Futurebuilders England Fund
Futurebuilders England was a ground-breaking, Government-backed £142m social investment fund that provided loan financing to social sector organisations in England to help them bid for, win, and deliver public service contracts. Futurebuilders was the first social investment fund in the UK.
Purpose
Who did the fund help?
This is your average loan recipient:
Futurebuilders provided a means for social sector organisations to access flexible, long-term investment products that are not readily available from commercial banks or private investors.
Turnover:
£712k
Employees:
30
Total assets:
£498k
Cash:
£110k
Profit:
£14.5k
Liabilities:
£133k
How did the fund work?
The fund breakdown
£17m
27 loan-only deals
26 unique organisations
£4.6m
189 grant-only deals
183 unique organisations
£121.6m
179 blended deals
175 unique organisations
£101m
Loan components
£20.6m
Grant components
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Patience
What makes social investment work?
Futurebuilders demonstrated how patience and flexibility in investment can effectively support the social economy at scale, while providing modest financial returns for areas most in need.
Patience
The average loan length was 13.9 years, with longer loan terms corresponding to higher returns.
Flexibility
Financial and non-financial variations were applied to a significant number of investments, representing the long-term commitment to supporting investees through difficult times. A variation could be a repayment holiday, or a change in loan purpose.
Investing where most in need
Over 40% of investment was disbursed to the 20% most deprived areas in the country, ensuring social impact objectives remain at the heart of social investment decision-making.
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114 investees out of 247 (46%) of FBE loan investees were provided with 1 or more financial variations. These include the 37 that moved from 6% fixed to 3% variable interest rates (option provided in the contracts at point of offer).
Of these
68.4%
were interest rates
13.2%
were both interest and payment variations
18.4%
were payment changes
IMD 2010 Quintiles (by number of investees)
*IMD 5= Most deprived
Note: some postcodes registered might reflect head offices and not areas of delivery
IMD 2010 Quintiles (by value disbursed)
*IMD 5= Most deprived
Note: some postcodes registered might reflect head offices and not areas of delivery
Results
What have we learnt from Futurebuilders?
Our analysis of the Futurebuilders portfolio has provided answers to longstanding questions around ‘what makes social investment work’. In particular, there are six key lessons to be drawn from the Futurebuilders experience...
1. It creates long-term employment:
Social sector organisations are productive and enterprising – This investment approach could work efficiently to generate jobs, grow incomes and create fairer employment. Our data shows that three years after receiving Futurebuilders investment, organisations increased their employment figures by 16%, and wages increased alongside business growth.
2. It improves the financial performance of charities and social enterprises
Key indicators of financial performance - such as Turnover, Net Assets, and Cash – all increased for 3-4 years after receiving Futurebuilders investment; ultimately reaching a new and higher plateau. Following investment from Futurebuilders, charities and social enterprises have also been shown to be more sustainable, with profit cycles showing as positive on balance.
3. It generates tangible financial returns for investors:
Of the £144 million invested, £98 million has already been returned (with the Fund still with 16 more years until closure).
4. It supports more affordable investment offers:
Larger grants by proportion went to smaller organisations; this kind of subsidy enables smaller organisations to take on investment and become stronger and more resilient. Subsidised loan rates were 2.14% based on initial offer terms (smaller if considering the financial interest rate variations offered during investment management).
5. It needs subsidy to be most effective:
The IRR on loans is 1.2% at time of writing, which is anticipated to rise. This has been subsidised by long-term business support and portfolio management costs: if these are taken into account, the IRR is around -8%. This subsidy has been essential to achieving the financial performance, employment growth and impact detailed elsewhere.
6. It absorbs risk through subsidies:
Operating on small profit margins (with maximum median profit at £30k), subsidies through variations, flexibility, use of blend and longer time horizons, have kept write-offs and provisions at only 17% (in 2019), against an original target of 25%. Despite the purpose of Futurebuilders being one of higher risk, specifically to test use of repayable finance in the third sector, the fund has exceeded expectations in terms of financial performance.
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Turnover’s effect on employment and wages
Futurebuilders investees in the Children and Young People sector have seen significant increases in employment, and even larger increases to wages. Although this was not the case for all sectors (the Education and Learning sector, for example), seeing these increases across the Futurebuilders portfolio further demonstrates that social investment can work efficiently to generate jobs and grow incomes.
Turnover change compared to (i) Employment change and (ii) Wage change (3 year change from point of investment)
FBE Internal Rate of Return (IRR) for Loans
Steadily increasing IRR reflects that longer loan terms correspond to higher returns – as of 1st May 2020, FBE IRR was 1.20%. The IRR has been calculated based on the fully closed book. We would expect IRR to continue to increase in future, as longer loan terms come into effect and larger proportions of the portfolio are closed.
The Future
What's next?
COVID-19 has exposed the need for a new approach to how we invest in places and people.
The pandemic has exacerbated inequalities between and within communities. The places that were already at-risk – due to levels of deprivation, job insecurity, or low wages – will struggle to bounce back.
In the recovery, the social economy must and will play a vital role in helping the hardest hit places to rebuild.
A blended social investment fund on the scale of Futurebuilders has not been repeated in the market since. It is important that these learnings from Futurebuilders and other available data sets are used to make new patient, flexible funds fairer and more effective for those most in need.