Connecting impact capital: Developing the right blend

Scroll to Read

COVID-19 has shone new light on the value of creativity and culture, in its ability to bring people together, provide comfort during isolation and help generate hope as we face an uncertain future. It has also raised questions about how we fund culture in the future. Alongside government support – such as the unprecedented Culture Recovery Fund for organisations in the United Kingdom – we need to consider the role that other forms of funding, like impact investing, can play as part of a mixed funding model. I believe the cultural sector will make a very important contribution to our national recovery and will continue to demonstrate creative innovation as we emerge from the current crisis. The creative industries continue to offer exciting opportunities for individuals and companies who are interested in investing in some of the economy’s most innovative businesses and who want to build a better world for generations to come. 


Sir Nicholas Serota
Chair, Arts Council England
Sir Nicholas Serota talking to ballet dancers
Sir Nicholas Serota at the Arts & Culture Impact Fund launch event, March 2020

Working on the Arts Impact Fund project over the past five years has bestowed many privileges. One of the biggest and most humbling is having fascinating people from around the world interested in the story I have to tell. As an initiative made possible by the foresight and ambition of a public funder, Arts Council England, we have been committed since the start to sharing our learnings, as well as reaping the benefits of open, honest dialogue with other funders, practitioners and policymakers in the field. It is impossible to develop without listening, and difficult to evolve if you aren’t open to your own mistakes. In this spirit of open humility, I’ve been able to build relationships with remarkable people looking to connect impact-seeking capital and impact-driving opportunities in the arts, culture and heritage sectors and the broader creative industries. We are all driving at the same goal: ensuring that impact capital can be structured to support the wider creative economy and build a tailored, constructive, sustainable and dynamic funding ecosystem. This will provide a solid base of support for artists, creatives, organisations and communities, enabling the creation of bold, dynamic and innovative work that advances its medium as well as reflecting, challenging and even changing the world around us.  

A big reason for my humility is my acknowledgement of the great tailwinds we had in setting up the Arts Impact Fund. Arts Council England brought the sector experience and know-how to provide an informed foundation, but also the foresight, imagination and daring to consider doing something really different. Our partnership with Esmée Fairbairn Foundation was also invaluable. One of the true pioneers of social impact investment in the UK, the foundation was a dedicated arts grant funder already making impact investments in the arts. One such investment was its pioneering arts transfer facility, which allowed smaller theatre companies such as Headlong and the Almeida to take a stake in the transfer of their own shows to the West End, and therefore benefit from the potential for income growth without assuming potentially crippling financial risk. Finding fewer investment opportunities in the arts than anticipated, the foundation had been considering the establishment of a specialist sector lender. The thesis was that this might result in more arts organisations embracing the possibilities of investment, and generate a critical mass, increased awareness and growing acceptance of impact-seeking repayable finance as a tool for organisational development in arts and culture. Nesta, which already had a reputation for groundbreaking research in the arts and creative economy, wrote a report, The New Art of Finance, scoping out future funding models for the arts and exploring the idea of a sector-specific funding mechanism, as well as contributing to the fund from its own endowment. The UK government’s Cabinet Office, which had done some theoretical work on structured funds, blending public, private and philanthropic capital with varying risk and return expectations, was keen to have a living, practical example, and introduced Bank of America, which has a strong history of funding the arts and an experienced ESG department, as well as expertise in community development finance, which became incredibly valuable as we launched the fund. We worked to balance the different expectations of each investor in terms of the deployment and risk profiles of their respective investments, alongside consideration of the opportunity cost of their capital, and the careful and cooperative design of the fund ensured that the whole was more than the sum of the parts.

We are all driving at the same goal: ensuring that impact capital can be structured to support the wider creative economy and build a tailored, constructive, sustainable and dynamic funding ecosystem

A key lesson from the establishment phase is the importance of not striving for perfection. There is a direct impact opportunity cost to any time spent in the structuring or theoretical planning stage, on top of the impact delay caused by the due diligence and deployment process. Even with interest rates at all-time lows, the time value of impact has never been greater. We were lucky to have the strong support and commitment of all the partners, even as we entered the complicated legal negotiation stage. Our investors were willing to model, through their own actions, exactly the kind of creative risk-taking we are hoping to enable organisations to take with the capital the fund provides, albeit from the opposite side of the table. 

