Capital worked with Social Investment Business (SIB) and other social investment partners to provide £25 million in loans and £4 million in grants through the Resilience and Recovery Loan Fund (RRLF). This was backed by the government’s Coronavirus Business Interruption Loan Scheme (CBILS) and the fund offered immediate affordable credit to organisations who were unable to meet their needs from other funding sources. 40% of it 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.
To find out more about the Resilience and Recovery Loan Fund click below.
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, the Social Investment Tax Relief (SITR). This tax relief can mean investors have a "buffer" against losses in higher risk segments or it can help them meet the level of return they need.
Big Society Capital committed £2.25m into the Resonance SITR Top-Up Facility to support Resonance to scale their West Midlands fund and launch in other regions. Resonance's SITR funds invest in social enterprises addressing regional poverty and inequality.
To find out more about Social Investment Tax Relief click below.