paul cheng chief officers feb 2011

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CAF Venturesome – Impact Investing Paul Cheng Senior Investment Manager, CAF Venturesome The text in this document may be reproduced free of charge providing that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as Venturesome copyright and the title of the document specified.

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Page 1: Paul Cheng Chief Officers Feb 2011

CAF Venturesome – Impact Investing

Paul Cheng

Senior Investment Manager, CAF Venturesome

The text in this document may be reproduced free of charge providing that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as Venturesome copyright and the title of the document specified.

Page 2: Paul Cheng Chief Officers Feb 2011

Leading UK impact investor

Page 3: Paul Cheng Chief Officers Feb 2011

Emerging industry – but still fragile

Page 4: Paul Cheng Chief Officers Feb 2011

Finance-first vs Impact-first

Page 5: Paul Cheng Chief Officers Feb 2011

The social investment market: risk / return

(100%)

(80%)

(60%)

(40%)

(20%)

0%

20%

40%

Ex

pe

cte

d r

etu

rn (

%)

Low Financial Risk

Philanthropy

Impact InvestmentProperty / working capital Development capital

Commercial returns

VS Bridging Fund

VS Development Fund

Classical grant making (-100%)

Reduced financial return compensated by social impact

High Financial Risk

Loss of capital compensated by social impact

Giving Multiplier

Page 6: Paul Cheng Chief Officers Feb 2011

The investor universe

+ 8%

Page 7: Paul Cheng Chief Officers Feb 2011

The investor universe

+ 8%

Market-rate return

Page 8: Paul Cheng Chief Officers Feb 2011

The investor universe

+ 8%0%

Market-rate return

Page 9: Paul Cheng Chief Officers Feb 2011

The investor universe

+ 8%0%

Market-rate returnCapital-protected

Page 10: Paul Cheng Chief Officers Feb 2011

The investor universe

- 100% + 8%0%

Capital-protected Market-rate return

Page 11: Paul Cheng Chief Officers Feb 2011

The investor universe

- 100% + 8%0%

Capital-protected Market-rate returnGrant-makers

Page 12: Paul Cheng Chief Officers Feb 2011

The investor universe

- 100% + 8%0%

Capital-protected Market-rate returnGrant-makers

- 15%

Page 13: Paul Cheng Chief Officers Feb 2011

The investor universe

- 100% + 8%0%

Capital-protected Market-rate returnGrant-makers

- 15%

?

Page 14: Paul Cheng Chief Officers Feb 2011

Income/revenue is distinct from capital

Income / revenue covers the costs of expenditure of ongoing work

(service provision, projects etc) suppliers of income = PURCHASERS of your work

Capital money and other resources that enable you to deliver

your service / project / work capital funders = INVESTORS in your organisation

Page 15: Paul Cheng Chief Officers Feb 2011

Philanthropic equity vs Revenue funding

Page 16: Paul Cheng Chief Officers Feb 2011

Charities need a capital base

Capital base is required for:1. Working capital

2. Financial resilience

3. Growth or development

Few charities are able to create a surplus that can be set aside as reserves

Emerging supply of capital for charities and social enterprise

Page 17: Paul Cheng Chief Officers Feb 2011

Mad money – the irrational world of development finance

Surpluses are bad Cash is restricted Price does not have to cover costs Marginal costs of growth can be ignored Overhead is a luxury and a distraction

Page 18: Paul Cheng Chief Officers Feb 2011

Venturesome provides capital funding

Since 2002, we have offered £20m to over 270 small- and medium-sized charities

Provide capital investment in the form of unsecured loans, underwriting and equity-like investments

To date, 96% of funds have been recycled, to be reinvested

Nearly nine out of ten organisations have achieved or outperformed initial capacity building aims