Even more crucially, we had a sympathetic set of investors who were motivated, by consensus, to create flexible financing that suited the market we were hoping to build. This meant that, when building a financial model, we were able to work backwards from the principles our research told us would stimulate demand (low interest rates, flexible terms, no prepayment penalties) and to derive from there the terms that the fund would, in turn, establish with investors. We also had to strike a balance between minimising the operating costs of this subscale fund operation, which we achieved partly through direct subsidy from Arts Council England and the Calouste Gulbenkian Foundation, and partly through limiting the fund to larger loans of between £150,000 and £600,000. This was a considered, long-term decision and reflected our urge to create a funding market that was truly additive – that worked for the investors (who recognised their greater flexibility) and for the organisations we were aiming to support. After all, if we structured the loan products in a way that didn’t work for the end market, not only were we minimising our additionality over bank finance, but we might have been dooming the project to fail by not optimising conditions for swift deployment of the capital, at appropriate levels of risk.

No one wanted the project to fail. As we stand, today, the original investors are expected to get the returns they signed up for, even in spite of the ongoing pandemic slashing and burning the revenue-earning capabilities of performing arts organisations across the globe – but it’s not just about the money or about the impact of the investments we make through the fund. We’ve also received investments of considerable time, goodwill and expertise – from the founding partners, the extensive initial steering group, and all of the experts with whom we’ve consulted, formally and informally, over the five years since the fund launched. This is the responsibility we have and the endowment we recognise. While we can’t claim unequivocal success until the loans are repaid to the fund and the fund has delivered the expected returns to its investors, we have kept ourselves accountable (and our investors engaged) by including all investors in the investment committee. This governance structure has given our investors, and our three vital independent members, a vivid sightline to the portfolio through the regular meetings and bespoke reports that give more detail on the specific risks to each investor’s investment, differentiated by timing and seniority. All the partners have been fully committed to this high support/high challenge approach, which has been essential to our development as we established the procedures and practices of our bespoke credit operation. 

We achieved full deployment of the £7 million Arts Impact Fund pilot in 2019, after an active investment period of just over 2.5 years. This represented 27 loans, and loans extended to the sector of a total of £8.8 million, reflecting some recycling of loans fully or partly repaid before we closed the investment period. The majority of borrowers were registered charities, and we had an overweighting towards organisations in London and the south east of England, likely owing to our office’s location and the limited capacity of the fund team (two to three full-time equivalent through the investment period). The portfolio organisations span a diverse range of primary art forms/activity areas, business models and targeted positive social outcomes. We loaned £250,000 to the National Holocaust Centre and Museum in Nottinghamshire to help them invest in a joint venture that married holographic projection with natural language processing to help preserve the experience of conversing directly with a Holocaust survivor into perpetuity. The profits from the commercial venture, the Forever Project, will be reinvested into the centre to help them continue their education work. We also enabled Fuse Arts Space, a Bradford-based arts organisation working with refugees, to purchase a property in the south of France where it runs short residency programmes featuring high-profile artists, who often then continue their work with the Yorkshire base. 

The dearth of risk capital has previously not only prevented organisations from doing this kind of business development; it has discouraged them from even thinking in this way. Seeking and allocating funding project by project, operating hand to mouth on a cash break-even basis, runs counter to a strategic mindset, and this is one of the most exciting challenges we face. The opportunity to make genuine internal investment into the future of your organisation is invigorating, whether the idea comes from a sparky intern, a frustrated executive or a board member making random connections, and having the right capital available to do so opens up previously unimagined vistas of possibility. However, translating this into reality needs a lender who can bring patience, understanding and support for wholesale change along with its capital. 

Alongside the investment of the Arts Impact Fund, we had been undertaking our own business development to establish where to take the project next. Again, this was in full view of the market and in collaboration with our original investors. All our founder partners committed to invest in a follow-on fund, alongside three significant additional investors, and this year we achieved a first close of the £23 million Arts & Culture Impact Fund. Significant tweaks to the structure, based on our learnings from the pilot fund, include a longer repayment term to increase affordability for end borrowers; the introduction of arrangement fees (usually added to loan balances) to ensure our borrowers are committed and improve the economics of our operations; and the introduction of secured loans, where security is available (often in the form of a second or lower-priority charge), in order to extend the maximum loan to £1 million without uncomfortably distorting the portfolio’s risk. We also plan to make investments in the devolved nations of Scotland, Wales and Northern Ireland; across a broader spectrum of creative industries; and in more heritage projects; as well as to use the additional capacity afforded by the fund’s scale to intensify our relationship-building and pipeline development outside London and the south east. 

One of the first investments we made through the Cultural Impact Development Fund was InHouse Records, the world’s first fully functional record label launched in prison. Our £77,000 supported the organisation to develop vital progression pathways for graduates of the organisation’s in-prison work on release 

In the meantime, noticing through both our own experience and enquiry database, and some market research we commissioned, that there was significant demand for smaller loans, we secured funding from the National Lottery Community Fund and Big Society Capital through Access – The Foundation for Social Investment to launch the Cultural Impact Development Fund. This fund has allowed us to offer loans of between £25,000 and £150,000, as well as to extend our offer more widely across the creative industries (e.g. fashion and architecture). It has also given us a tighter focus on reaching organisations that support people and communities in greatest need, and more human resource to develop our impact evaluation and management approach – to crystallise not only what we expect organisations to be able to demonstrate in terms of their positive social impact, but also how we can help them to articulate, develop, iterate and redouble this. 

