Does social investment offer a new opportunity for federated charities? | Big Society Capital

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Does social investment offer a new opportunity for federated charities?

Many charities with a large national presence such as Age UK and YMCA operate in a “federated” structure (with an umbrella or national charity and a number of local independent charities run with a common identity).

Having worked for an international NGO with a federated structure, I can see the unique strengths of operating in this structure – it enables autonomy and connectivity at a local level whilst we benefitted from the combined resources and influence of charities across the world.  I’m also familiar with the dynamics that can arise – tensions between the local charities delivering the “real” work and the central umbrella organisation. Getting buy in and consensus from many independent local charity Boards for changes in strategic direction or internal operations isn’t easy, when central charity plays a leadership and co-ordination role and is often also governed by members of the local charities.

There are strong drivers for change facing federated charities, with reduced funding and increased demand for services, and social investment could be one tool to help their response. Some individual charities within these structures are already using social investment – to buy a building, to help grow income generation from services or trading, or to secure funding for payments by results contracts. We recently explored with a group of charities whether having a federated structure could provide an opportunity for social investment to be more effectively accessed to benefit a group of organisations delivering common goals.

Some of the areas we discussed:

1) The umbrella charity playing a role in sharing knowledge of social investment 

One of the points raised was that capacity of individual local charities to explore this area and engage with social investors and advisors may be limited. The umbrella charity could play a useful role through building knowledge of social investment and relevant investors, and to share this, optimising time spent on this to benefit the federation. Some umbrella charities have started doing this, for example by organising information sessions around social investment and social enterprise for the managers/trustees in their networks, and by supporting applications for capacity “investment readiness” grant funds for a number of charities in their network.

2)  Using the umbrella organisation to help secure investment for their local charities

Could a dedicated fund be set up to benefit all charities within a federation? Rather than charities individually exploring the social investment maze to find social investors this approach could allow a fund to be set up that provides investment for individual local charities in the federation. This may be particularly relevant where there are many local charities in a network that have similar investment needs - the Access Foundation Growth Fund was set up to increase the supply of small loans to charities and could be a relevant option to consider for a federated charity.

There may be other benefits of a tailored approach for a federation, for example sharing impact measurement indicators, the knowledge of the organisation’s work should make due diligence and assessment processes simpler (hopefully reducing costs!), and the opportunities for ongoing peer learning  should strengthen the organisations.

The mechanism to do this could vary – for example the umbrella charity could manage an investment fund to invest into local charities, or work in partnership with a fund manager to help identify and support local charities where investment could be appropriate. This approach could also allow larger charities to invest some of their reserves into a fund to benefit the wider network and overall mission.

3) To facilitate transformation and/or consolidation across the network

Some federated charities are considering how to achieve closer working and transformation of their services to achieve both improved impact and operational efficiencies.

Access to upfront capital could help with this – for example by using investment to finance the development of shared back office systems or digital frontline services across the network.

Many charity federations have seen numerous closures and mergers in their networks over recent years – and as raised at our event in Trustees Week, social investment could play a role in facilitating planned mergers, rather than waiting until circumstances force merger. For federations who are moving towards consolidation, upfront investment could help fund some of the costs of transition, with repayments coming from reduced operating costs in the long term, and potentially income growth from the new larger organisations.

What’s the downside?

Using social investment through a federated structure could bring its own considerations – for example the potential change in the relationship between the umbrella body and the local charities – recognising that the accountability of the umbrella to its network will remain. Charities within a federation are often diverse in terms of size, strength of balance sheet, service development and potential for investment, and may collaborate more closely with other charities in a region than within its federation, so a one size fits all approach to a dedicated fund could be challenging, and could limit options for a local charity.

Building up expertise and appetite for change across a network’s governance is likely to take time, and social investors need to better understand how these structures operate if they are to create appropriate ways for investment to be used in this context. And fundamentally, the basic question will still remain – how will any investment be repaid? Will the charity be in a better position to generate increased income/cost savings through this route?

Change beyond the money

Whether these approaches are relevant will depend on each organisation’s strategy – what’s the structure that’s right for them, and how will services be delivered in future? However, in our discussions there has been a sense that social investment could bring an exciting opportunity for federated charities – both to bring additional funding into a network, but beyond this, to help strengthen relationships, unlock traditional blocks to change, and focus on the common purpose that their charities are working towards.

 

Last updated | 
8 February 2016

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