Accessing funding for smaller providers and charities

Rather than relying on rental surpluses, or donations from the public for charities, we could do this by borrowing against future income. As banks have tightened their lending criteria, cutting funding for many small and medium-sized enterprises (SMEs) including charities, the sector has had to turn to alternative sources of funding, including social investment funds. There are many examples of this across the charity sector depending upon the size and type of borrowing required.

However, we return to the issue of resource – sourcing and accessing this ‘new’ finance takes considerable time, expertise and resource which many organisations simply do not have.

There are further anomalous issues which impact on ability to borrow, including the restrictions on providing assets as security and how charities invest.

“The need for capital is compounded in these times of austerity and rising housing costs as charities, including housing associations, are required to do more than ever before.”

To protect charitable assets, a charity cannot provide assets or a guarantee to support non-charitable subsidiary borrowings even if that subsidiary is supporting the aims of the charity. This prevents some transactions or means the charity has to be the borrower. Alternatively the subsidiary sources funding without the benefit of a guarantee at a higher cost, causing depletion of charitable resources.

Dolphin Living, like many other charities, holds investments. In following our charitable objectives and risk considerations we, and others, do not lend directly to other charities and we restrict our fund managers to investing in rated and liquid investments. Thus to protect our balance sheet and charitable aims, we invest our money in investments that have no social impact, while other charities struggle to raise the funds necessary to delivering their charitable objectives.

In 2016, we completed a secured long-dated private placement. To meet further growth aspirations, in early 2017 we were looking for a finance arrangement that provided flexibility, for example not involving restricting assets through security arrangements.

The amount of funding we required, £25m-£50m, meant that an own-name public bond issue was not viable given the small size and the incidental costs of documentation and regulatory compliance. These are major impediments for charities and SMEs and sometimes push them towards unregulated routes such as crowd funding and peer-to-peer lending.

Dolphin Living was fortunate to be accepted by Retail Charity Bonds, an independent bond-issuing platform established by Allia Impact Finance to enable charities to access the capital markets. I say fortunate as Retail Charity Bonds sets the bar high for those applying to use its platform, in terms of financial performance and governance.

The preparation for the bond was significant and absorbed large amounts of management time. Most intense were the two or three months before the issue spent preparing for the due diligence commissioned by Allia, preparing a full prospectus and investor presentation, as well as a week of investor meetings.

Two matters, in particular, concerned us.

First, as a charity we don’t produce interim results. For commercial reasons, we wanted to issue in June rather than wait for publication of our 2017 financial statements. This left us taking a risk that the financial statements in the prospectus were more than a year old while investors were interested in recent performance.

“The preparation for the bond was significant and absorbed large amounts of management time.”

Second, informal access to investors to gauge their views on covenants and pricing is severely restricted by market abuse regulation. As a result, new issue pricing can be imprecise, with issuers leaving too much on the table. To reduce this risk, the investor roadshow, which was formally announced to the market, was key.

This proved to be a hugely valuable exercise requiring us to understand investors’ key concerns which went beyond delivery of our charitable aims. We had to face our business and economic challenges head-on, a good discipline for any organisation. Without the support of advisors and the expertise of Retail Charity Bonds, we would have been unable to accomplish such a successful issue, currently trading at just over par.

So what are the solutions to making more finance more easily available to charities and housing associations? I’d like to have an answer to this but our experience and knowledge has hardly scratched the surface. I hope in sharing some of the anomalies we have uncovered in borrowing and investing it will help another organisation unlock their unused funding potential.

Olivia Harris, chief executive, Dolphin Living