One of the first investments we made through the Cultural Impact Development Fund was InHouse Records, the world’s first fully functional record label launched in prison. Our £77,000 supported the organisation to develop vital progression pathways for graduates of the organisation’s in-prison work on release. Over the course of our relationship, InHouse has clearly demonstrated not only its deep commitment to the mission but also agility and adaptability as an organisation when the pandemic hit. At the start of the lockdown, prisoners were spending nearly 24 hours a day locked up in their cells to protect their health, without any connection to each other or the outside world. Barred from in-person contact with their learners, InHouse quickly repurposed resources into the production of an educational music magazine called Aux, which aims to support literacy, meaningful engagement and positive aspirations through inspirational content on creativity, beatmaking, production, culture and music industry careers. As of June 2020, it was reaching 2,500 people every week across seven UK prisons. The impact doesn’t always follow the money directly: impact activities can often be absorbent rather than generative of cashflow. Cross-subsidy opportunities are welcomed – where the bulk of the expected positive impact will flow not directly from the investment itself but instead in due course from the revenues generated by the specific opportunity the fund invested in, such as a food and beverage outlet or the licensing of digital assets. In order to stimulate these opportunities, we look at impact on an organisational level rather than limiting our impact assessment to the direct and immediate use of funds.

Throughout this journey, we have been keenly aware of our role as stewards of impact capital. Our investors have signalled that they are looking to us not simply to protect their capital (inward-facing, private good) but also to protect positive social impact (outward-facing, collective good). If impact investing is to differentiate itself from traditional investment vehicles, we have a responsibility to ensure that our investment decisions are grounded in a reasonable level of confidence that they will deliver positive social impact, as well as to track, evidence and mitigate risks to this impact over the term of the investment. In our position as social investment managers, we have a unique opportunity to promote, normalise and cultivate good impact practice among our portfolio organisations, as well as across the wider arts and cultural sector. Over the years, we have iterated and developed our approach to supporting organisations to plan, deliver, evaluate and continually improve their approach to impact. We now have a well-developed framework that we use across our funds to critically appraise the impact potential of each organisation we consider for investment according to its impact risks and impact returns, and we work with each of our investees to create a development plan that sets out their impact ambitions and targets over the life of the investment. On the Cultural Impact Development Fund, we are also pioneering the use of financial incentives, in the form of a reduction to the headline interest, to drive the achievement of social impact targets – making it one of the first impact investment funds with a clear trade-off between financial and social returns.

If impact investing is to differentiate itself from traditional investment vehicles, we have a responsibility to ensure that our investment decisions are grounded in a reasonable level of confidence that they will deliver positive social impact, as well as to track, evidence and mitigate risks to this impact over the term of the investment

In practical terms, a fixed-term fund with a closed investment period is not the ideal vehicle for lending. One consequence, for example, is that investors’ money is drawn down and paid back over extended and somewhat unpredictable periods, and there is a limited period of full extension (where all the money is fully invested in the market it is hoping to support). We accept such compromises as necessary – simply put, without experience in the market as a lender, any lending operation would be hard-pressed to achieve capitalisation that would support balance sheet lending. Even with the Arts Impact Fund fully deployed, without significant credit data on the portfolio, and until we have been able to perform a thorough analysis to establish and differentiate the properties of the particular market (structural, developmental and seasonal) and the strengths and challenges of the lending operation, another fund as a post-pilot, scaled-up experiment was always going to be the best way forward. 

We don’t want to limit the learnings from our experiments to ourselves or hoard our knowledge in pursuit of private or limited benefit. International cooperation and replication in different markets, with a robust approach to finding where parallels can and cannot be drawn, will be hugely mutually beneficial to the establishment of best practice in lending to and investing in our sector across the globe. Moreover, such collaboration will contribute to non-linear gains in utility as the learnings interact and multiply. This is the movement that this collective initiative among Arts & Culture Finance, Upstart Co-Lab and Fundacio Compromiso aims to catalyse, and we thoroughly welcome stories, questions, enquiries and mutual support from anyone for whom these reflections strike a chord or spark a flame. Impact capital has a vital role to play in rebuilding a supportive, dynamic and respectful funding ecosystem that equips arts and culture organisations, artists and creative practitioners to enliven, enlighten and strengthen both our economies and our society at this critical point in human history.

Creativity is the answer we’ve been looking for – now is the time to embrace and invest in it