In our first Insights blog we shared with you facts and figures from our second year of running the Arts Impact Fund. Here, we address the extent to which arts and cultural organisations have become more familiar with repayable finance and understand the requirements and processes involved in taking on investment. We also point out some commonly encountered hurdles along the way.
Last month we shared with you facts and figures from our second year of running the Arts Impact Fund. In this blog, we address the extent to which arts and cultural organisations have become more familiar with repayable finance and understand the requirements and processes involved in taking on investment (one of the outcomes outlined in our Theory of Change). We also point out some commonly encountered hurdles along the way.
Do your research
After our initial year of running the Arts Impact Fund, we asked ourselves why some enquiries we receive don’t progress to a full investment application and why some of those that do are not successful. The data we collected during our second year suggests that, for the most part, we turn enquiries away because they don’t meet our eligibility or funding criteria. Some of the enquiries we receive are rejected because:
they are looking for amounts below what we can consider at present, given the guidelines imposed largely by the economics of our fund ( which suggests that there is significant demand for smaller-scale repayable finance - we are investigating this further with our market sizing survey, which we hope to report on towards the end of the year);
they fall outside of our art form and geographic remit; and/or
they have assumed that we make grants rather than investments.
It is encouraging to see such wide-ranging interest. Understandably, this comes with varying degrees of awareness of the specifics of social investment and the investment guidelines of the Arts Impact Fund in particular. We make a concerted effort to inform those arts and culture organisations who approach us of the wider social investment landscape, and signpost them to more appropriate funders if required; notwithstanding, our advice would be to check carefully what the funder’s requirements are before making an approach.
Invest in a good working relationship
Then there is the question of good ‘fit’ between our investment objectives and the opportunity presented by the arts organisations. We assess enquiries and applications against a number of factors, including the nature of the proposal; the skills and capabilities of the management team and people involved; the quality of the organisations’ artistic or cultural output or their contribution to artistic creation; and the social impact of their work. In this respect, developing long-term relationships is crucial to making good investments. Good investment depends on understanding the context in which the applicant organisation operates and this, together with mutual trust and a common vocabulary, takes time to develop.
Ideally, we want to begin a relationship long before the team present a formal proposal to our investment committee (which is made up of stakeholder representatives and sector experts, including our independent Chair). This not only gives us time to work practically with the applicant organisation on interrogating assumptions about their proposed investment but also builds our confidence in the management team and their capacity to see the project in question through to a successful completion.
Use the investment process to strengthen your proposal
Of the 16 organisations in our portfolio, three were initially declined by our investment committee or deferred for further due diligence. An initial rejection does not (always) have to signal the end of the road for applicant organisations and this is definitely one of the lessons we want to get across from our second year of making investments. The due diligence process is iterative and no matter how much time and effort you’ve spent developing your business plan or financial model, there will always be questions to address or details to iron out before we can commit to an investment. An (initial) ‘no’ could mean that the timing is not right or that the financial risk is too high and not counterbalanced by potential to achieve proportionate social impact. In any case, there is a lot to be learned from the process that ultimately benefits the applicant organisation as it makes business or impact planning more robust.
One thing to look forward to
Learning from our experience of managing the Arts Impact Fund portfolio, we want to invest even more in the added value we can provide as a sector-specific impact investor. We have become aware of the many synergies between our investee organisations that lend themselves to peer learning. In the future, we plan to have more coordinated portfolio networking events and an online portal to make sure all investees know each other as a cohort and have the opportunity to share best practice as they develop their business models.
1. Have a solid idea of the opportunity you are looking to invest in, and a high degree of confidence that it can generate the income to pay back a loan. We are looking for organisations who are motivated and keen to boost their own resilience by using their assets to generate sustainable revenue streams and drive their independence,protecting their future.
2. Think about your impact, how you engage with your audience and beneficiaries and incorporate their feedback to keep improving your offer to them. We look for a strong management team, which combines business acumen (a sense of who their customers are and what they will pay for) with the passion to drive continued artistic excellence and a focus on positive social impact.
3. Engage your Board early in the process of thinking of taking on loan finance. You will need buy-in from across your organisation - support at governance level is crucial for a successful investment.
Have a look at our portfolio and case studies to see the kind of projects we’ve been excited about funding so far.
Image: A public event at one of V22's artist studio spaces. © V22 London.