Page 19: Paul Cheng Chief Officers Feb 2011

Helping individual charities – what we offer

1. Working capital to cover cash flow fluctuations

2. Development capital – ‘hard’ and ‘soft’

3. Pre-funding of fundraising – bridging loan

4. Underwriting – standby facilities

Page 20: Paul Cheng Chief Officers Feb 2011

Life cycle of an organisation

Page 21: Paul Cheng Chief Officers Feb 2011

Matching financial mechanisms to funding needs

Page 22: Paul Cheng Chief Officers Feb 2011

Matching financial mechanisms to funding needs

Secured loan

Standby Facility

Overdraft

Unsecured Loan

Patient Capital

Quasi-equity

Equity

Grant

HIGH CHANCE OF REPAYMENT

LOW CHANCE OF REPAYMENT

Page 23: Paul Cheng Chief Officers Feb 2011

Matching financial mechanisms to funding needs

Secured loan

Standby Facility

Overdraft

Unsecured Loan

Patient Capital

Quasi-equity

Equity

Grant

HIGH CHANCE OF REPAYMENT

LOW CHANCE OF REPAYMENT

LOW RISK HIGH RISK

Property/Asset purchase (mortgage)

Cashflow bridging

Pre-funding Capital Fundraising

Higher risk working capital

Development Capital

Page 24: Paul Cheng Chief Officers Feb 2011

Matching financial mechanisms to funding needs

Secured loan

Standby Facility

Overdraft

Unsecured Loan

Patient Capital

Quasi-equity

Equity

Grant

HIGH CHANCE OF REPAYMENT

LOW CHANCE OF REPAYMENT

LOW RISK HIGH RISK

Property/Asset purchase (mortgage)

Cashflow bridging

Pre-funding Capital Fundraising

Higher risk working capital)

Development Capital

Page 25: Paul Cheng Chief Officers Feb 2011

Matching financial mechanisms to funding needs

Unsecured Loan

Overdraft

Quasi-equity

Equity

Grant

Pre-funding capital

fundraising

Higher risk working capital Development

capital

Standby Facility

LOW RISK HIGHRISK

Property/Asset purchase (mortgage)

Appropriate Funding (correlation)

Patient

Capital

Secured loan

Cashflow bridging

LOW

CHANCE OF REPAYMENT

HIGH

CHANCE OF REPAYMENT

Page 26: Paul Cheng Chief Officers Feb 2011

Charity or business?

Social benefit

enterprise

Social purpose business

Socially responsible

business

Commercial enterprise

Charity with fundraised/

grant income

Charity with ‘on mission’

trading/ contracting

Business generating profits for charitable

spend

Grey area in which organisations are often loosely referred to as social enterprises

Page 27: Paul Cheng Chief Officers Feb 2011

Helps manage timing of income/expenditure

1. Working capital

Beat On average income matched expenditure, but income typically ‘lumpy’

while expenditure remained fixed Venturesome underwrote reserves using a standby facility to help

manage uncertainty

St Peters Church Undertaking major refurbishment work requiring £1.6m fundraising

campaign Helped structure fundraising approach to enable the church to proceed

with its plans, providing £200,000 to pay builders ahead of future fundraising income

Page 28: Paul Cheng Chief Officers Feb 2011

Helps manage rainy days

2. Financial resilience

Bedford Creative Arts Local educational charity had to move offices at short notice, at the same

time as experiencing uncertainty around key funding streams Venturesome provided a £20,000 financial safety net for a year to help

the charity through uncertain times

Global Links Initiative Small charity managing international network connecting social

entrepreneurs Venturesome provided a financial bridge to legacy income, protecting the

work while future plans were reviewed

Page 29: Paul Cheng Chief Officers Feb 2011

Enables investment in your organisation

3. Growth or development

Book Aid International The charity wished to invest in a door-to-door fundraising campaign to

diversify income streams, but couldn’t risk all its reserves in doing so Venturesome underwrote reserves enabling the charity to invest

successfully

Charity Technology Trust (CTT) Transitioning from grant-dependency to a more diversified income,

including trading Provided £50,000 of equity-like investment, with Venturesome and CTT

sharing the risk associated with the new trading arm

Page 30: Paul Cheng Chief Officers Feb 2011

Contact details:

Paul Cheng

[email protected]

03000 123 256

www.venturesome.org

Twitter: @cafventuresome