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Holger Westphely

Senior Investment Manager

Charities Aid Foundation


A CALL FOR CLARITY

21 October 2015

CAF Venturesome participated in a panel about transparency at the Critical Mass - Good Deals conference earlier this week. Flanked by science and engineering memorabilia at the Royal Institution, we discussed the need for transparency to help the social investment sector grow and the challenges of being transparent.

Holger Westphely, Senior Investment Manager, shared our experience of collating deal data for the groundbreaking EngagedX research report, which is based on 426 closed social investment deals. It highlighted the difficulty of extracting detailed deal information in a useful format from our systems and taught us a lot about the practical barriers to transparency. Holger also spoke about failure and how we hope that sharing the lessons we have learned may help others avoid the pitfalls.

KEY TAKEAWAYS FROM THE SESSION

  • Transparent about what, to whom and why? There are many things an organisation can be transparent about. It is important to identify the areas that are of most value to the different stakeholder groups.
  • There is no point in being transparent on everything for the sake of it. It takes effort and resources to be transparent that should be weighed up with the benefits.
  • Funders and investors often require great transparency from their investees and offer little transparency of their own in return. It doesn’t have to be like that. Social enterprises can push back on information requests within reason and can demand information of their investors.
  • Collaboration is needed among SIFIs (Social Investment Finance Intermediaries) to improve data systems sector-wide. This will enable more data to be made available and shared.

There were a lot of questions from the audience and from fellow panellists that I tried to respond to as best I could. Here are the answers I gave, plus a few that I did not have the chance to give.

QUESTIONS FROM THE AUDIENCE

How do the high interest rates charged by SIFIs come about?

For many of our peers the interest charged needs to cover the cost of capital, default rates and administration costs. This is different for each organisation as all three factors vary, but it is not hard to see how costs quickly add up. At CAF Venturesome our charges only need to cover administration costs, as our capital costs and default rates are born by our funders. We charge 6.5% interest, which makes us one of the cheapest in the sector.

What do Funders and investors look for when they invest through a SIFI? How do they start the conversation?

At CAF Venturesome we usually start the conversation, looking to persuade philanthropists to commit their money to us for six years before (or instead of) giving it away to their preferred cause. We try to avoid giving them too much choice about what sort of causes their money supports, as our funders’ wishes may not match the opportunities we see in the marketplace. While we have raised a Children and Young People Fund, which has been popular among philanthropists, we were only able to do that because of our strong pipeline in that sector.

Rodney Schwartz from ClearlySo, one of my fellow panellists had an interesting perspective: the angel investors in ClearlySo’s network are a diverse bunch and each of them would have a different answer to the question, which does not necessarily remain consistent over time.

What are the 3 most important pieces of information we look for from our potential investees during the due diligence phase?

  • 1 Governance: demonstrate that the Board and the Senior Management are aligned able to execute the strategy as well as taking hard decisions when things go wrong
  • 2 Risks: identify the key uncertainties that may affect financial and social performance of the investment and demonstrate that management have the necessary experience to manage these risks
  • 3 Plan B: demonstrate that management recognises the possibility of different outcomes and has planned ahead for a number of different scenarios

My fellow panellist Niamh Goggin from Small Change helpfully identified a few questions that an investee should ask of their lender/investor during the process of taking on finance. In the interests of transparency, I am answering them here on behalf of CAF Venturesome.

QUESTIONS FROM NIAMH GOGGIN

Does this lender do my type of lending? (Indicator: Average loan size and term)

CAF Venturesome average loan size: £100k (min £25k, max £350k)
Typical term: 3-5 years

What is their track record? (No. of and value of loans last year and since they started lending)

CAF Venturesome total lending: 470 social investments totalling £38m
Last year (May 2014 to April 2015): 31 social investments, totalling £2.2m

Are they good at picking winners? (Write-off rate)

The write-off rates of our main funds average around 8%

Is this organisation resilient and sustainable? (Last financial year’s accounts)

CAF Annual Report and Accounts

Want to know more about CAF Venturesome? 

Talk to our team on 03000 123 300 or email us at venturesome@cafonline.org and we’ll be happy to help.


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